May 29, 2009
I understand the Commission's concern related to custody in light of recent abuses by certain firms and individuals.
However, I believe the Rule, as proposed, will be too onerous on smaller RIA firms in regards to cost.
I believe an exception for advisors which only have custody of clients assets due to their ability to withdraw management fees directly fromt the clients account at a qualified custodian is appropriate. Of the thousands of RIA's registered with the commission (and at the state level) the number of cases of abuse are small, I would say less than 0.5%. And in most cases, it was obvious to the client that these advisors had custody, indicated they had custody on Form ADV, and that the problem was as much fraud at the audit level as the fraud of the misuse of the client funds.
One aspect of the most recent changes (several years ago) to the determination of custody related to the withdrawal of management fees from a clients account at a qualified custodian was to remove the requirement that a "Notice" be sent to the client coincident with the billing of fees from the account (if certain other conditions were met). At my firm, we have continued to advise the client of the fee debit from their account by sending a "Billing Notification" via the postal service even though the requirement to do so was eliminated.
I believe that just like allowing a utility company to debit my personal checking account to pay my bill, I deserve to receive a notice so I can monitor the level of the fee for a particular service.
Requiring RIA's to send a Notification of Billing to their clients at the time of the debit of the management fee from the client account at a qualified, non-affiliated, custodian would empower the client to monitor the level of the fee paid and to watch for abuse by comparing the RIA's Notification agains the monthly statement or online account viewing provided by the qualified custodian.
Unless there has been a rash of abuse of fraudulent management fee withdrawals from client accounts,of which I am not aware, I believe the Rule, as proposed goes too far and penalizes the 99% + investment advisors who are honest, committed to their fiduciary responsibility, and who use independent qualified custodians.
In summary, the rule should have an exception for advisors who would only be deemed to have custody due to their ability to withdraw management fees from the clients account, and if deemed necessary, impose a requirement to send a notice of billing at the time the management fee withdrawal occurs.
Thomas Breiter, President
Breiter Capital Management, Inc.
941-778-1900