July 1, 2009
I have received word that the SEC if proposing a custody rule IA-2876, which may require SEC Registered Investment Advisors to undergo a surprise audit by an independent accountant. Because of the Madoff situation and similar scams that have taken place in this country, I see why something needs to be done. However great care must be taken in the writing of this bill. Many registered advisors, are very small firms who are paid directly from the clients accounts by client-agreement. The legitimate accounts are held at legitimate custodians such as TD Ameritrade and should not be put under the label of “custody”. I think a surprise audit by a regulator is a good thing to help keep the mavericks honest. However, if the very small firms have to pay a significant fee for a surprise audit by a private accounting firm, that could be a significant financial burden.
In addition, I fail to see how an audit by a private accounting firm would help solve the problem. Obviously Madoff didn’t have any trouble paying off those who were in his way.
Thanks for listening.
Max W. Smith