The SEC will consider two proposals on custody rules as part of a package of initiatives aimed at ensuring the safekeeping of investor assets in the wake of the massive Ponzi scheme perpetrated by Bernard L. Madoff Securities LLC of New York, Securities and Exchange Commission Chairman Mary Schapiro said today.
The SEC will propose “in short order” a proposal to strengthen the controls applicable to investment advisers with custody of client funds and securities, Ms. Schapiro said in prepared remarks to the Society of American Business Editors and Writers in Denver.
“I anticipate that this proposal will include a consideration of ‘surprise’ examinations by a certified public accountant, and a requirement that investment advisers undergo third-party compliance audits,” she said.
Another proposal would require that a senior officer from broker-dealers and investment advisers with custody certify that controls are in place to protect investor assets, Ms. Schapiro said.
The two proposals are part of a package of initiatives that she said the SEC is developing to ensure safekeeping of investor assets.
The Madoff firm, which had reported $17 billion in assets when the Ponzi scheme was made public, held custody of its own assets and was audited by a “storefront” accounting firm that was not registered with accounting regulators.
In addition, the SEC in June will propose new money market fund regulation, Ms. Schapiro said.
The proposal would govern “the credit quality, maturity and liquidity provisions that currently apply to money market funds. In addition, we are reviewing whether more fundamental changes are needed to protect investors from runs on the funds, including floating-rate net asset values.”
Nearly $4 trillion is invested in money market funds, she said. New York-based Reserve Management Co. Inc.’s Primary Reserve Fund “broke the buck” last fall when the net asset value of its shares fell below $1 after its holdings in Lehman Brothers Holdings Inc. of New York deteriorated.
That event “called into question the stability of all [money market] funds and has led us to ask how we can bolster the resilience of these funds that have become so important to our economy and to investors,” she said.
The SEC next month will consider a proposal to remove the barriers that make it costly for company shareholders to nominate directors, Ms. Schapiro said.
She acknowledged that, “In real ways, the SEC has not been where investors most needed it” during the past year as the financial services industry has reeled from problems stemming from bad mortgage investments.
But the SEC chairman insisted, as she has in the past, that the SEC should remain independent.
Investors “need an agency that’s there for them — and primarily them. They need an independent agency that exists not just to protect Wall Street, but to protect Main Street,” she said.
The SEC currently has about 150 active
hedge fund investigations in the works, as well as about two dozen municipal securities investigations, and more than 50 investigations involved credit default swaps, Ms. Schapiro said.
