July 1, 2009
To: The Security and Exchange Commission
I am writing in regard to the SEC’s Proposed Changes to the Custody Rule, Release No. IA-2876, “Custody of Funds or Securities of Clients by Investment Advisers.” My firm is an SEC registered firm. I am a Certified Financial PlannerTM licensee and a member of the Financial Planning Association.
I am totally opposed to the “Surprise Audit” proposal for several reasons. There is a clear distinction between having “discretion” over a client’s account and having “custody” of a client’s account. The fact that we choose to place client accounts with a third party custodian is a clear indication that we choose not to have custody of those accounts. The fact that we deduct fees from those accounts does not and should not change the definition of “custody.” To my knowledge, there have been no problems related to the deduction of client fees so the SEC’s attempt to tie the fee deduction process to custody seems over reactive and unnecessary. I’m aware that the SEC is under some public and political pressure due to the Madoff case and others so perhaps this is attempt to take action in response to those criticisms. I truly believe this is not the answer. The estimated cost ($8,100) alone is reason enough not to implement this amendment. It would impose an unbearable cost on my firm and is likely to put many others out of business. This cost would obviously be passed on to clients, who don’t need that burden any more than the firms do. Additionally, one of the major problems with the custody rule has already been solved by eliminating the loophole from registration for the accounting firms with the PCAOB, which Madoff's accountant used to avoid detection of his phony auditing practices.
Another factor is that Madoff ran his Ponzi scheme for decades as a broker-dealer before being forced to register two years ago as an investment adviser. The SEC and FINRA ignored repeated warnings from the media and whistle blowers about Madoff. Therefore, Congress and the SEC should hold FINRA accountable for its shared oversight (or lack thereof) of Madoff and other Ponzi schemes, which resulted from a lack of aggressive enforcement by both organizations.
I am in full support of good regulation but do not support unnecessary and reactive regulation. We should not be attempting to implement new amendments just to get something done. What is needed is well thought out and rationally discussed regulation. The regular cycle of audits by the SEC will work if the Commission has the resources to perform them on a regular basis. I would support Congress providing the SEC with the necessary resources to hire and train new staff members to perform regularly scheduled audits.
Thank you for the opportunity to comment.
Michael J. Smith, CFP®
RTD Financial Advisors, Inc.