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