Mary Schapiro, the incoming head of the US Securities and Exchange Commission, walked into a storm of controversy less than a day after being nominated to lead the Wall Street regulator when Barack Obama takes office next month.

It emerged yesterday that Ms Schapiro appointed one of Bernard Madoff’s sons to a regulatory body that oversees American securities companies. Ms Schapiro, at present the chief executive of the Financial Industry Regulatory Authority (Finra), employed Mark Madoff in 2001 to serve on the board of the National Adjudicatory Council, which reviews disciplinary decisions made by Finra.

Mark Madoff and his brother, Andrew, were understood to have approached the authorities last week after their father apparently confessed to orchestrating a $50 billion securities fraud.

Although both sons have denied any involvement in the alleged scam, the development comes at a sensitive time for the SEC, which is under fire for failing to spot such a colossal fraud, despite tip-offs over ten years.

Pending confirmation by the Senate, Ms Schapiro, 53, will next month replace Christopher Cox, who is scrambling to construct a case against Bernard Madoff and to launch an inquiry into why the regulator failed to spot such a huge scheme.

The appointment of Ms Schapiro has triggered speculation that a merger of the SEC and the Commodity Futures Trading Commission (CFTC), the commodities regulator, which she led during the Clinton Administration, is being considered. She will be under intense pressure to help to rewrite the Wall Street rule book, which, by and large, is 70 years old. New rules are expected to address sensitive issues, such as short-selling and the scrutiny of hedge funds.

Since the eruption of the credit crisis 18 months ago and the collapse of Lehman Brothers in September, Washington has been aghast at how useless much of the Wall Street regulatory structure has proved to be. Mortgage lenders have been allowed to extend loans to borrowers who were unlikely to be able to repay them and unregulated markets, such as the credit default swaps industry, have ballooned without oversight.

An SEC-CFTC merger would bring under one roof all American regulation for capital markets, such as shares and bonds trading, and commodities markets, such as oil trading. It would make Ms Schapiro one of the most powerful financial regulators in Washington since the SEC was created in 1934 by Franklin Roosevelt to inject confidence into stock markets.

In a speech in October last year, Ms Schapiro said: “Investors can understand and accept a tech bubble or a recession – they go with the territory of a free market. What they won’t accept is a system they can’t trust. That’s why it’s so important for all of us to work together to safeguard that sense of trust and foster confidence among investors.

“There’s no question the future can be intimidating, but as a famous scientist once said: ‘The best way to predict the future is to invent it.’ Right now we have an unprecedented opportunity to invent the most effective and efficient regulatory approach, one that will better protect investors and allow you to do what you do best – help investors to realise their dreams and give them the tools to invent their own financial futures.”

Ms Schapiro may prove to be a canny appointment by Mr Obama. Having trained as a lawyer, she worked as an attorney within the futures industry and helped to write government policy and regulations on the derivatives market in the wake of the 1987 stock market crash.

With a deep understanding of both financial futures and the commodities markets, she is well placed to merge the SEC and the CFTC to streamline regulations in those sectors.

Last year Congress granted the SEC an annual budget of $906 million, and the regulator had a full-time work-force of 3,500.

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