Madoff Registration: Regulator Reform

Chidem Kurdas

The Securities and Exchange Commission is working to improve its oversight process—-to prevent Madoff problems, as Michael Macchiaroli of the SEC’s Office of Risk Management described certain reform efforts at a conference of the New York State Society of CPAs.

The Dodd-Frank Act has created a rulemaking boom, including new rules for the implementation of mandatory SEC registration of hedge fund managers with more than $150 million in assets. It might help to look at what registration did in the past.  So let’s consider the last investment adviser registration filing with the SEC by Bernard Madoff. 

This exercise in electronic red tape would be funny if it weren’t a disgrace. The registration procedure commands the filer to “Complete this form truthfully.” It is entertaining to imagine Madoff, a hardened impostor who proved himself capable of lying effectively under all circumstances, going through the absurd pro forma bureaucratic process that reminds him to be truthful.

The instruction does threaten bad consequences if a registrant is not truthful: “False statements or omissions may result in denial of your application, revocation of your registration, or criminal prosecution,” it warns. But Madoff knew from years of experience that he ran little risk of regulators catching him.

The registration form covers formalities such as the business hours Madoff kept—was it useful to his clients that officially he was a regular nine-to-five guy? In reality, Madoff would avoid any investors who asked tough questions.

He gave the total value of the assets he managed as $17.1 billion in 23 accounts as of the end of 2007. A year later, after he confessed, regulators announced that most of the assets were gone. How much did he really have in 2007?

The SEC Office of Investigations’ report on the debacle says: “In the examination of Madoff, the SEC did not seek Depository Trust Company (an independent third-party) records, but sought copies of such records from Madoff himself.” Had an examiner checked the information, the scheme would have been detected.

But 2007 was already very late in the game. The report says: “Had they sought records from DTC, there is an excellent chance that they would have uncovered Madoff’s Ponzi scheme in 1992.”

The mandatory registration procedure now being instituted is not that different from the one applied to Madoff. It will generate huge amounts of information and electronic red tape, no issue. What’s not clear is whether it will be any more effective in detecting lies.


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