July 15, 2009
Ms. Elizabeth M. Murphy
Secretary
United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
RE: Proposed Amendments to Rule 206(4)-2
Release No. IA-2876
File No. S7-09-09
Dear Ms. Murphy:
I appreciate the opportunity to express my views in response to the Securities and Exchange Commission’s (the “Commission”) request for comments on the proposed amendments to Rule 206(4)-2.
As a registered investment adviser representative, under Rule 206(4)-2 we are deemed to have custody solely because we have the authority to deduct advisory fees from our clients’ accounts, all of which are maintained by an independent, qualified custodian. I strongly believe that the portion of the proposed Rule that would require advisers with this form of custody to undergo an annual surprise audit is not warranted.
As required by current Rule 206(4)-2, the independent qualified custodian maintaining my clients’ accounts delivers account statements, on at least a quarterly basis, directly to clients, identifying the amount of funds and securities at the end of the period as well as all activity in my clients’ accounts. As a result, my clients receive comprehensive account information directly from the qualified custodian and are thus able to monitor the activity in their accounts. Furthermore, my clients have on-line 24/7 access to their accounts, to check balances and to view all activity. In addition, my clients agree, in writing, that my advisory fee will be deducted directly from their advisory accounts.
Accordingly, the safekeeping measures currently required by Rule 206(4)-2 provide my clients with the ability to sufficiently identify and detect erroneous or fraudulent transactions. It is also my understanding that abuses in the industry have not generally resulted solely because of arrangements whereby advisers have the authority to deduct fees from accounts maintained at qualified independent custodians. The absence of such actions supports my position that the safeguards mandated by current Rule 206(4)-2 are sufficient to deter advisers from engaging in fraudulent conduct.
Furthermore, the cost associated with an annual surprise audit would cause a financial strain on my company, the cost of which would most likely be passed on to my clients in the form of higher advisory fees, which is not in the best interests of my clients. I suspect that these surprise annual audits would prove overly burdensome and costly for most small, independent investment advisers, and the clients would be no better off.
Given that existing safeguards in place are adequate and considering the adverse effects of a mandatory surprise audit on advisers as well as clients, I respectfully request that the Commission leave current Rule 206(4)-2 intact and unchanged with respect to advisers who have custody solely because they have the authority to deduct advisory fees from client accounts. I thank the Commission for the opportunity to comment on this matter.
Respectfully,
Michael S. Carey, CFP®
First Vice President
cc: The Honorable Barbara A. Mikulski, Senator- (D-MD)
The Honorable Benjamin L. Cardin, Senator (D-MD)
The Honorable Donna Edwards, Representative (D-04)
Michael S. Carey, CFP®
Cassaday & Company, Inc.
Financial Planning - Investment Management