In an excellent feature, Reuters details the extensive steps taken by the SEC to reform a system facing overwhelming criticism in light of the failure to detect Bernard Madoff's massive Ponzi scheme. While still in their infancy, critics see the changes as a much-needed step in the right direction. Even Harry Markopolos, the financial analyst who famously faulted the SEC for repeatedly rebuffing his warnings that Madoff was running a Ponzi scheme, lauded the moves, saying that the "they [the SEC] have done a fabulous job of reforming themselves.
The reforms deal mainly with the way the SEC handles tips and complaints from its constituents. Under the SEC's prior system, tips in the form of phone calls, emails, faxes, and even handwritten letters were received at the SEC's eleven regional offices and Washington office. Yet, upon receipt, the complaints were not made accessible to other regional offices; instead, they were filed away and inaccessible to other offices. Thus, a regional office receiving a complaint had no way of knowing whether any other regional office had received similar complaints without placing a call to potentially every regional office.
Enter the Tips, Complaints and Referrals database. Known to insiders as TCR, the database was officially deployed for inter-agency use in March 2011 and brings a previously-unavailable ability to automate access to complaints. Aided in part by a first-ever partnership with the Federal Bureau of Investigation, 2,300 SEC employees are now able to view and add information once a tip or complaint is added to the system.
The presence of the FBI also seeks to minimize the disconnect between civil and criminal investigations. Under a deal reached between the two agencies, the FBI is now permitted access to tips involving securities fraud, which enable the criminal aspect of a case to begin at an earlier stage than usual. Both agencies are quick to note that the enhanced collaboration takes place before an official investigation commences to avoid the appearance of improper collaboration or information sharing.
Another visible reform is the agency's newly-formed Market Intelligence Unit, headed by 19-year SEC veteran Thomas Sporkin. In Washington, the MIU's forty-one employees analyze over 100 tips, complaints and referrals that come in each day, prioritizing the legitimate referrals and striving to route these referrals for follow-up. Additionally, in light of recent rules adopted by the SEC, individuals such as Markopolos now have expanded incentives to submit such tips. Under a rule adopted in May spurred by Dodd-Frank, a whistleblower who submits significant evidence of financial fraud that yields SEC sanctions of at least $1 million is now eligible for a financial award. The terms of such an award are much broader than before Dodd-Frank was passed, when an award was limited to insider-trading cases and could not exceed ten percent of penalties collected.
Markopolos, who has since submitted three tips to the MIU, has received follow-up calls from SEC attorneys within days, if not hours, of his submission. According to him, "[e]verything they should have done in the Madoff case they are now doing."