July 15, 2009
I am a member of the Financial Planning Association and also an SEC-registered investment adviser. I have reviewed the proposed changes to the custody rules in File Number S7-09-09. I am opposed to the requirement in the proposed amendments to the custody rule that would subject investment advisers to a surprise audit by an accounting firm, for several reasons:
* The regular audits by my broker/dealer, the SEC, and FINRA already accomplish the amendment’s purpose.
* One of the major problems with the custody rule has already been resolved. The SEC had already eliminated the “loophole from registration” for certain accounting firms with the PCAOB that Madoff's accountant used to avoid detection of its phony auditing practices.
* The Madoff and other Ponzi schemes resulted from a lack of aggressive enforcement of current rules, both by the SEC and FINRA. Repeated warnings from the media and whistle blowers were ignored. The SEC should hold FINRA accountable for its shared oversight of Bernie Madoff in conducting the Ponzi scheme for decades as a broker-dealer before registering two years ago as an investment adviser. Innocent investment advisers should not be punished for this failure.
* The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisers. I am not aware of any systemic problems in this area.
* The new surprise audit requirement will add additional costs to my business and all other investment advisers. These costs will ultimately be passed to my clients through higher fees. This added cost will no doubt reduce their net return, which means that accomplishing their financial goals and maintaining financial security will be that much more difficult. In addition, this requirement will take away valuable time that is needed to assist clients during the ongoing financial crisis.
The proposed requirement is unnecessary, costly, and burdensome, particularly for small, independent investment advisers. Rather than this proposed requirement, I support getting Congress to appropriate additional resources to the SEC to hire and train additional examination staff to increase the regular audit cycle of investment advisers. This is in the best interest of the consumer, and will more effectively ensure compliance with regulations and prevent fraud.
Michael T. Tarrant
Financial Network Associates, Inc.
A Registered Investment Advisor