July 2, 2009
I am a Certified Financial Planner™ practitioner and a member of the Financial Planning Association and the National Association of Personal Financial Advisors. I also currently serve as the Chairman of the Financial Planning Association of Greater Phoenix. I and my partner own and operating a small SEC Registered Investment Advisory firm.
I am absolutely opposed to the requirement in the proposed amendments to the custody rule that would mandate an annual surprise audit of all discretionary accounts of an investment adviser by an independent public accountant.
In my opinion, the proposed surprise audits are more of a reaction to public criticism of the SEC and congressional pressure after the Madoff scandal than an effective regulatory response.
The SEC already resolved one of the major problems with the custody rule by eliminating a loophole from registration for certain accounting firms with the PCAOB that Madoff's accountant used to avoid detection of its phony auditing practices.
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 had nothing to do with fees deducted by investment advisers. To the best of my knowledge, there have been no systemic problems in this area and the surprise audits are unnecessary, costly and burdensome, particularly for small, independent investment advisers.
The new surprise audit requirement will add additional costs that could ultimately be passed on to the consumer. Moreover, current regulatory requirements have already resulted in incremental costs of compliance. To add annual surprise audits will result in less time available to serve the needs of clients, potentially higher fees to cover the costs and potentially a need to reduce head count, rather than grow, since any new employees will necessarily increase our regulatory burdens of compliance.
I believe that better consumer protection is needed and support Congress appropriating additional resources to the SEC to hire and train additional examination staff to increase the regular audit cycle of investment advisers.
An annual surprise audit is not the answer. The clarity of guidelines, the quality of the audits, and the enforcement of existing rules and regulations is a far better choice of action.
Cornelius H. Van Zutphen, Jr, CFP®
Delta Ventures Financial Counsel, Inc.