Oct. 9 (Bloomberg) -- The U.S. Securities and Exchange Commission, facing criticism for its oversight of Wall Street, plans a “top-to-bottom” review of investment-firm inspections and may boost disclosure for the asset-backed securities market.

The SEC, faulted by Congress for missing Bernard Madoff’s $65 billion Ponzi scheme, will seek to improve training and tackle “structural issues” that hurt communication in its Office of Compliance Inspections and Examinations, according to a draft five-year strategic plan released yesterday. The agency said it’s considering an overhaul of disclosure rules for banks that sell pools of debt to investors.

SEC Inspector General H. David Kotz said in a report last month that the agency missed at least six opportunities to spot Madoff’s fraud because it assigned inexperienced staff to inquiries and failed to pursue leads. Kotz and lawmakers had already questioned the agency’s oversight of Wall Street banks that loaded up on mortgage securities before Bear Stearns Cos. faced bankruptcy in March 2008.

The SEC “will conduct a top-to-bottom review of the effectiveness of its examination process,” according to the report. The agency is “instituting extensive reforms of its programs to foster and enforce compliance with the federal securities laws” in response to Madoff.

The SEC is seeking public comment on the plan, a 55-page document that lays out the agency’s goals through 2015.

Kotz faulted the inspections office, which examines investment advisers and brokerage firms, for conducting narrow reviews of Madoff’s business and failing to pursue records that might have exposed the fraud. OCIE Director Lori Richards quit in August after leading the unit for 14 years.

Asset-Backed Securities

The asset-backed securities market began drying up in 2007 after home loans that were packaged into bonds defaulted, sapping investor demand. The SEC said it may revise rules and forms that securities firms must file “to improve registration and disclosure requirements.”

The SEC said it may also require brokerage firms to disclose more information about how their compensation is linked to selling certain mutual funds, variable annuities and other investment products.

The agency said it will review its enforcement policies for imposing fines to make sure penalties have the “appropriate punitive and deterrent effect.”

The SEC in 2006 issued guidelines on fining companies amid a partisan dispute on the commission. Democrats argued that fines helped deter wrongdoing and Republicans said penalties further hurt shareholders who had already lost money when the alleged misconduct came to light.

The debate over corporate fines reignited last month when U.S. District Judge Jed Rakoff rejected a $33 million settlement between the SEC and Bank of America Corp. The SEC had accused the bank of misleading shareholders about bonuses scheduled to be paid to Merrill Lynch & Co. employees.

In his Sept. 14 ruling, Rakoff questioned why the SEC didn’t punish Bank of America executives and whether the settlement unfairly compounded damage to investors.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: October 9, 2009 00:01 EDT