Boost hedge fund, accounting oversight: SEC watchdog

Date: Thursday, July 2, 2009
Author: Reuters.com

The U.S. Securities and Exchange Commission should tighten regulation of hedge funds and other investment advisers in the wake of its failure to stop Bernard Madoff's $65 billion Ponzi scheme, an internal investigator for the agency said.

The SEC's inspector general made its recommendations in a letter to U.S. Representative Paul Kanjorski, Democratic chairman of a subcommittee on capital markets, who released the letter on Wednesday.

Among the recommendations by Inspector General H. David Kotz is to mandate that hedge funds and investment advisers use an "independent custodian" to maintain investments in separate accounts, like mutual funds are required to do now.

"This custodian requirement essentially removes the ability of an investment adviser to fraudulently use the proceeds invested by new investors to make payments to old investors," Kotz said in his letter to Kanjorski.

Bernard Madoff was sentenced to 150 years in prison earlier this week for orchestrating a Ponzi scheme that defrauded investors out of billions of dollars.

The SEC has been harshly criticized for missing warnings of the fraud and for rebuffing Wall Street tipster Harry Markopolos, who urged agency officials for nine years to thoroughly investigate Madoff's investment business.

A second recommendation would require hedge funds and investment advisors to pledge that they conducted due diligence on their advice, much like chief executives are now required to certify their financial reports, or face criminal prosecution.

A third recommendation is to embolden the Public Company Accounting Oversight Board, the U.S. auditing watchdog agency established after the Enron scandal earlier in the decade, with new authority to audit reports prepared by domestic and foreign accounting firms.

Currently the PCAOB registers firms, sets standards and conducts inspections.

The last recommendation is for the SEC to extend its so-called bounty program that gives incentives to company whistle-blowers to report violations of federal securities laws. Now the program only applies to insider trading.

(Reporting by Kim Dixon; Editing by Lisa Von Ahn)