Investment Advisers Would Face More Scrutiny Under SEC Proposal

The Securities and Exchange Commission yesterday proposed rules to better protect the assets of people who use investment advisers to manage money.

The proposals would require investment advisers to show evidence to an independent accountant that they actually have the assets they tell clients they have. Clients turn over their savings to advisers and often leave it up to them to decide how to invest it.

The rules respond to concerns among regulators that it is too easy for investment advisers to misuse client assets and then cover up the abuse by sending clients false reports about their accounts. That was what happened in a number of recent financial frauds, including the Bernard L. Madoff scheme.

"We are taking this action in response to major investment scams -- such as Madoff -- and many other potential Ponzi schemes," SEC Chairman Mary L. Schapiro said. "Many clients understandably are concerned about whether their investment advisers are properly handling their hard-earned dollars."

Nationwide, there are about 11,000 investment advisers, who register with the SEC and manage tens of trillions of dollars in assets. Vanguard and Fidelity are among the best-known investment advisory firms. Most firms are small, with fewer than 10 employees. Investment advisers generally charge clients a fee based on percentage of assets under management per year.

One proposal would require advisers to undergo an annual surprise exam by an independent accountant. The accountant would verify the existence of assets that advisers claim.

The SEC's second proposal addresses the minority of investment advisers who do not use independent firms as a custodian for client assets. These advisers would still be subject to a surprise exam. But each year they would also have to show a federally regulated accounting firm that they have the proper procedures in place to safeguard client assets.

Karen L. Barr, general counsel for the Investment Advisory Association, said the industry supports additional oversight for advisers who do not use independent custodians.

But she said the industry is generally opposed to new burdens on advisers who use independent custodians.

"The potential risks in those situations are relatively minimal compared to the risks in a self-custody situation. I'm not sure the costs outweigh the benefits in that circumstance," she said.