As amended yesterday, the SEC’s custody rule will require advisers who do custody their clients’ asset to use independent public accountants as third-party monitors. Depending on the investment adviser’s custody arrangement, the SEC said the rules would also require the adviser to be subject to a surprise exam and custody controls review that were generally not required under existing rules (see “SEC Proposes Tighter Adviser Custody Rules”).

The SEC noted that most investment advisers do not maintain physical custody of their clients’ assets and rather hold assets with a qualified third-party custodian. However, the advisers who do and take advantage of the situation have been all over the news in the past year; the SEC has brought a series of enforcement cases against advisers, such as Madoff, who misused their access to clients’ assets.

Those advisers often covered up the misuse by distributing false account statements to their clients reflecting assets that didn’t really exist. The SEC said the new rules are intended to help prevent that from happening and promote the independent custody of assets.

“The Madoff Ponzi scheme and other frauds have caused investors to question whether their assets are safe when they entrust them to an investment adviser,” SEC Chairman Mary L. Schapiro said in a statement. “These new rules will apply additional safeguards where the safeguards are needed most—that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets.”

In addition to requiring audits, the new rules will require advisers to hedge funds and other private funds that comply with the custody rule by obtaining an audit of the fund and delivering the fund’s financial statements to fund investors, according to the SEC. The rule will require that the auditor of such a private fund be registered with and subject to regular inspection by the Public Company Accounting Oversight Board (PCAOB).

The  rules also require that the adviser “reasonably believe that the client’s custodian delivers the account statements directly to the client, to provide greater assurance of the integrity of these account statements,” the SEC said. Clients will also be able to compare the account statements of the adviser and the custodian to determine that the account transactions are appropriate.