Common Sense for Investors’ Common Cents
Starting next year, the SEC will require investment advisors to place their clients’ assets with independent custodians and hire independent accountants to monitor the custodians. (See Press Release 2009-269, “SEC Approves Stronger Safeguards to Protect Clients’ Assets Controlled by Investment Advisers”.) Custodians must also send account statements directly to the clients. These changes are part of the SEC’s response to the Madoff scandal. Madoff was able to commit his crimes by effectively holding his own clients’ asset and then reporting fictitious data to them. Not only was the fox watching the henhouse, but he owned it and kept track of the eggs! I am impressed that the SEC instituted very simple and practical changes to close a loophole in the regulatory scheme. It did not create a committee, regulatory division or other oversight body. I hope that Congress takes note of this example as it contemplates financial regulatory reform. Bigger and complicated regulation is not necessarily mean better and effective regulation. (December 23, 2009)
