Why Bernie Madoff Would Not Work Here
In case you didn't hear, in 2008, Bernard Madoff was arrested for running one of the largest Ponzi schemes in U.S. history. The Madoff scandal has caused investors to be wary with their investment relationships, and rightfully so. Outlined below are a number of important considerations regarding how we protect client assets and how the procedures used by Wichita Wealth Management (WWM) and the firms we work with are different from Madoff & Company.
As an independent Registered Investment Advisory firm, Wichita Wealth Management is regulated by the Kansas Office of the Securities Commissioner (KOSC). Madoff however, apparently operated as an unregulated hedge fund for most of the time, so there was no similar regulatory oversight — at least not until 2006. WWM submits to periodic inspections by the KOSC. Madoff apparently never did undergo a full SEC (Securities and Exchange Commission) audit.
WWM is not affiliated with Pershing LLC (Pershing), the custodian who holds our clients' investments and is not affiliated with Shareholders Service Group (SSG) the broker/dealer who processes account paperwork and executes trades on clients' behalf. In contrast, Madoff operated both a brokerage firm and an advisory firm.
Based on our registration with the KOSC, WWM cannot (and does not) have custody of clients' investment accounts, nor do we have full power of attorney over client accounts. (We do have the ability to affect trades in client accounts, charge advisory fees, and submit client instructions for processing.) Madoff apparently had more or less unimpeded control over client accounts.
SSG and Pershing are SEC registered broker/dealers. They are regulated by the Financial Industry Regulatory Authority (FINRA), and are registrants of the Municipal Securities Rulemaking Board (MSRB). These regulators are different than the one that regulates WWM's advisory business, which affords additional layers of regulatory oversight and protection for clients. FINRA reviews SSG and Pershing's businesses independently of any review of WWM.
By regulation, SSG and Pershing must calculate net capital on a regular basis, and must notify FINRA and the SEC if it comes within a set minimum of required capital. Hedge funds have no similar requirement.
SSG clears trades through Pershing, where all of our client accounts (except 529 college funding accounts) are held in custody. As of this writing, Pershing has over $1 trillion in assets under custody and is owned by Bank of New York Mellon (BNY Mellon), the largest asset custodian in the world with over $26 trillion in assets. Because of SSG's clearing arrangement, there are three layers of independent control, three layers of independent regulatory oversight, and three sets of financial reporting.
Clients receive a full statement of positions, balances, and account activity monthly or at least quarterly from Pershing, a source that is not affiliated with WWM or SSG. Hedge funds do not have the same requirement.
As a member of the Securities Investors Protection Corporation (SIPC), as of this writing, client accounts are covered by insurance protection up to $500,000 including $250,000 for claims of cash. In addition to the SIPC account coverage, there is excess coverage from Lloyd's of London to protect clients' assets up to an overall aggregate level of $1 billion for assets in custody, including up to $1.9 million in cash awaiting reinvestment per client account. (Neither SIPC nor excess of SIPC coverage protects against the decline in the market value of securities or losses incurred while broker/dealer remains in business.)
SSG and Pershing undergo full financial audits annually of all accounts and financial operations by an independent certified auditor. Audited financial statements are filed with the SEC, FINRA and state regulators where required.