July 1, 2009
The proposal to require all RIAs (who are deemed to have custody solely because they submit their fees to an independent custodian for payment) to engage a public accountant for a surprise annual audit would be a significant and unnecessary burden to my firm.
Our firm, and many like us, calculate client fees on a very simple arithmetic basis. The invoice (which includes the market value, time period and the fee percentage rate calculation) is produced quarterly, given to each client quarterly, and matches the fee amount listed on the independent custodian's statement under "account activity". In order for the fee to be paid, the client must sign a blanket fee authorization with the independent custodian.
Including a review of client fees does not seem to be a difficult item for the SEC to review during audits. I submitted my firm's accounts receivable information to the SEC examiners and they could match any entry to the client's independent statement from the custodian. The SEC could also view account fees over time to determine that the change in the amounts were consistent with market action or due to significant deposits or withdrawals. The SEC also looked at my annual income statement prepared by an independent accounting firm to confirm that the client fees were consistent with our reported revenue.
If an SEC audit finds evidence that a firm which uses an independent qualified custodian (which directly mails account statements to clients) has inconsistently/erroneously charged client accounts, overcharged client accounts or has billed fees in a way that is inconsistent with Form ADV Part II, I believe the surprise audit requirement would be warranted for that firm.