July 16, 2009
Your proposal to require registered investment advisors to spend an estimated $8,100 each for a surprise annual audit is incredibly stupid. This is a classic example of passing empty meaningless legislation as a feel-good action to give the appearance of actually accomplishing something.
To require an RIA who has his clients' assets custodied with a qualified custodian that is providing an account statement directly to clients is a complete waste of time and effort. There is almost zero possibility of fraud in this type of situation. Direct delivery of account statements by qualified custodians provides clients confidence that any erroneous or unauthorized transactions would be reflected and, as a result, would be sufficient to deter advisers from fraudulent activities.
Instead, greater scrutiny of RIAs who do directly custody client assets would make great sense. However, even that idea would only be helpful if there were greater training of those doing the audits. The fact that FINRA/NASD audited Bernie Madoff's broker/dealer firm on a regular basis and failed to discover any of the fraud should scare the hell out of the public who has placed their trust in FINRA and the SEC.
The proposal to require advisors to pay for their audits would harm the public, as advisors like myself would simply raise fees to pay for the audit.
I strongly urge you to reconsider this proposal and use commonsense to come up with a better solution.