SEC wants investment funds to get surprise inspections
WASHINGTON -- Federal regulators on Thursday proposed requiring investment advisers to submit to surprise exams by outside accountants, 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 came as 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. 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 the Madoff case, his longtime accountant — a tiny firm — 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.
