June 30, 2009
To Whom it May Concern:
I am an FPA member and a partner in a firm that operates as an SEC Registered Investment Advisory firm. I am opposed to the proposed ruling that would require surprise audits of firms like ours simply because we deduct client fees.
I am disturbed and outraged that an individual like Bernie Madoff operated for so long escaping the scrutiny of regulators that were given multiple credible cautions that something was not right. Had those regulators followed existing audit procedures, they would have discovered the fraud. That did not happen.
Now, the SEC has proposed a new regulation that will re-define "custody of assets" as it relates to advisor control over assets. The simple act of deducting fees for services would constitute custody under the new rule and subject firms like ours to "surprise audits" by approved CPA firms. The cost of these audits is estimated by the SEC to be $8,100 per firm; a cost that will likely be passed on to clients in the form of increased fees.
In the Madoff case, that firm did not use a third party custodian for holding client assets, generating third party investment statements and providing 24/7 online account access. Madoff's firm "manufactured" all the financial reporting of client accounts. For firms in that situation, an outside audit is a must. The SEC already resolved one of the major problems with the custody rule, which was eliminating a loophole from registration for certain accounting firms with the PCAOB that Madoff's accountant used to avoid detection of its phony auditing practices.
If the SEC and FINRA had been more aggressive in the enforcement of existing rules rather than ignoring the whistleblowers, his fraud would have been discovered years ago. This points to a lack of enforcement of existing rules rather than a lack of effective rules.
The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisers. As far as we are aware, there have been no systemic problems in this area and are unnecessary, costly and burdensome, particularly for small, independent investment advisers. The costs and time burden for these audits will simply be an added expense to our clients, a distraction to us from serving our clients and are in no way related to the problem that gave rise to this action.
From this side of the beltway, this appears to be an excellent example of diverting attention from the real issue of lack of enforcement by pretending that there aren't sufficient rules. We operate in a highly regulated environment as it is. What we need are regulators to enforce the rules that currently exist and stop adding new obstacles to our business and costs to our clients that add no value.
I appreciate your consideration of my point of view.
William S. Hart
President, Retirement Strategies
Chairman, FPA of Northeast Florida