The Securities and Exchange Commission’s custody rule governing investment advisors’ custody of client assets imposes various requirements and, in turn, costs on investment advisors, who often need to hire independent accountants to conduct surprise examinations, according to a new report by the Government Accountability Office

To protect investors, the rule requires advisors that have custody to use qualified custodians (e.g., banks or broker-dealers) to hold client assets and have a reasonable basis for believing that the custodian sends account statements directly to clients. The rule took on urgency in the aftermath of Bernard Madoff’s Ponzi scheme, in which his office sent fraudulent statements for decades to his investment clients, who were cheated out of billions of dollars.

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