INVESTORS’ WORKING GROUP SEEKS IMPROVEMENT OF REGULATORY INSPECTION TO PREVENT ANOTHER MADOFF-LIKE FRAUD

Posted September 8, 2009

NEW YORK – The Investors’ Working Group (IWG), an independent task force operated under the umbrella of the CFA Institute, has issued recommendations for improving regulators’ inspection, operation and enforcement capabilities with an eye toward preventing future events like the Bernard Madoff fraud.

“Congress and the Obama administration need to streamline and make more efficient the multiple agency structure we have for securities regulation, fix antiquated securities regulations, and provide resources that will ensure properly trained staff,” says Kurt Schacht, Managing Director, CFA Institute Centre for Financial Market Integrity. The Inspector General’s recently issued post-Madoff report is intended to help the SEC learn from past mistakes that contributed to allowing the fraud to continue.

“The investigation will help the SEC learn from the past so that it can take appropriate actions in meeting its mission of protecting investors,” he adds. “We encourage the SEC and policymakers to continue to move forward on fixing the problems at hand.”

The IWG, chaired by two former SEC chairs, William H. Donaldson and Arthur Levitt Jr., has also issued the following recommendations: 

• Congress and the Obama Administration should nurture and protect regulators’ commitment to fully exercising their authority.

• Regulators should have enhanced independence through stable, long-term funding that meets their needs.

• Regulators should acquire deeper knowledge and expertise. In this regard, CFA Institute recently agreed to partner with the SEC to encourage eligible SEC staff members to participate in the Level I CFA examinations.

• The SEC and the CFTC should have primary regulatory responsibility for derivatives trading.

• All investment managers of funds available to US investors should be required to register with the SEC as investment advisers and be subject to oversight.

• Existing investment management regulations should be reviewed to ensure they are appropriate for the variety of funds and advisers subject to their jurisdiction.

• Investment managers should have to make regular position disclosures to regulators on a real-time basis and to their investors and the market on a delayed basis.

• Investment advisers and brokers who provide investment advice to customers should operate under a single, rigorous fiduciary standard.

In addition, the CFA Institute has added a risk management provision to the second edition of its “Asset Manager Code of Professional Conduct.” “These new guidelines establish a more detailed risk management process that identifies, monitors, and analyzes an asset manager’s risk position and exposure,” says Schacht. “We believe that investors should require their investment managers to adopt and verify their adherence to the Code as a means of helping protect their interests and avoiding fraudulent advisors like Madoff.”