The SEC adopted December 16 its custody rules that would require advisors who have custody of clients’ assets to submit to annual surprise examinations by outside auditors.

The new rules, the SEC says, “provide safeguards where there is a heightened potential for fraud or theft of client assets.”

According to the SEC, the rules “promote independent custody and require the use of independent public accountants as third-party monitors. Depending on the investment adviser’s custody arrangement, the rules would require the adviser to be subject to a surprise exam and custody controls review that are generally not required under existing rules.”

“The Madoff Ponzi scheme and other frauds have caused investors to question whether their assets are safe when they entrust them to an investment adviser,” said SEC Chairman Mary Schapiro, in a statement. “These new rules will apply additional safeguards where the safeguards are needed most – that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets.”

Here’s how the SEC says its surprise exam and custody control reviews will work:

Surprise Exam. The advisor is now required to engage an independent public accountant to conduct an annual “surprise exam” to verify that client assets exist. Such a surprise examination would provide another set of eyes on the client’s assets, and provide additional protection against theft or misuse. The accountants would have to contact the SEC if they discovered client assets were missing.

Custody Controls Review. When the advisor or an affiliate serves as custodian of client assets, the advisor is now required to obtain a written report–prepared by an accountant that is registered with and subject to regular inspection by the PCAOB–that, among other things, describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests. These reports are commonly known as SAS-70 reports. Requiring that the accountant be registered with and subject to inspection by the Public Company Accounting Oversight Board–the PCAOB–will provide greater confidence regarding the quality of these reports, the SEC says.

A new control will be imposed on advisors to hedge funds and other private funds that comply with the custody rule by obtaining an audit of the fund and delivering the fund’s financial statements to fund investors. The rule, the SEC says, “will require that the auditor of such a private fund be registered with and subject to regular inspection by the PCAOB.”

The new rules also require “that the advisor reasonably believe that the client’s custodian delivers the account statements directly to the client, to provide greater assurance of the integrity of these account statements,” the SEC says. “It also will enable clients to compare the account statement they receive from their advisor to determine that the account transactions are proper.”