July 13, 2009
To Whom It May Concern:
I am sending this email to simply inform all parties that I am opposed to the proposed amendments to the custody rule that would subject investment advisors to a surprise audit by an accounting firm simply because firms deduct advisory fees from clients’ accounts. On the other hand, I do agree that advisors who have true custody of client assets (that is, beyond a limited fee-deduction authorization) should be subjected to a higher level of scrutiny, such as surprise audits.
I understand and am sympathetic to the fact that the SEC wants to avoid all future ponzi schemes and scandals, and I wholeheartedly agree that doing so is a worthy effort; however, I fail to see how this proposed change will do anything to accomplish the objective. Ponzi schemes have nothing to do with and are neither enhanced nor aggravated by the ability to deduct fees. I am not aware of any systemic problem or risk in this area of fee deductibility, and to require these surprise audits are unnecessary, costly and burdensome – especially for small, independent investment advisory firms such as Ascension Capital Advisors, Inc. I’ve seen cost estimates ranging from $5,000 to $10,000 for these proposed surprise audits, which is real money to my firm and the other 9,000 + firms this would affect. The $45,000,000 to $90,000,000 cost of the new program will either have to be passed on to clients or will result in lower capital expenditures or other cost-cutting measures.
As an alternative, I propose a redefinition of the term "custody" to exclude registered investment advisors that have "custody" of client assets simply because their ability to deduct advisor fees. The regulatory burden involved with audits and surprise examinations is onerous and should only be imposed on firms that represent a significant risk to the safety of client assets. For advisers that (by the new definition) do not have custody but do have the ability to deduct client fees directly, I propose that the independent custodian firm(s) be required to monitor client fee deductions to ensure that they are reasonable (in terms of amount and frequency). Many custodians already have such monitoring policies in place including "red flag" safeguards to require human intervention in the event that a fee deduction threshold is exceeded.
Chip Thiel, CFP®
Ascension Capital Advisors, Inc.