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FRM Part II · FRM Exam Part II · Madoff: A Riot of Red Flags

Which regulatory reform theme is most consistent with lessons drawn from the Madoff case?

The most consistent reform is giving examiners expertise and incentives to follow up on credible tips and verify information with third parties. Madoff's case showed weak follow-up and no independent confirmation. Greater self-certification or fewer examinations would reduce, not increase, oversight of firms with potential fraud.

  1. AGiving examiners the expertise and incentives to follow up on specific, credible tips and verify with third partiesCorrect
  2. BRelying more heavily on firms' self-certification of compliance
  3. CLimiting examinations to firms that hold client assets in custody with unaffiliated custodians
  4. DLowering the number of examinations to focus only on firms with reported losses

Explanation

The failures involved inexperienced examiners, weak follow-up on tips and no third-party verification. Reforms therefore stress expertise, tip handling and independent verification. The other options reduce scrutiny or increase reliance on the firm.

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