Friday, September 4, 2009

SEC Releases Full OIG Report On Madoff; Congressional Hearings Coming

This evening, the SEC posted the 477-page report of its Office of Inspector General, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme - Public Version (SEC Office of Investigations Report No. OIG-509.)

As noted in our earlier post, SEC OIG Report on Madoff: A Tale of Redemption, the release of an Executive Summary of the OIG report earlier this week was announced concurrent with a Statement by SEC Chairman Mary L. Schapiro of actions already underway to address shortfallings noted in the OIG report, in addition to a listing of 13 post-Madoff reforms underway at the SEC.

Congressional Hearings Scheduled; Self-Funded SEC A Possibility
Rep. Edolphus “Ed” Towns (D-NY), has promised to hold hearings on the SEC's handling of the Madoff affair, focusing in particular on the agency's funding and the level of experience and qualifications of its staff, among other things. See Rep. Towns' letter to SEC Chairman Schapiro, and this press release.

The Senate Banking Committee has already slated a hearing for Thurs. Sept. 10 on Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance. The all-star list of witnesses for the Sept. 10 hearing includes as of today (9/4):
  • SEC OIG H. David Kotz
  • SEC Director of the Division of Enforcement Robert Khuzami
  • Madoff tipster/whistleblower Harry Markopolos
  • Reformed fraudster (Zzzz Best) Barry Minkow. (Minkow now serves with the Fraud Discovery Institute which he co-founded.) [UPDATE 9/10: Based on current list of witnesses posted on hearing website today, Minkow has been replaced with SEC Acting Director of the Division of Compliance Inspections & Exams (OCIE), John Walsh]
Separately, Sen. Charles Schumer (D-NY), a member of the Senate Banking Committee, issued a press release yesterday, with the broad-ranging title: In Wake of Explosive Report on Failure to Catch Madoff... Schumer Proposes Allowing SEC to Keep All Fees it Collects in Order to Afford Better-Trained Personnel -- Legislation Could Result in Near-Doubling of Agency Budget. (Schumer press release.)

"The SEC’s failure to catch Bernie Madoff shows a level of incompetence unseen since FEMA’s handling of Hurricane Katrina," says Schumer in the press release. To address the failures noted in the SEC OIG's report, Schumer announced he is drafting legislation for the SEC to be self-funded. The objective, as noted in Schumer's statement, would be "to allow the agency to keep all of the fees it collects so it can afford to recruit and retain better-trained personnel." The statement continues:

Schumer’s proposal, to be introduced when Congress returns to session next week, would, on average, bolster the SEC’s budget by hundreds of millions on an annual basis, enabling the agency to attract professionals with the expertise required to uncover complex financial fraud. In recent years, the size of the financial markets has grown rapidly while the SEC’s budget has remained essentially flat. The new funding scheme Schumer is proposing would treat the SEC in the same way as Federal Reserve and the Federal Deposit Insurance Corporation, both of which are funded through fees it collects from institutions it oversees.

SEC Chairman Mary Schapiro has already signaled her support for
Schumer’s proposal....

The idea of letting the SEC become a self-funded agency is appealing to many since some view it as subsidizing other government operations, without receiving - in the view of some - adequate Congressional funding. For example, Schumer notes that:

In 2007, though the SEC brought in $1.54 billion in fees, it secured just $881.6 million in funding. Had the agency simply been able to hold onto all the fees it collected, it would have represented a 75 percent increase over the budget it was allotted through the appropriations process.

... Under Schumer’s proposal, the SEC will fund its own operations by using the transaction and registration fees it collects in place of a Congressionally-mandated budget. Self-funding will give the SEC access to millions more than is allocated through the Congressional appropriations process. Shapiro has suggested that hiring hundreds of new employees over the next few years for the Division of Enforcement and the Office of Compliance, Inspection, and Examination will give the SEC the human and technological resources it needs to keep up with a vast and expanding market.

[My two cents -I remind you of the disclaimer posted on the side of this blog: One potential downfall in the concept of the SEC being entirely self-funded could be if fees run short in an economic downturn, or the necessary level of activity/expenses within the SEC grows beyond reasonable self-funded fees, I wonder if Schumer's bill will have an automatic emergency funding clause to address possible contingencies, even though such contingencies may generally be considered a 'black swan' or unlikely type of event. Otherwise the SEC could be put at risk by a self-funded model (unless it sets aside reserves, but that may not be a sufficient backstop).]

Other commentary
There are some press reports of some former SEC staff speaking out on the OIG report, based on the information that was included in the Executive Summary of the report issued earlier this week. See, e.g. Ex-SEC Lawyer: Madoff Report Misses Point , reported by Suzanne Barlin earlier today on .

Print this post

1 comment:

Edith Orenstein said...

See UPDATE to witness list for Sept. 10 Senate Banking hearing noted above, Minkow (one of the originally scheduled panelists) has been replaced with Walsh.