In the wake of the Bernard Madoff scandal, the Securities and Exchange Commission unanimously agreed Thursday to consider a series of proposals that would require investment advisers who manage or have access to customer funds to undergo annual surprise audits.
Part of the plan would require all SEC-registered advisers who have custody of clients' assets to retain an independent public accountant to conduct an annual surprise exam to verify the money actually exists.
If client funds were missing during the process, those accountants would have to notify the SEC.
SEC Chairman Mary Schapiro estimated that the proposed rule changes would affect 9,600 investment advisers who have custody of clients' assets in one form or another.
The goal behind the proposal is to promote independent custody of funds as an extra step to prevent fraud.
"We are taking this action in response to major investment scams such as Madoff," Schapiro said. She said "investor confidence in the market has been shaken. These investors are looking to the SEC to ensure the safekeeping of their assets and we cannot let them down."
Typically, most investment advisers do not have physical custody of their clients' assets. Instead, they are held by a broker-dealer or a bank. But in some cases, the adviser may still be considered to have custody of the funds because he or she has the authority to withdraw the money. In other cases, the custodian of the money may belong to the parent company of the adviser.
Both of these categories would qualify as "custody" under the SEC proposal.
A second piece of the proposal approved for consideration by the agency Thursday would require investment advisers with custody of clients' assets to obtain a written report prepared by an auditor to certify the firm has the proper controls in place.
That accountant would have to be registered with and inspected by the Public Company Accounting Oversight Board.
Current rules do not require such third-party reviews.
Madoff operated both a broker-dealer and an investment advisory business, Bernard L. Madoff Investment Securities LLC. He held custody of the assets in the broker-dealer portion of his business, which was in line with current SEC rules that permit self-custody in certain cases.
The SEC said Thursday that recent enforcement cases have demonstrated that some advisers have managed to gain access to customers' money and misused it.
