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Embarrassed after missing the warning signs of the financial crisis and the Ponzi scheme of Bernard L. Madoff, the Securties and Exchange Commission's enforcement division has adopted several new — if somewhat unconventional — strategies to restore its credibility, the New York Times' DealBook Blog reported today. The SEC is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator. "We were given a once-in-a-lifetime opportunity to rethink what we do and how we do it," said Robert Khuzami, the agency's enforcement chief since 2009 and a former federal prosecutor who once was the general counsel of Deutsche Bank. In one of the agency's first efforts, Khuzami and his boss, Mary L. Schapiro, the chairwoman, sought to tear down the agency’s bureaucratic barriers. The SEC had more than 70 tip lines, including e-mail and voice mail, but no central repository. To consolidate the tip system, Schapiro dispatched a top lieutenant, Stephen L. Cohen, to help create a database from scratch. Now, all tips and referrals — regardless of the source — are put in a single database. SEC employees must put a tip into the system within three days.

Democrats on the House Financial Services Committee were critical yesterday of the Securities and Exchange Commission at a hearing to examine settlements for corporate wrongdoers, the Washington Post reported today. Democrats said that they were worried that such settlements could send the wrong message, allowing corporations to treat SEC enforcement actions as just another cost of doing business. U.S. District Judge Jed S. Rakoff last year challenged what has long been official policy at the SEC by refusing to approve Citigroup’s $285 million, "no-admit" settlement with the agency over charges that it misled investors during the mortgage meltdown. The SEC and Citigroup have appealed, and in a preliminary ruling, appellate judges have expressed sympathy for their position. Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, bristled at the criticism, saying thats, when it comes to resolving enforcement cases, the SEC knows best and judges should not micromanage.

U.S. securities regulators are investigating hedge-fund firm Magnetar Capital LLC, which bet on several mortgage-bond deals that wound up imploding during the financial crisis, the Wall Street Journal reported today. If the SEC were to file civil charges, it would be its first enforcement action against hedge funds related to collateralized debt obligations (CDOs). Investigators are looking at whether Magnetar had such a strong influence in designing any of the deals that in effect it took over the role of collateral manager. The collateral manager has the ultimate responsibility for selecting the assets for the CDO and owes a duty of care to all the investors in the deal. CDOs are based on pools of risky mortgages and other loans and are sold in tranches. Magnetar invested $1.5 billion to $1.8 billion into the riskiest slices of CDOs from 2006 to 2007, while betting about twice as much that the mortgage-bond deals would decline in value.

The House Financial Services Committee will hold a hearing today at 10 a.m. ET titled "Examining the Settlement Practices of U.S. Financial Regulators." To view the witness list and prepared testimony, please click here: http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=29…

A new study using industry data says that the rebates could be costing mutual funds, pension funds and ordinary investors as much as $5 billion a year, the New York Times reported today. The study was written by financial consulting firm Woodbine Associates and will be released this week. Woodbine said that the report was done independently, without support from industry participants. Some financial firms criticized Woodbine's calculations and said the cost to investors was overblown, but did not dispute that the potential for a conflict of interest exists. The study estimates that investors lost an average of four-tenths of a cent on each of the 1.37 trillion shares traded last year because of orders being sent to exchanges that were not offering the best final price.

The Federal Reserve's attempt to clarify the "Volcker rule" is only creating more confusion in the financial services industry and Congress, the Wall Street Journal reported today. At issue is whether the Fed is requiring banks to start scaling back on making bets with their own money almost immediately, or whether they can continue until the ban on such activities goes into effect in two years. Law firms, bankers, analysts and members of Congress are divided on what the Fed is advising. While Fed governor Daniel Tarullo said at a congressional hearing in March that regulators should keep trying to meet the July deadline, there is no firm date internally for when that final measure will be ready. The Fed largely calmed bankers' fears when it said in its guidance that it expects banks to "engage in good-faith planning efforts" to make sure they comply with proprietary-trading restrictions by July 21, 2014. That deadline follows a two-year "conformance" period after the rule's implementation.