Director of SEC Inspections Office Resigns
Thursday, July 9, 2009
A senior Securities and Exchange Commission official who oversaw an office that conducted key probes of Bernard L. Madoff's business is resigning, following a period when the agency reevaluated how it conducts oversight of brokers and investment advisers.
Lori A. Richards is stepping down after 14 years as director of the Office of Compliance Inspections and Examinations, which has come under scrutiny for its role in the SEC's monitoring of Madoff's business. Her office reviewed his firm at least three times, in 1999, 2004 and 2005, without finding the multibillion-dollar fraud he was conducting.
With Richards' departure, SEC Chairman Mary L. Schapiro will soon have installed her own people in nearly all the top positions at the embattled agency. Early in her tenure, she asked enforcement director Linda Thomsen to leave and hired Robert Khuzami, a former federal prosecutor focused on white-collar crimes in New York, as a replacement.
"This is another example of Mary Schapiro deciding that the SEC cannot do business as usual," said John F. Olson, a partner at Gibson, Dunn & Crutcher in Washington. "I think she'll try to re-imagine the office."
Schapiro has acknowledged privately that figuring out the OCIE's future is one of the most challenging internal tasks she faces, though an SEC spokesman said the chairman has no plans to close the office. With a staff of more than 700, the OCIE is responsible for ensuring that brokers and investment advisers, including mutual funds, comply with securities laws.
The demands on the office, which has struggled to keep up with the growth of the financial markets, are about to get more onerous. The Obama administration has proposed that the SEC begin examining hedge, private-equity and venture capital funds.
The extent of Richards' role in the Madoff debacle could become clearer in coming months as the agency's inspector general prepares to release a report on the matter. To date, no evidence has surfaced publicly that Richards played a central role in the Madoff exams. Schapiro has received a limited briefing on the investigation.
In response to lawmakers' questions about Madoff, Richards told Congress that her office doesn't have the resources to keep up with the growing numbers of firms needing oversight. Many firms do not get inspected for years at a time or at all. She has announced efforts to improve examinations of firms dealing in complex financial products, focus on firms that are at high risk of fraud and improve market surveillance.
For many years, compliance and exams were part of the SEC divisions responsible for writing regulations -- markets and trading, for example, or investment management.
But in the mid-1990s, interest grew in creating a watchdog focused solely on oversight and not encumbered by policymaking. In a move resisted by the financial industry, then-SEC Chairman Arthur Levitt created the OCIE in 1995 to toughen oversight and appointed Richards, a top adviser, as director.
"The question about whether it worked or not and whether you lose the expertise and knowledge [by separating oversight] is a fair question," said William R. McLucas, a former enforcement director who is now a partner at the law firm WilmerHale. "I think at least the issue will have to be revisited."
In a statement yesterday, the SEC credited Richards with helping the agency uncover a number of abuses in the financial industry, including inappropriate trading by exchange specialists, inadequate disclosures in the credit rating business, conflicts of interests by pension consultants, insider trading and improper fees charged by mutual funds.
"Lori is known widely for her passionate and tireless service to the agency," Schapiro said in a statement. "I respect her decision to leave the SEC and am grateful for her many years of public service."
Richards, who has worked for the SEC for two decades, said in a statement that she is leaving to "take on new challenges."
"I'm enormously proud of the dedication and professionalism of the men and women in the SEC's examination program across the country, and of the important work we did together," Richards said. She is scheduled to step down Aug. 7. Longtime OCIE Associate Director John Walsh will serve as acting director.