July 23, 2009
Dear Ms. Murphy:
Background: I am an independent investment advisor registered with the State of Oregon. TD Ameritrade is the custodian for my accounts. In addition to their monthly statements from TD Ameritrade, my clients receive a quarterly report set from my office which includes my bill and the quarterly fee computation. My fees are deducted from client accounts by TD Ameritrade per my instruction and client authorization.
For my clients and I, the automatic fee deduction is a service that simplifies the fee payment process. I have no problem with a surprise audit per se but I’m very concerned about the additional cost that will ultimately be passed through to clients. To avoid having custody as defined by Proposed Rule S7-09-09, it would be more cost-effective to bill my clients directly than to pay for an annual surprise audit. I believe the following would provide a more cost-effective and comprehensive long-term solution:
1. Amend rule 206(4)-2 and require all advisors to use a qualified custodian.
2. Require that publicly produced software like Advent or Centerpiece be used to generate performance reports, track account history, compute gains, etc.
3. Modify the new proposed custody rule to exclude advisors who’s only custodial function is to submit a bill to their custodian for payment of client fees.
3. Add a small transaction fee per trade to provide funding for additional SEC audit staff.
4. Raise the asset level threshold for State regulated advisors in order to increase the SEC staff time available for larger, more complicated advisory firm oversight.
5. If staffing is available, increase audit frequency. Enforce rules that are currently in place.
6. Require that the Protective Legend be expanded to include language recommending that clients compare custodian and advisor report detail on a regular basis.
As I read the proposed changes, I found the definition of custody on page 86, (2) (ii) to conflict with what was said on page 90, A. (1). If the rules are going to mean that:
If you are registering or registered with the SEC, answer “No” to Item 9.A.(1)(a) and (b) if you deduct your advisory fees directly from your clients’ accounts but you do not otherwise have custody of your clients’ funds or securities, then the primary definition of custody should be changed to reflect this. I think we would all appreciate clarity and less ambiguity.
Thank you for the opportunity to submit comments to the rule change.
Alberty Asset Management LLC