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Investment Advisers Must Submit to Surprise Audits

WASHINGTON (CN) - Investment advisers with custody of client funds or securities must submit their books to an independent public accountant under a new Securities Exchange Commission rule.

In 2009 the Commission brought several enforcement actions against registered investment advisers and broker-dealers alleging misuse of investor assets and falsification of account statements, including using investor assets to pay for personal expenses, build luxury homes and make Ponzi payments to other investors.

As a result, the Commission has enhanced the rules governing the custody of customer assets, by requiring, among other things that investment advisers and broker-dealers undergo an annual surprise examination by an independent public accountant, to verify customer assets.

The Commission also requires that the physical custodian of assets and securities must send statements directly to the client and, if client assets are not controlled by an independent custodian, requiring advisors and broker-dealers to provide clients with a report of the internal controls on client assets prepared by an accountant registered with the Public Company Accounting Oversight Board.

The Commission believes that these new protections will encourage investment advisors to maintain client funds with qualified, independent custodians who will directly provide clients with statements to compare against statements provided by investment advisors to insure that all deductions from the account are legitimate.

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