June 30, 2009
I am the president of a small (sole advisor) SEC-Registered Advisory Firm and respectfully submit this testimony AGAINST requiring surprise audits in those cases where a firm is considered to have custody SOLELY based upon custodian fee deductions.
Several years ago, the SEC did a good job of separating those advisors with actual “custody” from those who would be considered to have custody solely due to automatic deduction of fees. This was a fair and logical line drawn between those who can manipulate clients funds and those who cannot. The exemption from having full “custody” for those deducting fees was predicated upon having a qualified custodian holding the client assets and supplying the client with regular account information. Those are sensible standards that I believe would be fair and safe going forward.
Subjecting advisors who deduct fees to an audit of this type is an over-reaction to current situations and, I believe, harmful to clients and their advisors. Other areas of interest in the proposed regulations such as implementing internal controls, notice to clients, duty of due inquiry and ADV disclosure of assets are all realistic enhancements to current rules. Adding the burden of a surprise audit to small shops like mine would cost an inordinate amount of resources from a monetary and time commitment.
We in the small-advisor community need to work effectively and efficiently in order to serve our clients properly. Having surprise audits at my level is a waste of resources both on my part and that of the SEC. If it cannot be demonstrated to have a positive impact on how I serve my clients or how I run my practice, it is a distraction from my duties and hurts my clients.
Best of luck with your thoughtful deliberations on this.