March 9 (Bloomberg) -- The U.S. Securities and Exchange Commission is asking investors to verify holdings as the agency increases scrutiny of money managers in the wake of Bernard Madoff’s alleged $50 billion fraud.

The SEC is sending letters to investment-advisory customers to learn whether their account statements match what money managers have disclosed to the agency, said Lori Richards, who heads the SEC’s inspections office. Disparities may mean advisers are keeping two sets of books, as regulators say Madoff did.

“We are beefing up our exam procedures in light of the recent frauds,” Richards said in a March 6 interview. “Investors should not draw any negative conclusions” about their money managers “if they get one of these letters.”

Richards and other SEC officials have twice testified before Congress on Madoff on why inspections failed to spot wrongdoing before the New York money manager was arrested Dec. 11 after allegedly confessing to his sons.

As it expands examinations in response to Madoff and R. Allen Stanford, the Houston-based financier accused last month of falsifying statements and misappropriating clients’ funds, the SEC faces questions over whether it’s unnecessarily scaring investors.

Customers of investment advisers are already jittery after the Standard & Poor’s 500 Index plunged 46 percent in the past year, said Ron Geffner, a lawyer at Sadis & Goldberg LLP in New York whose clients include hedge-fund managers.

‘Stampede’

“When investors open up their mail and see the SEC seal on the letterhead, many will immediately and incorrectly presume the SEC believes their manager has engaged in fraud,” said Geffner, a former SEC attorney. “In an effort to protect investors, the SEC unintentionally may cause a stampede of investors running from their managers.”

Investors shouldn’t be concerned, Richards said, noting that the SEC has previously sent such letters on a more limited basis.

“This is just a normal part of our exam procedures going forward,” said Richards, director of the SEC office of compliance, inspections and examinations.

SEC examiners are verifying records with the securities firms that money managers use to hold customer assets. Richards called it a “top-to-bottom” review in which the SEC cross checks the account statements of custodians, investment advisers and clients.

She declined to comment on whether the SEC is conducting any examination “sweeps” of fund managers in response to Madoff and Stanford.

No Bank, Brokerage

Madoff, who’s accused of paying off old investors with money raised from new ones, didn’t use a bank or outside brokerage firm to hold his clients’ money. After his arrest, Richards and former SEC Enforcement Director Linda Thomsen told lawmakers investment advisers should be required to assign customer assets to third parties to help protect investors.

Richards said SEC examiners are also scrutinizing money managers over who audits their books. If an investment adviser who oversees a substantial amount of money uses a “no-name” auditor, the SEC considers the fund a higher risk, she said.

Bernard L. Madoff Investment Securities LLC, which Madoff registered with regulators as a brokerage and an investment adviser, was audited by Friehling & Horowitz, a three-person firm in New City, New York.

Money managers aren’t required to tell the SEC who they use as a broker or an accountant, leaving agency examiners to figure out such information on their own. Robert Plaze, an associate director in the SEC’s investment management division, said the agency is working on a rule to require disclosure.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: March 9, 2009 09:45 EDT