SEC Verifying Client Assets

In reaction to the Bernie Madoff Ponzi scheme, the Securities and Exchange Commission has started a new examination practice in which the agency is verifying the existence of client assets managed by the advisor it is examining.

“The SEC is taking a number of proactive steps to address issues arising from the Madoff fraud,” says David Tittsworth, executive director of the Investment Adviser Association (IAA) in Washington. He says that Gene Gohlke, associate director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), told IAA of the new exam ritual in a recent letter so that IAA could tell its advisor members. “Contacting clients and other third parties to verify account balance information is an additional check that can be used in routine examinations to detect potentially fraudulent activities. We are pleased that the SEC has informed us so that advisers and their clients do not misconstrue this new examination practice.”

To deal with repercussions of the Madoff scandal, the SEC is also conducting targeted examinations that focus on self-custody practices of certain dually registered firms, and preparing a rulemaking that will address self-custody and other issues, Tittsworth says. The IAA sent a letter to SEC Chairman Mary Schapiro on March 6 setting forth various recommendations for the anticipated rulemaking.