Bernie Madoff's legacy is still influencing the regulatory community. Fraud is as much a part of Wall Street's history as the closing bell on the New York Stock Exchange, but the Securities and Exchange Commission's recent amendments to its custody rule are intended to make life trickier for any future Madoff.

The agency was widely seen as having dropped the enforcement ball while being warned about the former money manager's epic $50 billion Ponzi scheme. Keenly aware of this perception, the SEC has moved to close off some of Madoff's fraud paths, most recently by updating the custody rule.

The rule is rooted in the Investment Advisers Act of 1940, which was enacted along with the Investment Company Act that year. The Advisers Act required that certain investment advisors register with the SEC, among other provisions. It was amended during the Clinton era to require only advisors with at least $25 million of assets under management to register, leaving the remainder under state regulation.

Typically, investment advisors are not custodians of their clients' assets. Clients usually hire advisors to manage their accounts and establish a customer account with a broker/dealer to execute transactions. Madoff fulfilled both functions.

The SEC is not going to keep that from happening, but its amendments impose more checks on those that wear both hats. A major amendment establishes surprise annual examinations for advisors who also have custody of their client's assets.

"The annual surprise exam imposes an additional expense [on investment advisors] with estimates rang[ing] from $10,000 on up, depending on the size of the advisor," said Justin Kam, director at National Compliance Services. "From SEC's standpoint, it provides safeguards against the misappropriation of client funds."

Surprise exams also extend to pooled investment funds, but only to a point. Advisers to investment pools will be exempt if they are audited yearly by the Public Company Accounting Oversight Board.

Advisors whose custodian status is based on their ability to deduct fees directly from their clients' accounts were not made subject to surprise audits because this role does not lend itself to Madoff-type fraud.

For all the SEC's fault in the matter, and as spectacular as the Madoff fraud was, it is easy to forget that Madoff benefited from such extraneous considerations as commanding respect in the industry, managing legitimate businesses and moving in elite circles.

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