The new rule is a direct response to the Madoffs and Stanfords of the world, SEC Chairman Mary Schapiro said Wednesday. "Such frauds have caused investors to question whether their assets are safe when they entrust them to an investment adviser," she said.

 

Under the rule, investment advisors who have custody of their clients' funds would be subject to surprise audits on an annual basis, with audit teams referring suspicious findings back tot he SEC for further action. 

 

Surprise audits are, no doubt, a strong disincentive to fraud. But it is important to remember that it was SEC examiners who gave Madoff a clean bill of health in 2006, and who failed to note any irregularities in a business that was, in fact, the largest Ponzi scheme ever perpetrated.

 

While the SEC's move is a welcome one, its effectiveness will be dependent on the Commission's commitment to aggressive oversight.