July 21, 2009
As a compliance officer and consumer, I can appreciate the thought process behind the proposal of requiring advisors with custody to have an annual surprise audit. However, I believe that there are a few areas where this proposal becomes a burden rather than an asset to both the advisors it affects and to the public.
I am going to focus on the idea of requiring advisors who charge fees from client accounts held through a qualified custodian to pay for an annual surprise audit only for the purpose of verifying annual fees. I believe that these investment advisors with custody should be excepted from the surprise examination requirement. This form of custody is less likely to be abused, as clients receive monthly statements directly from their qualified custodians and therefore have their own personal records to verify fees withdrawn in a very timely fashion. Rather than requiring an annual audit, which would be redundant and overkill, perhaps the requirement of sending invoices to clients should be re-introduced. With that simple change, clients would be advised of the fee coming out of their accounts, then they would have their monthly statements directly from the custodians to verify that withdrawal.
The answer to the question "Should we specify certain minimum procedures that each chief compliance officer should implement regarding the safekeeping of client assets" could be as simple as that invoice. There would be a paper trail indicating the calculation made to arrive at the invoice in the advisor's files as well as the client's personal files. Again, if an advisor is working with qualified custodians that send monthly statements directly to clients, or where clients have online access to their accounts, and they inform the client of the amount of the fee and how they arrived at it, there is no need for an expensive annual audit. For most Registered Investment Advisory firms that deduct fees from client accounts, that expense will be prohibitive and will out of necessity be passed directly on to the clients.
In summation, this surprise annual audit will be redundant for advisors who utilize qualified custodians that send out monthly statements directly to clients, or have real-time web access. This surprise annual audit will also raise the operating expenses needlessly, making an RIA's services more expensive for clients.