June 30, 2009
This letter is written to express our opposition to the proposed amendments by the SEC to the custody rule that would require annual surprise audits of investment advisors who use a third party custodian and deduct fees from client accounts. This rule is unnecessary and a burdensome requirement for smaller RIAs.
We are a federally SEC registered RIA firm. As with many RIA firms, we do not hold custody of client’s assets. Client’s investment accounts are held by a non-affiliated, third party custodian. We pull management fees from client accounts, the authority for which is fully disclosed to the client on both the asset management agreement and on the account application. Clients sign their agreement to grant us limited power of attorney to pull management fees on both of these documents. Our clients are provided with monthly statements sent directly from the custodian that list the management fees charged. The clients are also sent a quarterly report from our office, again listing the management fees. With these checks and balances already in place, clients can easily compare statements and examine for any discrepancies and potentially fraudulent account activity.
Surprise audits would increase operating costs especially for the small independent advisory firm. This could hurt the middle income investors who may no longer be able to afford hiring a financial planner to manage their retirement investment accounts.
Although enforcement and due diligence needs to be improved upon to better protect the investor, the proposed custody amendment will not address the failures in proactively uncovering the fraud committed by Madoff and other Ponzi schemes. To enhance the protection of investors, the SEC should instead allocate greater resources to an efficient audit cycle and practice greater diligence in following up on warnings and whistle blower reports on investment advisors.
This summarizes our strong objections to the proposed changes to the custody rule, File No. S7-09-09.