July 1, 2009
TO: Security & Exchange Commission
RE: Proposed Rule Change
As a participant in the financial services industry since 1975 and the securities industry since 1982 I wish to speak against the above referenced proposed rule change.
Insofar as I understand the matters at hand both Mr. Madhoff and Mr. Stanford held custody over client’s assets, and abused that trust. They did not allegedly steal billions from their clients in the form of charging fees; they stole billions from their clients by holding custody over the assets and putting out fictitious account statements. I would submit that this is the locus of the problem and where regulatory attention should be focused; and not on surprise audits for virtually the entire investment advisory industry.
I would recommend instead simply mandating all investment advisors to use independent custodians – in my case such as TD Ameritrade – to report independently to their clients on a monthly basis the value of their accounts and the trades that have been made. I believe this should be an absolute mandate.
Further, the TD Ameritrade model already limits the amount of fees that can be charged to my client’s accounts by me to a relatively deminimus amount, (I believe TD Ameritrade’s limit to be 3% annually; I know that my own fee schedule is much less) – thereby further safeguarding the client against fraud from the advisor. I would encourage something along the lines of this “gentle fencing” be incorporated into the new rules as well.
TD Ameritrade additionally requires any distribution request not going into the client’s checking account/to their home to be signature guaranteed. This too is a wise restriction in my opinion and should be part of a general rule.
I further believe that those who might object to such simple regulation might come from hedge fund management. I would offer as a counter-argument that if we have learned anything from the above debacles it is that no one should be able to control valuing customer accounts while at the same time making trades and having the capacity to withdraw significant amounts from the client’s account. Hedge funds, in my opinion, need to have the light of day shined on them. They should have to report what they own and what the value of each position is in each account not less than monthly to their clients. Simply the fact that someone is rich should not leave them exposed to unethical or unscrupulous investment advisors.
In sum, I believe that a few simple mandates centering on independent custodians, limits on fees, and mandates as to distributions from customer investment accounts going into customer checking accounts/home address would resolve the problem. The surprise CPA led audits would, in my opinion, overlay more expense and still not resolve the problem with certainty. As long as advisors are able to maintain custody and value their customer’s accounts and withdraw funds from those accounts directly we woulkd continue to be at risk. I would argue, with all respect, that over a decade of routine regulatory auditing did not discover these fraudulent acts. What assurance can we have that a CPA would be able to discover truth? The answer is, I believe, we can’t. Only by separating the advisor from the custody and valuation of the client’s accounts can we resolve the problem with certainty.
Having the “gentle fencing” in place would allow the SEC to more thoroughly audit the independent custodians. I have two clients who have come to me in 2008 after having been exposed to fraud: Enterprise Trust Company, now in receivership. My clients’ settlement…about 50 cents to the dollar.
Thank you for allowing me to communicate on this important issue. I wish you well in “getting it right”. Chuck
Charles K. Arnold
Registered Principal & Investment Advisor Associate
Protected Investors of America