July 6, 2009
I am writing, as an SEC registered investment advisor, to protest the proposed rule change that all investment advisors who “have custody of their clients’ assets” be subject to a surprise audit by an independent accounting firm. My firm, like most small independent investment advisory firms, only has “custody of client assets” because the SEC includes the ability to deduct in-arrears management fees in its definition of “custody”. Most unbiased observers would not include the ability to deduct in-arrears fees in a list of attributes of what constitutes “having custody of client assets”.
Just because I deduct in-arrears management fees, under the proposed rule I will be forced to bear significant financial expense and time distraction dealing with auditors. And for what? Is the client any safer? Has there been any problem or scandal with managers deducting in-arrears fees? Our clients’ assets are custodied with State Street Bank & Trust and with Fidelity Investments, two of the largest custodians in the nation. I totally understand the need, even necessity, of an outside audit when the manager controls the custodian, as in a parallel investment management / broker dealer arrangement. However, simply deducting fees has not been a problem and, therefore, there is no reason to add a significant expense and burden on managers to correct a non-problem.
The easiest solution to your commendable efforts to tighten regulation post-Madoff is to change the SEC’s definition of custody so that simply deducting fees in-arrears does NOT constitute “having custody of client assets”.
T. Montgomery Jones, managing partner