July 28, 2009
I am president of Seger-Elvekrog Inc., an SEC-registered investment advisory firm for 28 years. The repeated financial scandals this decade clearly warrant a re-evaluation of the regulatory approach. The reputation of our industry has been repeatedly tarnished by cleverly-engineered schemes that bypassed regulatory scrutiny. First we had the Worldcom and Enron frauds that evaded detection by the SEC, late-trading of mutual funds and now, sadly, Ponzi schemes from Madoff and Stanford.
The public clearly wants and deserves a higher level of protection from such scams. However, none of the above scams had anything to do with the SEC’s proposed change to the custody rule, release #IA-2876. This proposed change will require almost all investment advisors to subject themselves to a surprise annual audit by virtue of a change in the definition of “custody” of client assets. The overwhelming majority of advisory practices, including Seger-Elvekrog, use reputable, third-party firms such as Schwab, Fidelity and TD Ameritrade to hold client assets. The failure of the SEC and FINRA to take action against Bernie Madoff, whose own firm had custody of his client’s assets and could therefore steal from them, is not grounds for imposing a further burden on firms that don’t hold client assets. The proposal would simply add more cost and bureaucracy for the thousands of small businesses in our industry. In addition to an average cost of $8,100, time and attention that would have otherwise been focused on clients and their investments will instead be spent procuring documents and files for the audit. All this money and effort will probably not stop one crook.
Scott D. Horsburgh, CFA