U.S. SEC watchdog: revamp exam process post-Madoff

WASHINGTON (Reuters) - U.S. regulators had "ample information" to trigger an extensive exam of convicted fraudster Bernard Madoff's investment firm, but continually gave it only a "medium risk" rating, a government watchdog said on Thursday.

David Kotz, the inspector general for the U.S. Securities and Exchange Commission, issued a report that gave the agency 11 recommendations so it can better pick which investment advisers and investment companies to examine.

"The investigation found that the SEC received more than ample information in the form of detailed and substantive complaints over a period of many years to warrant a thorough and comprehensive examination," of Madoff's firm for operating a Ponzi scheme, the report said.

Kotz said the agency conducted three examinations and two investigations of Madoff and his firm, but never performed a "thorough and competent" examination that could have uncovered the $65 billion fraud.

He said Madoff's firm was given a "medium risk" rating when it registered with the SEC in 2006, and was given that rating again in 2007 and 2008.

Only firms categorized as "high risk" trigger routine exams within three years of receiving that rating.

Kotz recommended that the SEC use more database information when assigning risk ratings to investment advisors, share more information among the enforcement and examination staffs, and require that investment firms disclose more information to the SEC, among others.

The SEC's Office of Compliance Inspections and Examinations agreed with all 11 recommendations, the report said.

(Reporting by Karey Wutkowski; Editing by Richard Chang)