Subject: File No. S7-09-09
From: Marshall Jaffe
Affiliation: Jaffe Asset Management, LLC

June 30, 2009

I am an SEC registered adviser and a member of the FPA.

I support the use of audits, surprise or otherwise. Those of us who assume a fiduciary responsibility should feel reassured that the government is acting in the interests of our clients. Whatever inconvenience we feel from the process is more than made up by the fact that investors’ comfort level is increased when they know that effective oversight is taking place.

However, the SEC’s proposal is flawed in two fundamental ways:

  1. This proposal appears to be a solution in search of a problem. In 33 years I have yet to hear about any kind of significant or widespread abuse regarding the withdrawing of advisory fees from client accounts via third party brokerages.
  2. There is an old saying: "When your only tool is a hammer, every problem looks like a nail." Audits are useful and revealing –but they are also time consuming and expensive. If the SEC wants to tighten restrictions on this one particular issue, I can think of simpler and much more effective ways of reducing or even eliminating the potential for abuse. Software could easily be developed which would allow third party brokerage firms to confirm, calculate and withdraw the management fees of each adviser. Since the brokerage firms would take on responsibility for this task, advisers would pay a fee to them for the service. Clients would periodically be required to confirm the arrangement with the brokerage firms. As third party brokerage firms have no financial interest in the fees, the issue of “custody” is eliminated, as is the potential for abuse.

The audit system is a valuable tool – but like every tool, it has to be used appropriately. Otherwise, the audits themselves will be less useful, and the public again will not be protected.


Marshall Jaffe