January 11, 2009 / 4:10 PM / 10 years ago

Obama's SEC pick could face bumpy ride over Madoff

WASHINGTON (Reuters) - President-elect Barack Obama’s choice to lead the U.S. Securities and Exchange Commission is likely to be roughed up at her confirmation hearing in connection with the Bernard Madoff scandal, but ultimately she is expected to be confirmed.

Mary Schapiro currently oversees the Financial Industry Regulatory Authority, the watchdog that supervises nearly 5,000 U.S. brokerages, and is in turn overseen by the SEC.

FINRA’s role in the Madoff case has been drawn into the debate over why the SEC failed to uncover what could be the largest U.S. fraud in decades.

Prosecutors say Madoff ran a $50 billion Ponzi scheme, paying off earlier investors with money from later ones, in a scam that has devastated sophisticated investors as well as charities.

The Senate Banking Committee has announced plans to examine the performance of FINRA and the SEC in the Madoff case. That same committee will hold a confirmation hearing Thursday on Schapiro’s nomination to replace the Christopher Cox as chairman of the SEC.

“Mary will face some tough questions during the confirmation hearings on what FINRA did and didn’t do, and appropriately so,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “I would be a little surprised, however, if it derailed her nomination.”

Politicians have slammed the SEC for not pursuing tips about Madoff from one of his competitors. They also fault the agency for missing red flags such as Madoff’s uncanny ability to generate steady returns in all types of markets, and his firm’s use of a small, little-known auditor.

But some lawmakers and experts have begun to ask about FINRA’s own deficiencies in supervising Madoff’s activities.

“The primary regulator was FINRA because for throughout the entire scandal, Madoff had a registered broker-dealer entity,” said Mercer Bullard, a securities law professor at the University of Mississippi and an advocate for mutual fund shareholders.

“Broker-dealer regulations are intended to address the problem of disappearing assets,” continued Bullard, who once worked in the SEC investment management division. “It has surprised me that the SEC has borne the brunt of so much of the criticism. If fingers are to be pointed, they should be pointed first at FINRA.”

The 53-year-old Schapiro joined a FINRA predecessor in 1996 and became CEO in 2006. The watchdog was created in 2007 through a merger of NASD and parts of NYSE Regulation.

FINRA said it regulated Madoff’s broker dealer arm.

“FINRA has long been on record about our concern regarding a firm’s ability to avoid our jurisdiction by keeping its customers outside the FINRA-registered broker-dealer either through unregistered investment vehicles or though registered investment advisers,” said FINRA spokeswoman Nancy Condon.


Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and the panel’s top Republican, Alabama Sen. Richard Shelby, demanded a complete list of SEC and FINRA examinations and enforcement actions involving Madoff’s firm.

The lawmakers also asked for all internal SEC and FINRA emails that made references to the firm, as well as a list of any positions held by Madoff and others he employed through appointments by the SEC or FINRA.

Key Democratic senators on the banking committee have already voiced support for Schapiro, who was previously chairman of the Commodity Futures Trading Commission and an SEC commissioner.

“The SEC faces very significant challenges. and it will unfortunately take time to undo the damage of the last administration,” said Rhode Island Sen. Jack Reed, who chairs the Senate banking subcommittee on securities.

“Mary Schapiro is well positioned to take on this task,” he added. “She will play a vital role in restoring confidence in the SEC.”

Another Democrat, Sen. Robert Menendez of New Jersey, also praised Schapiro.

“I look forward to getting more details from her and asking additional questions during her confirmation hearing about her plans for implementing accountability, transparency and investor protections,” he said in a statement.

Editing by Tim Dobbyn

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