Marcia Kramer Mayer of NERA Consulting has studied issues such as market efficiency, settlement protection and class certification. She spoke to Judith Schoolman about how the SEC should look to the example set by the IRS, which uses computerized searches to identify problems.

1. Why has it taken the SEC so long to take an aggressive stand against investment fraud?

I don't think the problem is one of leniency toward fraud. The SEC has been aggressive but disorganized. A recent Office of the Inspector General report on the Madoff investigation-16 years in the making, by the way-showed that the SEC failed to pull it together again and again.

For example, several offices had Madoff investigations open simultaneously, but none knew of the others. Madoff himself was told of being examined by SEC offices in Boston, New York and by the SEC's home office in D.C. There was never follow-up and things fell through the cracks, even though there were tons of red flags. In the final analysis, the SEC is numbers oriented-the larger the number of scams closed, the better. But closing down one $65 billion scam is worth more than 200 minor violations. Don't treat them as equals.

2. Is the SEC's image tarnished because of how long it took to get Madoff?

Terribly. Madoff confessed Dec. 11, 2008. That's when the SEC filed its complaint. They were close many times, but dropped things. It reminds me of another colossal failure-the World Trade Center on 9/11 and the FBI. There was a failure to connect the dots. Different agencies were working without coordination. The FBI then, the SEC now. Madoff was handed to the SEC on a silver platter by multiple parties, multiple times. From 1992 though 2006, there were investigations, and it wasn't as if he was under the radar. He was highly influential and a big name.

3. What can advisors do to prevent another Ponzi scheme?

A lot. And to give credit where it's due, some investment advisors did perform due diligence and walked away. A few Wall Street firms were involved with Madoff, but it was mostly private money.

Generally, when looking at a fund, financial advisors need to look for the existence of an independent custodian, an unrelated auditor, and excessive secrecy. In Madoff's case, why didn't investors, or anyone for that matter, know who the counterparties were in the options transactions? Financial advisors also need to look a fund's consistency. With Madoff, there were very few negative months, maybe seven out of 145. Any financial advisor worth his or her salt will question that level of consistency.

4. What is the role of an independent custodian of an investment advisor?

The custodian (in the form of a bank) looks at whether there are assets and whether withdrawals are authorized. The custodian can blow the whistle, of course, if there's theft of assets.

Madoff had a custodian, but he also wanted to be the sub-custodian, completely in charge. This isn't good enough. A change in SEC regulations could require the involvement of an independent custodian.

5. You believe that data verification, such as that used by the IRS, is a tried-and-true approach. Why has there been resistance to this method of oversight?

The IRS data is very systematic and comprehensive. They have numerous forms and computer checks of returns in place. The SEC never considered adopting this sort of system. Its investigations are labor intensive, and are largely staffed by attorneys and people poring though records.

There was a human decision not to get Madoff's trading data, and look what happened. I believe that the SEC will have to get independent third-party verification because that's where they failed. Yet, there is still resistance due to the SEC's corporate culture.

We need to ensure that every quarter or first-of-the-year, investment advisors have their numbers cross-checked.