Mary Schapiro, Barack Obama’s choice to lead the Securities and Exchange Commission (SEC), previously appointed one of Bernard Madoff’s sons to a regulatory body that oversees American securities firms.

It has emerged that in 2001, Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra.

Mr Madoff is under house arrest in his $7 million Manhattan apartment and will be electronically tagged after he failed to secure further signatories to guarantee his $10 million bail.

Both sons have emphatically denied any involvement in what could be the biggest fraud perpetrated by an individual.

However, the link with Mark Madoff may prove controversial for Ms Schapiro and the President-elect, who has moved fast to replace Christopher Cox, the current head of the SEC. The watchdog has came under fire for failing to detect Mr Madoff’s activities.

Earlier this week, Mr Cox admitted the regulator had repeatedly failed to follow up on tip-offs about Mr Madoff’s business dealings.

At the time of Mark Madoff’s appointment, Ms Schapiro was serving as president of the National Association of Securities Dealers (NASD), according to the Wall Street Journal, which was consolidated with the New York Stock Exchange Member Regulation in 2007 to form Finra.

She has served as a commissioner of the SEC under three administrations since the 1980s: President Reagan appointed her in 1988, she returned for the first President Bush in 1989, and she was named acting chairman by President Clinton in 1993.

Ms Schapiro chaired the Commodities Future Trading Commission in the mid-1990s, during the downfall of Barings Bank, and first joined NASD in 1996 as president of regulation.

Mr Madoff was himself closely involved in NASD, the self-regulatory organisation for brokers and dealer firms, in the 1970s.

The NASD went on to found Nasdaq, the screen-based equity exchange, in 1971, and Mr Madoff became its chairman in 1990.

Mark Madoff began working at his father’s firm, Bernard L. Madoff Securities, in 1986. He was the third member of Mr Madoff’s family to join the business, following his uncle, Peter Madoff, and his cousin, Charles Wiener, son of Bernard’s sister, Sandra. Andrew Madoff, his younger brother, followed in 1988, and Roger and Shana, children of Peter Madoff, joined in the 1990s.

It emerged yesterday that Shana Madoff’s relationship with her husband, Eric Swanson, is at the centre of an SEC probe. Mr Swanson is a former SEC attorney.

In a profile of the Madoff family, published in 2000, Mark Madoff said: “What makes it fun for all of us is to walk into the office in the morning and see the rest of your family sitting there. That’s a good feeling to have. To Bernie and Peter, that’s what it’s all about.”

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