In a statement issued by the SEC, Cox said the review would "cover the internal policies at the SEC governing when allegations such as those in this case should be raised to the Commission level, whether those policies were followed, and whether improvements to those policies are necessary."

The investigation will also include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by SEC staff regarding the firm.

The Inspector General's office declined to comment on the request, which is expected to come as soon as today.

The inspector general, David Kotz, has issued a number of reports in recent months critical of the agency for being too close to entities it regulates. (See more below.)

The 70-year-old Madoff (pronounced MAY-doff), well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested last week in what prosecutors say was a $50 billion scheme to defraud investors.

Should the Inspector General decide to investigate, it would become one of a number of probes taking shape in Washington into whether the SEC gave any sort of preferential treatment to Madoff's firm.

Senate Banking Committee Chairman Christopher Dodd has already reportedly asked the SEC for information regarding the scandal. The ranking Republican on the Senate Finance Committee, Charles Grassley of Iowa, has been sharply critical of the agency—especially in light of the recent Inspector General reports—and could also jump into the fray.

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Among the key questions facing the agency: why the Madoff firm was not examined by the agency after it became a registered investment advisor in 2006, and why earlier inquiries into Madoff's operations did not turn up the alleged scam.

Madoff's alleged victims include the family charitable foundation for Sen. Frank Lautenberg, D-N.J.; a charitable trust tied to real estate magnate Mortimer Zuckerman; and a charity of movie director Steven Spielberg.

The Wall Street Journal reported DreamWorks Animation SKG Chief Executive Jeffrey Katzenberg and the foundation of Nobel laureate Elie Wiesel also took hits.

As the scale of the alleged scheme was realized, attention turned quickly to Madoff's connections to Washington regulators responsible for monitoring investment funds like the one Madoff operated.

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He knew everyone, former SEC chairman Arthur Levitt said in an interview with The Associated Press. Levitt said he did not invest any money with Madoff.

The director for enforcement at the SEC, Linda Thomsen, said the government was working with federal prosecutors and the FBI to understand the case, "to pursue the case we've got, to preserve assets to the extent we were able and to bring everyone who was responsible for the conduct at the Madoff firm."

At one SEC hearing in April 2004—during the period when Madoff is accused of carrying out his $50 billion fraud—Madoff joked with then-commission chairman William Donaldson about Madoff's own extraordinary profits and teased that he wasn't inclined to provide any advice that might help his business rivals.