5 Ways to Reform the Embattled SEC

(MoneyWatch)  In the latest twist of the Bernie Madoff story, the House Financial Services Committee will question Securities & Exchange Commission officials Jan. 5 about how they missed Madoff's huge pyramid scheme despite evidence of wrong-doing dating back more than a decade.
This is just another shoe to drop in what will prove a long, hard look at how the financial industry is regulated. The congressional probe is coming just two weeks before Barack Obama becomes president. With Democrats fully in charge of the White House and Congress, reform is in the wind.

And, not surprisingly, punditry is bursting out all over with reform advice about how the feds should regulate. Some of the key points include:

• Beef up the SEC. While the number of SEC regulators has dropped from 1,338 to 1,192 from 2005 to 2007, the number of investment advisers has been up 50 percent since 2002. According to former SEC chairman Arthur Levitt Jr., this means that only about 10 pecent of investment advisers can expect to be examined once every three years. The SEC had created a special position to assess risk, but since 2005, it has been all but abandoned as has a goal of examining all investment advisers once every five years.
• Close the revolving door. Many talented accountants and lawyers seek SEC jobs only to get their tickets punched so they can parlay federal experience to much higher-paying employment with the firms the SEC regulates. There should be a prohibition on such new employment for a specific period after an official leaves the SEC, according to Wall Street author Michael Lewis and fund manager David Einhorn.
• Make sure the SEC understands its mission. Complaints are growing that the SEC, founded in 1934 to protect investors, sees its mission as protecting investment houses and managers, especially if they have political pull. Madoff, for instance, is accused of using the marriage between his niece and an SEC official to blunt probes.
• Make sure the SEC has commisioners that are investors and not investment managers. Doing so would break the current trend of over-promoting self regulation as a panacea for investment wrong-doing.
• Register all investment advisers and hedge fund managers. Broker dealers of a certain size should be regulated by the Public Company Accounting Oversight Board, created by Sarbanes-Oxley.

To be sure, there are other plenty of other recommendations such as dealing with credit ratings agencies taking money from the firms they rate and creating greater oversight of derivatives such as credit default swaps. But this list is a good place to start in dealing with the SEC regardless of whether it remains intact or is merged with other federal agencies. Expect reform moment to grow after Jan. 20.