Congress should keep heat on the SEC

Wagging his finger from the bully pulpit of Federal Hall, President Obama reminded financial leaders last week of the urgent need for new, tighter financial regulation.

To restore investor confidence, let’s hope Congress heeds his words and wakes up the Securities and Exchange Commission with a swift kick in the rear that hastens a much-needed agency overhaul.

Wall Street’s top cop is taking a first step by admitting that it has a problem.

In response to a scathing report from the agency’s independent investigative arm released a few weeks ago, a chastened SEC Chairman Mary Schapiro posted the following on the agency’s website:

“Today, we are releasing the inspector general’s 450-page report regarding the Bernard Madoff fraud and the many missed opportunities to discover it. As I stated earlier this week, it is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors. In the coming weeks, we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January.”

What followed the highly embarrassing report was a much-anticipated hearing by the Senate Banking Committee at which every senator present took an obligatory potshot at the SEC.

The feeling in the room could be summed up by a comment from Sen. Robert Menendez, D-N.J.

“The first thing you have to do is clean house,” said the senator, referring to a suggested course of action in the wake of the agency’s bungled Madoff investigation.

As a result of the hearing, SEC officials promised that changes are on the way.

SEC enforcement director Robert Khuzami, who joined the agency in March, said he has started the most extensive restructuring of his division in at least 30 years.

“We intend to learn every lesson we can [from the inspector general report],” he said. “There are no sacred cows.”

Mr. Khuzami said every stone will be turned in revamping the agency, including making personnel decisions on a case-by-case basis.

“We will thoroughly examine all of the conduct and take appropriate action,” SEC spokesman John Nester said in a statement after the Senate hearing.

The SEC had better keep the self-examination fires burning, because lawmakers will be putting pressure on the agency as a new system of financial regulation takes shape.

As the events of the past year have amply demonstrated, our financial regulatory system is broken and has failed investors. It needs to be fixed.

SEC inspector general H. David Kotz, who testified at the Senate hearing, said that more than 20 SEC employees were involved in the failed Madoff examinations.

“The entire SEC should be held accountable for what happened,” he said. “This thing has really affected the SEC greatly. The SEC understands, I believe, that things need to be done, and [they] are taking action.”

Harry Markopolos, the independent-forensic-accounting expert and fraud investigator who brought his allegations to the SEC about improprieties in Mr. Madoff’s business starting in 2000, told senators at the hearing that the agency’s staff “was not capable of finding ice cream in a Dairy Queen.”

That statement is more pathetic than funny, since the public — as investors and taxpayers — has paid the price for the SEC’s incompetence.

Let’s hope that Congress keeps up the pressure so that the agency takes real action.

We all deserve a whole lot better from the nation’s financial watchdog — and soon.