July 2, 2009
I wish to express my opposition to the portion of the proposed rule that would mandate an annual surprise audit of all discretionary accounts of an investment adviser by an independent public accountant. Specifically, I am opposed to any position that considers the automatic deduction of client fees from their accounts to constitute 'custody' of client assets, thereby mandating the surprise audits. The mere automatic deduction of client fees does not raise the advisor’s relationship with the client to the level of custody of assets, particularly in relationships where a third party clearing firm is the actual custodian of client assets.
Nor do I believe that surprise audits of fees deducted from client accounts would constitute an effective regulatory practice that would add meaningful protection for investors. More aggressive examinations using existing enforcement techniques would be a more effective safeguard against Ponzi schemes and other major fraudulent activity.
In cases of automatic deduction of client fees, where there is an independent custodian, it would be reasonable to require the third party custodian to provide direct notification to the client of such fees. This would be in addition to the requirement for third party custodians to directly provide clients with monthly account statements.
I respectfully request the Commission to carefully reconsider this aspect of the proposed rule and to permit an exception to the surprise audit requirement for advisors who utilize an independent custodian for client assets.
Ralph E. Duckworth, Jr., CPA
ATI Financial Services, LLC