How to Tell If Your Money Is Safe

(MoneyWatch)  Here is a question I've been getting from several investors: In light of the Bernard Madoff and R. Allen Stanford scandals, how do you know your money is safe?

Madoff and Stanford were able to execute their massive frauds because they operated behind a curtain. On the other hand, publicly traded mutual funds operate with a high degree of transparency. Among the advantages of investing in publicly traded investment vehicles are:

• Publicly held mutual funds are a highly regulated industry governed by the SEC.
• Mutual funds are required to have audited financial statements. The audits verify the financial statements of the mutual funds including correspondence with the custodians, brokers and transfer agent of the funds that confirms the securities held.
• Mutual funds do not act as custodian of the assets.
• Mutual funds do not perform the fund's accounting themselves.

These scandals have shed additional light on the perils of investing in areas where the SEC does not have oversight. SEC Chairman Mary Shapiro recently disclosed a number of regulatory changes aimed at addressing weaknesses exposed by the Madoff and Stanford situations.

Still, one of the saddest parts of this great tragedy is that if investors had followed the basic rules of prudent investing, this tragedy would have been avoided. It is hard to understand why anyone would give their hard-earned assets to someone who invests those assets in a way that is not completely transparent.

You'd do well to remember that when things appear too good to be true, they usually are.