July 23, 2009
Our firm is a Registered Investment Advisor with the SEC and I have been a Certified Financial Planner(tm) professional since 1987. Our offices are located in Fort Collins, CO.
I am writing to state my strong opposition to the requirement in the proposed SEC amendments to the custody rule that would subject investment advisors to expensive and time intensive surprise audits by an accounting firm for advisors who mearly bill their clients management fees from their accounts with written client permission.
These clients receive monthly statements from an independent third party custodian (Fidelity and TD Ameritrade) and a mailing every quarter from our RIA showing our management fees and a reconciliation as to how the fees were calculated. Trust me, most clients read these statements and verify that our bills are correct. The current law has worked well for investors whose assets are custodied by INDEPENDENT third party custodians who provide independent statements. None of the recent issues in the news seem to be related to this rule that has worked well with few modifications for the past 30 years. In fact, there had been so few issues with billing by advisors that the SEC relaxed this rule a number of years ago and dropped the contemporanous mailing requirement to the client by the RIA showing how the fees were calculated It would be acceptable to our firm if that requirement were reinstated if the SEC can show how this will correct abuses that have occured.
The recent wave of frauds has primarily been the result of a lack of enforcement of current rules by the SEC and FINRA as they seemed to ignore multiple warnings from media and industry insiders. FINRA had oversight of Bernie Madoff as a broker dealer for decades prior to his registration as an investment advisor two years ago. The SEC and FINRA share responsibility for the terrible lapse in oversight that allowed his crimes.
To the SEC's credit, it has already resolved one of the major problems with the physical custody rule by eliminating a loophole from PCAOB registration for certain accounting firms who audit RIA's that PHYSICALLY SELF-CUSTODY assets. Madoff's accountant used this loophole to avoid detection of its phony auditing practices for all the accounts it self-custodized.
We (and most advisors)do not retain physical custody of any client assets. We fall under the SEC's "custody" definition strictly because we deduct our client fees directly from their accounts on a quarterly basis. The proposed surprise audit changes are unnecessary, costly and burdensome--especially for small and medium size investment advisers and will likely put many out of business if enacted as proposed. They will likely reduce competition, and choice, among consumers. At a minimum, these costs will be passed on to clients. The time spent "hosting" the surprise auditors will be an unwelcome distraction from more important priorities like communicating with clients and attending to all the other SEC regulatory rules with now live with on a daily basis.
I strongly support improved consumer protection. However, surprise audits by outside accounting firms will not enhance investor safety and would actually be counterproductive in the resources--time and money--wasted on them. It is actually an anti-consumer proposal for the previously mentioned reasons. This proposed regulation should have to pass a cost benefit analysis by the SEC - such analysis would show that this proposal is unecessary, counterproductive and a restraint of trade with harm being imposed on the consumers the SEC proposes to protect.
Thank you for receiving and listening to our comments as you try to protect investors.
Mark L. Kornblau