July 27, 2009
As the Chief Compliance Officer USA Tax & Insurance Services, I appreciate the opportunity to forward my comments on the proposed custody rule. As a small Registered Investment Advisory firm, we set up a Custodial arrangement for the back office functions of our advisory business and allow them to process all client fee charges directly from the account. We are fully supportive of the portion of the proposal that requires investment advisory firms which do not maintain client accounts at an independent qualified custodian (e.g., advisory firms with actual custody) to obtain a written report from an independent public accountant that includes an opinion regarding the qualified custodian's controls relating to custody of client assets. On the other hand, USA Tax believes that the portion of the proposal that would require registered investment advisers that instruct a qualified custodian to debit fees to undergo an annual surprise examination by an independent public accountant to verify client funds is unwarranted in its application to most investment advisors.
It is our opinion this explanation of “Custody” based on the proposal does apply to most investment advisers because they do not possess actual custody only because they direct the debit advisory fees directly from client accounts. The custodian is required to send statements to client that shows fees being charged and debited as per their contract. The client should be made responsible to review their statements to protect themselves. If there are any irregularities reported, there will consequences to the advisor based on existing SEC rules.
This proposal will subject thousands of advisory firms that make up this particular category of investment advisers merely because they debit fees from client accounts, to the additional cost of an annual "surprise" audit by their CPA firm focused on verifying client funds and securities seems unwarranted. This requirement does not address the specific problems that initiated the rule proposal. It will only make it more difficult for small investment advisors to work cost effectively in this market. It would seem more appropriate to require all firms to have a custodian arrangement that requires all fees to be process through that entity Thereby, ensuring an independent custodial entity transacting this process.
In summary, USA Tax believes that the effect of this proposal should be limited to firms that have actual custody of client funds not those that are merely deemed to have custody because they debit fees from client accounts.
Thank you for this opportunity to make comment.
Chief Compliance Officer
USA Tax & Insurance Services, Inc.