Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, May 14, 2009

SEC Considers Proposal for Independent Custodian of Client Assets

The SEC held an open meeting on May 14, 2009 to consider a recommendation from the Division of Investment Management that the Commission propose rules to strengthen the custody controls that apply to investment advisers.  The proposal is in response to major investment scams — such as Madoff — and many other potential Ponzi schemes. As explained by Chair Schapiro in her opening remarks:

At its core, the proposal would effectively require that client assets be maintained with a qualified custodian that is independent of the adviser. But, in the case where an adviser or its affiliate maintains custody of client assets, then a PCAOB-registered and inspected public accountant would have to perform an annual custody control examination.

That accountant would also be required to prepare a report describing the custody controls in place and the tests conducted of their operating effectiveness. This report is commonly referred to as a Type II SAS 70 report.

Commissioner Paredes, in his opening remarks, expressed concern about the increased costs the proposal would impose.


I want to emphasize that the new rules that we are considering today are part of a larger package of reforms — all of which are intended to better protect investors from fraud.

Related reforms include improvements to our exam process designed to better identify potential fraud, improvements to the agency's risk assessment process, improvements in the agency's ability to handle complaints and tips, and improvements in the enforcement program designed to ensure that the Commission's enforcement cases are, in the words of our Enforcement Director, "strategic, swift, smart and successful."

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