July 15, 2009
Proposed Rule S7 09-09 is an obvious response to the Madoff incident, and other current frauds. Unfortunately, Ponzi schemes and other frauds are not new events, as history is littered with repeated cases of broker-dealers, brokers, and others in the investment community defrauding their clients.
There is a huge distinction between Madoff (who was his own broker/dealer) and the independent registered investment advisor. The latter most typically uses an unrelated third party as custodian of client assets. As a result, concerns about independent RIAs would be isolated to fraudulently accessing client accounts to withdraw fees.
Has this been an issue? Through its own examination process, has the SEC discovered a pattern of independent investment advisors fraudulently withdrawing fees that would support the significant additional cost and burdensome time commitment resulting from surprise audits?
We would suggest the independent RIAs, who use third-party custodians, be excepted from the rule for the following reasons:
1. The recent frauds causing the SEC to re-examine its 2003 rule were related to custodied assets, not fraudulent withdrawal of fees.
2. We've seen no evidence that fraudulent processing of client fees is an issue in the independent RIA industry.
3. The fees withdrawn by the RIA are clearly delineated on custodian statements which are sent directly to the client (and are also available on line). This allows clients full transparency on fees withdrawn, virtually eliminating the opportunity for fraud.
4. The SEC already audits the fee-withdrawal process as part of its standard RIA audit
5. Most major custodians have policies and procedures in place regarding fee withdrawals that would restrict, or at least flag, fraudulent transactions.
Tim Halls, principal, Moneta Group Investment Advisors, LLC