July 7, 2009
The proposed rule changes regarding custody of assets and the "surprise" auditing to ensue seems a less than well thought out reaction to the relatively few in our industry who take advantage of others. The Bernie Madhoff's of the world will always be out there, no matter what measures you take. You simply can't regulate away all potential harm one man can instigate upon another. Indeed, it seems even your own institution is subject to the failures of a few and has greatly contributed to some of these more recent problems. Thus, where do you draw the line in the sand and define what is enough regulation? And, who then oversees the overseers? What's to say a local CPA firm doing such audits and who hold interest in an investment company won't allow their own competitive bias to get in the way of those they audit? It seems you would be attempting to fix one problem while creating many others.
That said, there can be better ways to investigate the actions of others. Perhaps for those firms who manage client funds AND create their own client statements there should be greater scrutiny. Such firms can certainly propogate subversive tactics and draw upon the exposure and ignorance of others. However, what questions will you ask now that you didn't ask before? Are you going to do a full blown audit by bringing in the equivalent of a team of forensic accountants to look for inconsistencies? Having had someone steal $83,000 from me at a previous firm I can certainly attest to the harm that is done both in dollars and reputation. However, to verify no more money than that was stolen we hired an accounting firm to audit ONE bank account and ONE brokerage account going back two years. That audit cost us over $32,000 to complete, and no other monies were found taken than the $83,000 we originally knew about. As you know CPA firms don't come cheap, and if you think small firms like ours can afford such audits you are greatly mistaken.
In my practice we actively manage about $20 million in client funds, with plans to double those assets the next two years. Do we do our business in a respectable and above board manner? Absolutely. Do I want to always be in compliance with the rules and regs of our industry? Of course. We affirm as much through annual audits done by our broker/dealer. But do I have the resources to pay an accounting firm to perform an in depth audit of our procedures? No way, even if we grow to twice our current size.
Though today we are not an SEC regulated RIA, we very well may be soon. And when that day comes I'd like to know the SEC is a "partner" with us, helping us to grow our firm in moral and ethical ways through education, dedication to fair practice and accountability to our investing clients. I pray the accountability piece will be done fairly and appropriated where problems originate, not through rules and scrutiny that negatively impact those of us who do things right already.
Thanks for listening.