July 2, 2009
To whom it may concern:
In reviewing the potential rule changes in the document "Custody of funds by Investment Advisors" I have several comments to share for your consideration
In section V. item B. states that an independent public accountant would provide "another set of eyes" on client assets. This statement I believe is made to sound like this is a positive when this idea has many flaws. If your goal is to protect client assets another set of eyes is another potential threat or liability to client accounts. Identity theft, fraud, industrial espionage, extortion and intentional individual wrongdoing are all items that are encouraged by this proposed rule change. The relationship between the advisor, client and custodian is based on a need to know basis with information correctly compartmentalized for data security. When one all knowing "set of eyes" comes on board to oversee there is no one to oversee the overseer.
I take great issue that the supposed problem is the advisor or custodian not having oversight. This rule is in my interpretation a direct reaction to the Madoff fraud with the "make a law approach". The fact is that an unscrupulous person such as Mr. Madoff or other advisors who defraud their clients will find a way to circumvent this set of rules as they did the current set of rules. The only people that are benefiting from a rule like this are the individual accountants. The clients whom this rule is designed to protect have no dramatically greater level of protection than before but the consumer, advisor and custodian have a significant burden to bear because of it.
Potential problems to the "surprise audit". There appear to be conflicting suggestions of when the surprise audits can occur. Do they happen at the end of the fiscal year? Are they prompted by complaints? Are the surprise audits directed by some body or organization? As you can see each of these "surprise audit" scenarios illustrates that no audit is truly a surprise and all this is doing is to act in the best scenario as a deterrent and in the worst as a signal that the fraud will not be detected for a fixed amount of time. The fact is that unscrupulous advisors can still defraud clients but they must do it all within a quarter or at the beginning of the fiscal year. While the benefit to the consumer is the deterrent aspect the reality is that the fraud can still occur and the consumer in turn is paying the price for the additional record keeping and red-tape. The consumer is in effect paying for insurance that he or she may or may not need that may or may not actually payoff. If you were to ask consumers directly if this sounded like a winning proposition I would venture to say 9 out of 10 would decline this type of insurance.
Another aspect to the "surprise audit" and "independent account" is that an independant accountant is no less subject to bribery, blackmail, extortion or intimidation as the current custodian and advisor are and if anything are more likely to be subject to these evils.
As a quick ten second sound byte on the nightly news this rule changes seems to benefit consumers and prevent another Madoff type scandal but in reality consumers may be less safe with this passage rather than more secure. While I am well aware that in many military and banking security procedures numerous overseerers are utilized to ensure the integrity of everyone I am also well aware that no security procedure is fail safe and one must weigh the potential benefits with the actual costs of any security procedure.
I would respectfully urge the SEC to utilize its resources under the current regulatory structure to detect fraud rather than implement burdensome changes that may or may not really help anyone. Thank you for your consideration.
Anthony W. Payne
Associate Financial Planner
John E. Sestina & Company