The thousands of regulators spread out among the seven positions are simply too many fielders converging for the same ball on the same field at the same time--and at the critical moment, they all assume that someone else will catch the falling ball.
Is it that simple an answer? No ... but, to some extent, it's a good starting explanation for the current regulatory mess: too many overlapping cops, too many organizations competing for starting time and the spotlight, too few stars willing to step up and take control--a team of players lacking a leader.
On an individual level, psychologists call this behavior of passing the buck "diffusion of responsibility." However, I am not familiar with an organizational equivalent. I am not convinced that organizational diffusion of responsibility was the primary reason that regulators overlooked recent frauds, however, it may have contributed to managerial myopia by regulators in allocating their scarce resources. The article discusses FINRA's short-sighted policy of only following up on complaints from customers but not complaints from industry employees. This policy caused the agency to overlook a tip on the (alleged) Stanford fraud given in 2003. Perhaps the agency originally decided to adopt the policy because it felt that another agency (such as the SEC) would be better suited to follow up on complaints from industry employees, which would allow FINRA to specialize in investigating investor complaints.
From an external audit standpoint, I wonder if increasing specialization (crucial to many of today's incredibly complex audits) is causing individual auditors to overlook fraud cues that are outside of their area of expertise...