Corporate & Securities Law

By Jim Hamilton

Maine Contemplates IA Exam Change in Light of Madoff Case

The Maine Office of Securities requests that state investment advisers comment on the Securities Office's intention to propose an additional step to its examination of investment advisers, before this additional step is implemented. The proposed addition is needed because the Madoff case and other recent Ponzi schemes have heightened the investing public's concern that funds they entrust to investment advisers are being misappropriated, and that the public, therefore, expects state securities regulators to take steps to prevent these fund misappropriations.

The Securities Office is confident that assets are safe given that misappropriation would require collusion between an adviser and brokerage firm, and advisers keep client assets with unaffiliated broker-dealers. However, using an independent custodian does not necessarily guard against an adviser who: (1) receives assets from a client and does not deposit all of the assets with the custodian; or (2) specifically arranges with a client for certain assets not to be held by the custodian.

To prevent client fund misappropriations from these causes, the Maine Securities Office is specifically asking state investment advisers to comment on the Office's proposed addition to the IA examination: To contact a random sampling of an adviser's clients and ask them the following questions:

1. Do you receive account statements for your advisory account directly from a brokerage firm, and if so, are the statements consistent with what you believe should be in your account?

2. Are there supposed to be assets in your advisory account that are not being held by the brokerage firm (and for which you may or may not receive statements from your adviser)?

3. Do you ever give money or securities directly to your adviser other than for your advisory fee?

The Securities Office would then take additional steps to confirm the existence of the client's assets if the client answered "yes" to any of the above questions.

Please submit comments on this proposed addition to the investment adviser exam to stephen.I.diamond@maine.gov

Full post as published by Jim Hamilton's World of Securities Regulation on March 11, 2009 (boomark / email).