Corporate & Securities Law

By Jim Hamilton

The SEC?s investigation of the Madoff scandal will include an evaluation of broader issues regarding the overall operations of the Division of Enforcement and Office of Compliance, Inspections, and Examinations, SEC Inspector General H. David Kotz told the House Financial Services Committee. The investigation will culminate in comprehensive recommendations to ensure that the Commission fulfills its mission of protecting investors and maintaining fair, orderly and efficient markets. At the same time, the investigation will also center on issues specific to the Madoff firm. He promised reports on a rolling basis as the staff identifies discrete issues that may be resolved separately and expeditiously. Thus, some conclusions may be provided very shortly

On the broader front, the Inspector General will examine the complaint handling procedures of the Division of Enforcement, including a review of how complaints are processed, as well as any internal incentives that may affect the decision whether to take action with respect to a complaint. There will also be an analysis of which complaints are brought to the Commissioners? and Chair?s attention; and whether tangible and specific complaints are being reviewed and followed-up on.

The review will also look at SEC examination and inspection procedures, including an analysis of whether proper policies and procedures are being followed and whether there are gaps in these policies and procedures relating to operations involving voluntary private investment pools, such as hedge funds, because they are subject to limited oversight by the SEC. As a corollary, there will be a determination of whether any such gaps may lead to fraudulent activities not being detected.

Even more broadly, the investigation will also examine the relationships between different divisions and offices within the Commission. As part of this inquiry, the review will determine if there is sufficient intra-agency collaboration and communication between the agency components to ensure comprehensive oversight of regulated entities.

Acknowledging that he had sketched an ambitious investigatory agenda, the IG emphasized that circumstances surrounding the Bernard Madoff matter may well dictate a more expansive analysis of SEC operations. Moreover, he believes that the culmination of these investigative efforts must go beyond the identification of individuals who may have engaged in inappropriate behavior, or potentially failed to follow-up on complaints, and provide the SEC with concrete recommendations designed to ensure that the Commission has sufficient systems and resources to enable it to respond effectively to complaints and detect fraud through its examinations and inspections.

Full post as published by Jim Hamilton's World of Securities Regulation on January 05, 2009 (boomark / email).