The New York attorney general's office had requested that Mr Merkin relinquish control of the funds as part of its civil complaint against the money manager, the Associated Press (AP) reports.
It said the move, which could be approved by a court later this week, does not represent a settlement of the case.
New York attorney general Andrew Cuomo alleges that Mr Merkin funneled $2.4 million to Mr Madoff without his investors' knowledge and earned millions in management fees, despite simply passing clients' money on to the fund manager.
He is also accused of ignoring "glaring red flags" regarding Mr Madoff's business activities.
Mr Merkin denies the charges and maintains he had no knowledge of Mr Madoff's $65 billion Ponzi scheme until the broker's arrest in December.
His lawyer, Andrew Levander, told the AP that handing over control of the funds are part of his "continuing efforts to maximize the returns to investors".