(Dow Jones) Independent registered investment advisors have good reason to applaud the Securities and Exchange Commission's approval of a final version of its "Madoff fix" a few weeks ago. For one thing, the rule, which calls for investment advisors to undergo annual surprise audits, could be helpful in stemming the kind of malfeasance imprisoned con artist Bernard Madoff has come to represent.

"The SEC is trying to put in place controls to protect investors from fraudsters," says Brian Stimpfl, head of advisor advocacy and industry affairs at TD Ameritrade's Institutional division, which provides custody and other support services to about 4,000 RIAs. "Rocks were overturned in the last year, and as an industry we really didn't like what we saw under those rocks."

But only SEC-registered investment advisories that custody assets in house-as Madoff's firm did-are subject to the rule, which calls for the firms to undergo and pay for yearly audits by independent public accountants of their clients' holdings. Most independent RIAs, which tend to custody assets with unaffiliated third parties like TD Ameritrade Institutional, Charles Schwab Corporation's Advisor Services unit and Fidelity's Fidelity Institutional Wealth Services business, are exempt from the final version of the Madoff fix.

It's thought that between 1,500 and 1,900 SEC-registered investment advisories provide in-house custody of securities-that is, hold them on behalf of the client with a view to reducing the risk of loss or theft-and most of these are either broker-dealer affiliates or alternative-investment managers, says Stimpfl.

This leaves well over 9,000 SEC-regulated RIAs and at least that many state-registered investment advisor firms free from the trouble and expense of the Madoff-fix audits, which stand to put firms back about $8,000 a year, according to the SEC; $25,000 a year, according to TD Ameritrade.

The SEC has yet to issue precise language for the final version of the Madoff fix. But its Dec. 16 press release on the topic and some of the comments it solicited from industry participants last summer suggest that RIAs that custody assets with third parties were let off the hook because their access to client assets are circumscribed by agreements between the custodian and the investor that leave these investment advisors little scope for Madoff-like shenangians.

If a firm that custodies its clients' assets with a third party were to issue false client statements to cover up theft, its efforts would be checked by the custody provider-which have to issue statements directly to the investor at least once a quarter.

Another reason the SEC has let RIAs that custody with unaffiliated providers skate on the Madoff fix is that these providers are, and have long been, subject to the audit requirements to which self-custody firms now have to conform. Running the RIAs through the same mill would amount simply to busywork.


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