July 1, 2009
Charging fees to a clients account at a legitimate custodian is not the same as having custody. A distinction must be made within the proposed regulations.
A Simple Solution: Let the real Custodians (Schwab, TD Ameritrade, Fidelity, Pershing, etc) monitor fees and movement of money out of each account,not just fees. Regulate that fees must be charged to respective accounts below a certain annual percentage range. Custodians can easily monitor these money flows daily via computer without having inefficient, sporadic and costly audits. Much of this is already being done by the larger custodians such as Schwab and TD Ameritrade.
Years ago, I remember a story in the Wall Street Journal about a major wirehouse brokerage team in Las Vegas who transferred funds out of numerous client accounts (including Paul Anka). As I recall, this husband and wife team who billed themselves as the brokers to the stars, transferred over $30million out of client accounts while sending these same clients counterfeit statements making it harder to detect the fraud. The real brokerage statements were diverted to addresses that the crooked brokers controlled. This couple left the country and the wirehouse made the clients whole. Since that story, regulations and procedures are in place at brokerage firms to head off practices like this. Now, if a client changes their address, a letter goes to the old address, confirming the change. Also, investors can now check in online and see all activity in their accounts 24/7.
You cannot regulate crooks. All the SEC may do is make it so hard for criminals to operate within the system that the crooks may simply decide to operate outside the system. Imagine regulating the industry so tight with regulations that the crooks falsely claim they are an Investment Advisor on their stationary while they lure in the greedy and unaware anyway. The SEC can may be able to put in enough regulations to demonstrate added protection but at the cost of increasing their bureaucracy and cost to the ultimate consumer. The problem with onerous safeguards is that they may be lost on consumers who delegate in any way. Even the do-it-yourself consumer needs to buy products and services that, without proper due-diligence, could undermine their goals.
All consumers must beware of everything from buying a pound of fresh food to repairing/buying a car to safeguarding their assets.
(Attached File #1: s70909-263.pdf)