July 1, 2009
I am a member of FPA and an IAR with a SEC registered RIA. I am opposed to the requirement in the proposed amendments to the custody rule that would subject investment advisers to a surprise audit by an accounting firm.
The proposed surprise audit appears to be more of a reaction to public outcry and congressional pressure due to the Madoff scandal rather than an effective regulatory response. The SEC has already resolved one of the major problems with the custody rule, which was eliminating a loophole from registration for certain accounting firms that Madoff's accountant used to avoid detection of its phony auditing practices. Also the Madoff and other Ponzi schemes resulted from a lack of aggressive enforcement by the SEC and FINRA of current rules and ignoring repeated warnings from the media and whistle blowers. The SEC should hold FINRA accountable for its shared oversight of Bernie Madoff in conducting the Ponzi scheme for decades as a broker-dealer before registering two years ago as an investment adviser.
The Ponzi schemes uncovered by the SEC have had nothing to do with fees deducted by investment advisers. As far as I am aware, there have been no systemic problems in this area and therefore the proposed action is unnecessary, costly and burdensome, particularly for small, independent investment advisers. The new surprise audit requirement will add additional costs to my business that will ultimately be passed on to my clients or drive me out of business. I would suggest and support instead regulations that would inform clients as to how to independently verify custody of their assets. If only one client who was the victim of one of these Ponzi schemes separately verified assets chances are these crooks will be caught faster. Unfortunately all the regulations in the world will not stop the crooks. They will find some way around them. Therefore the only effective regulations would need to uncover these schemes quickly but not at the expense of the clients they are trying to protect. Costly regulations do not serve these clients.
In order to enhance consumer protection, I would support Congress appropriating additional resources to the SEC to hire and train additional examination staff to increase the regular audit cycle of investment advisers.