After Madoff Fraud, SEC Proposes Brokerage Rules
June 16, 2011 (washingtonpost.com) In the long shadow of Bernard Madoff's Ponzi scheme, financial regulators on Wednesday continued closing barn doors after the horses had left.
The Securities and Exchange Commission proposed rules to make it harder for brokerage firms to pull off frauds like Madoff's, in which billions of dollars of investments purportedly held for clients never existed.
First, the agency wants to tighten the audits of brokerage firms.
Second, it wants to give itself and other regulators access to records of the outside auditors and the right to talk to those accountants about what they found.
Third, the SEC wants brokerage firms to file quarterly forms explaining how they handle customers' assets.
The proposals were made in response to Madoff's scheme and other frauds, SEC Chairman Mary L. Schapiro said.
"The fact is that when investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed. But when a broker-dealer violates that trust and misuses the assets, that broker not only harms the investor but also erodes confidence broadly in the financial system," Schapiro said in a statement.
Commissioner Luis A. Aguilar said the proposals "will make long-overdue improvements."
Under the proposed rules, the accountants who perform annual audits of brokerage firms would have to pay attention to the controls the firms use to ensure the protection of customer assets. For example, firms that hold funds for customers are required to keep those assets separate from the firm's own funds.
In Madoff's case, clients received periodic account statements showing that the funds they had entrusted to Madoff were steadily growing in value. Those statements turned out to be fabrications. Investments from some clients were being used to make payouts to others.
Wednesday's proposals are subject to a 60-day public comment period and a final SEC vote.