Subject: Response to SEC S7-09-09

July 22, 2009

Dear SEC,
I am a member of NAAIM and also a SEC registered investment advisor. The Securities and Exchange Commission recently proposed a controversial new requirement for federally registered investment advisers that would mandate an annual surprise audit of all discretionary accounts of an investment adviser by an independent public accountant. The SEC considers automatic deduction of client fees from these discretionary accounts to be 'custody' of client assets, thereby requiring special attention in the wake of the Madoff scandal. The SEC estimates the average fee of these audits at $8,100 per firm and internal costs of administering it of $1,256 for a total of $9,356. The FPA estimates $10,000 to $20,000 per year.

I am strongly opposed to this specific requirement in the rule, and offer the following comments.

· The requirement of surprise audits for advisors who have “custody” solely because they deduct client fees from an independent custodian flies in the face of over 35 years of SEC rulemaking.

1 Why punish most advisors who use independent custodians, instead of requiring independent custodians of the few hundred that don’t use such custodians. That would get at the heart of the Madoff problem without everyone else bearing the cost.

2 There is no connection between the problem the SEC is trying to deal with and the solution proposed.

3 Surprise audits offer no additional investor protection when the assets are custodied at an independent, third-party custodian. What would the audit disclose that the receipt of the custodian’s statements does not already reveal? How would your clients benefit? Would you pass the costs on? Would you stop deducting fees? Detail your custodian arrangements.

4 The SEC says the reason for the audit is to get “a second pair of eyes” on the lookout for fraud. But we already have two sets of eyes: the client’s and the custodian’s Do we really need the third?

5 We are not aware of any situation where the ability of an advisor to withdraw fees from an independently custodied account opened the door to fraud.

6 Despite the fact that there is no documented fraud associated arising from an advisor’s ability to deduct fees from an independent custodied client account, the Commission is proposing passing on over $55 million in audit costs to these advisors and their clients.

7 The audits may require accountant letters to each of our clients every year - 8,214,262 across the nation.

8 The proposed surprise audit appears to be more of a political reaction to public criticism of the SEC and congressional pressure after the Madoff scandal than an effective regulatory response.

9 The SEC already resolved one of the major problems with the custody rule, which was eliminating a loophole from registration for certain accounting firms with the PCAOB that Madoff's accountant used to avoid detection of its phony auditing practices.

10 The Madoff and other Ponzi schemes resulted from a lack of aggressive enforcement by the SEC and FINRA of current rules and ignoring repeated warnings from the media and whistle blowers. 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.

11 The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisers. As far as we are aware, there have been no systemic problems in this area and changes are unnecessary, costly and burdensome, particularly for small, independent investment advisers.

12 The new surprise audit requirement will add additional costs to my business that will ultimately be passed on to my clients. [Provide an example of how this will affect your business, including taking away time needed to assist clients during the ongoing financial crisis.]

13 In order to enhance consumer protection, I would support Congress appropriating additional resources to the SEC to hire and train additional examination staff to increase the regular audit cycle of investment advisers.

Thank-you for considering these issues and concerns.

Warren Wall
Wall & Company