July 2, 2009
To the Commission:
I am wholly supportive of protecting the financial consumer from fraudulent activities. To that end, the single most important regulation that can be enacted is the requirement of an independent custodian. That single step would greatly reduce the number and magnitude of fraud cases.
While S7-09-09 contains much good it also contains some proposed regulation that would be both overburdening and unnecessary. In particular, the requirement that any advisor who deducts their fee from a client account be subject to surprise audits on an annual basis.
Unlike the vast majority of fraud cases that have occured, this arrangement does not allow the advisor to directly access the client's portfolio devoid of any supervision. Any such billing should be required to go through an independent custodian (which it always does for independent RIA's already) and there should be a requirement that the client receives a notice detailing the deduction before it occurs.
In 13 years in the advisory business I have never heard of a single case of an advisor who fraudulently billed a client through an independent custodian. From a practical standpoint, the transparency of the fee deduction process to both the client and the independent custodian make it nearly IMPOSSIBLE for an advisor to steal money in this fashion.
Imposing an independent audit based on fee deduction is an extremely poor use of time and money in combating fraud. Let's use the limited available resources to focus on things that will actually enhance consumer protection.