U.S. securities regulators plan tougher rules to hold investment advisers more accountable for their clients' money following money manager Bernard Madoff's massive fraud of as much as $65 billion over two decades.

The Securities and Exchange Commission voted 5-0 on Thursday to propose that investment advisers who hold their client's assets undergo a surprise exam once a year to make sure those assets exist.

The SEC also proposed requiring advisers who physically hold their client assets in the firm or through an affiliate -- which was the case for Madoff -- to be subjected to a third party internal controls review.

The SEC proposal would also step up scrutiny of investment advisers' auditors. Madoff, who sent out false statements to his clients, employed an obscure auditor that prosecutors allege failed to conduct due diligence on Madoff's operations.

Advisers would have to publicly disclose who their auditor was for both the surprise exam and third-party review, under the SEC plan.

We are taking this action in response to major investment scams such as Madoff and many other potential Ponzi schemes, said SEC Chairman Mary Schapiro. Investors' confidence in the markets has been shaken and troubling concerns have been raised about the safekeeping of investor assets.

In most cases, investment advisers do not physically control their clients' assets, which are maintained with a broker-dealer or bank, also known as a qualified custodian. Advisers who have custody of customers' assets either physically control or have the authority to withdraw their clients' funds.

The SEC plan is open for public comment and must be formally adopted by commissioners before it becomes a rule.

One objection likely to be raised by some investment advisers is the potential cost of the tougher regulations.

The new rules would impose other burdens on entities, said SEC Commissioner Troy Paredes, a Republican on the five-member commission. Any balancing of costs and benefits should account for more than out-of-pocket compliance costs.

Madoff, who ran a large Ponzi scheme, was registered as a broker-dealer and subject to oversight by the industry-funded watchdog the Financial Industry Regulatory Authority and the SEC. His investment adviser business was also registered with the SEC.

Schapiro, who headed FINRA before becoming SEC chairman this year, said a surprise exam would provide another set of eyes on client's assets to protect against theft or misuse. The surprise exam would apply to about 9,600 of 11,000 registered investment advisers and includes advisers who are deemed to have custody or the ability to deduct fees from their client's assets.

The third-party internal controls review would apply to about 370 investment advisers who physically control their customers' assets through the advisory firm or an affiliate such as a broker-dealer or bank.

Under the SEC proposal, the third-party review would describe the controls the adviser has in place, test the operating effectiveness of those controls and provide the results of those tests. That report would be required to be prepared by an accountant registered with U.S. audit watchdog the Public Company Accounting Oversight Board.

Other checks and balances sought by the SEC include further reporting from auditors. Accountants would have to report to the SEC within one business day any material discrepancies found and would have to tell the SEC if it had been fired.

(Reporting by Rachelle Younglai; Editing by Lisa Von Ahn and Maureen Bavdek)