Federal regulators on Thursday proposed requiring most investment advisers to submit to surprise exams by outside auditors, a move aimed at patching gaps that allowed Bernard Madoff to deceive investors about their funds’ health.
The Securities and Exchange Commission voted 5-0 at a public meeting to open the proposal to public comment for 60 days. It could be formally adopted some time later.
SEC Chairman Mary Schapiro said the move was a response to the Madoff scandal and the proliferation of other investment pyramid schemes revealed in recent months amid the market turmoil. The managers of those investment funds controlled clients’ money directly or through affiliates of their firms, giving them the power to withdraw client money.
“Investor confidence has been shaken,” Schapiro said before the vote. “Investors are looking to the SEC to ensure safekeeping of their assets, and we cannot let them down.”
The proposal would protect investors by encouraging investment managers to entrust client funds to the custody of independent third parties, Schapiro said.
The annual surprise examinations for investment funds with custody of clients’ money would allow independent accountants to peer into a fund’s books and verify that the money is actually there. The requirement would apply to about 9,600 investment advisers of the roughly 11,000 that are registered with the SEC.
It would provide “another set of eyes on client assets,” Schapiro said. Fund managers would know an exam was coming every year, but wouldn’t know when.
For investment funds not using independent firms to hold client assets, the proposal would require the investment adviser to obtain a report by a registered public accounting firm assessing the internal controls of the adviser firm.
In addition, investment managers would have to file reports to the SEC with the name of their outside accountant and each time they change accountants. The accountants would have to inform the SEC within one business day if: their exams turn up significant discrepancies, they are terminated by the investment managers, or quit on their own.
Like other regulatory filings, the information would be publicly available through the SEC’s Web site.
In the Madoff case, his longtime accountant — essentially a one-man shop run out of a tiny suburban office — essentially rubber-stamped Madoff’s books for 17 years, government authorities have said. The accounting firm failed to meaningfully audit Madoff’s investment business or confirm that securities purportedly held by his firm on behalf of its clients even existed.
Madoff, who pleaded guilty to fraud charges in March and admitted losing billions of dollars from thousands of investors, could face up to 150 years in prison when he is sentenced next month.
Copyright 2009 The Associated Press.