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Senate Pushes for Controls To Prevent Another Madoff

Calls for greater oversight of the investment advisory profession continued last week, with key congressional leaders pushing the industry to come up with changes designed to prevent future fraud schemes similar to that of the Madoff case.

Christopher Dodd (D-Conn.), chairman of the Senate Committee on Banking, Housing and Urban Affairs, said he would ask the Securities and Exchange Commission and FINRA for updates every three months on the steps it intends to take to prevent similar schemes in the future.

Industry professionals have been calling on the federal government to secure safety nets for consumers whose investment firms go under. Stephen P. Harbeck, president and CEO of the Securities Investor Protection Corp., said Congress should re-evaluate the U.S. Treasury line of credit to SIPC.

Not only is the corporation still unsure as to how much it might be asked to advance to customers of the failed Bernard L. Madoff Securities firm, but recovery work is still underway stemming from the collapse of Lehman Brothers, Harbeck said.

Created in 1970 under the Securities Investor Protection Act, the SIPC has a $1 billion line of credit with the U.S. Treasury, which has remained unchanged since then. It also maintains two commercial lines of credit with an international consortium of banks. One of those lines will expire in March. The SIPC is also partially supported by assessments on member firms. All told, it has assets currently of $1.7 billion, Harbeck said.

Through 2007, the SIPC has liquidated 317 brokerage firms and returned more than $15.7 billion in cash or securities to customers, all without having to tap its government funds or borrow from its commercial line of credit.

Losses stemming from securities industry failures in 2008, however, are very different from anything the corporation has faced in its past, he said. Although Madoff claimed that he stole $50 billion from investors, the SIPC will not know the full extent of the fraud until customer claims are received and processed.

"To date, the trustee has identified over $830 million in liquid assets of the defunct brokerage firm that may be subject to recovery," Harbeck said. The trustee has already collected $91.8 million, and is still in the process of recovering assets.

The SIPC believes that it could begin to satisfy, straightforward claims by February.

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