The Securities and Exchange Commission has launched a review of how investment advisers and broker/dealers care for client assets. The review is likely to lead to rules that either limit investment advisers' ability to hold client assets or boost the transparency of client asset accounts, say industry experts.
The SEC's Office of Compliance Inspections and Examinations has sent letters asking investment advisers and broker/dealers to produce a range of documents and submit to on-site interviews. According to the letters, the SEC is seeking to understand these firms' custodial arrangements and verify that client assets exist and are being kept safe.
Investment advisers are currently permitted under Rule 206(4)-2 of the Investment Advisers Act to have self-custody of client assets or to use an affiliate, provided the adviser or the affiliate is a registered broker/dealer, futures commission merchant or bank. Several authorities have stated that the Madoff Ponzi scheme would not have been possible had he been required to hold customer assets at an independent custodian.
Full Story: Rulemaking Ahead? SEC Probes Custody Practices, Compliance Reporter (Feb. 27, 2009)