The U.S. Securities and Exchange Commission has adopted rules designed to reduce the possibility of fraud or theft of client assets by an investment advisor.

The SEC said that the rule changes will substantially increase protection for investors who turn their money and securities over to an investment advisor that maintains physical custody of those assets. Most advisors don’t retain custody of their clients’ assets, the SEC says, but over the past year, it has brought a series of enforcement cases against advisors who had access to their clients’ assets and misused them.

The revised custody rule promotes independent custody and requires the use of independent public accountants as third-party monitors. Depending on the custody arrangement, the rules could require the advisor to be subject to a surprise exam and custody controls review that are generally not required under existing rules.

The new rules also will impose a new control on advisors to hedge funds and other private funds that comply with the custody rule by obtaining an audit of the fund and delivering the fund’s financial statements to fund investors. They also require that the advisor reasonably believe that the client’s custodian delivers the account statements directly to the client, to provide greater assurance of the integrity of these account statements.

“The Madoff Ponzi scheme and other frauds have caused investors to question whether their assets are safe when they entrust them to an investment advisor,” said SEC chairman, Mary Schapiro. “These new rules will apply additional safeguards where the safeguards are needed most — that is, where the risk of fraud is heightened by the degree of control the advisor has over the client’s assets.”

IE