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SEC improves client safety, but investors must play a role, by Matthew S. MacLean, chief operating officer and general counsel of Red Granite Advisors LLC.

The name Madoff is synonymous with the recent financial crisis. The Bernie Madoff case, however, is one of several recent enforcement cases brought by the Securities and Exchange Commission (“SEC”) against investment advisory firms that had access to client assets and misused them. 

Unlike Madoff, most advisory firms do not have physical custody of their clients’ assets. Rather, their clients’ assets are maintained by qualified and regulated third-party custodians like banks or broker-dealers. Clients receive one statement from their advisory firm and a separate statement from their custodial firm, creating a check and balance.

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The SEC recently adopted new rules related to custody of client assets to help prevent Madoff-style incidents and to increase checks and balances in the industry. The new rules provide safeguards where there is a heightened potential for fraud by SEC-registered investment advisers. In addition, the new rules promote independent custody and require the use of independent public accountants registered with the Public Company Accounting Oversight Board.

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