July 28, 2009
Re: SEC Proposed changes to the Custody Rule
Release No. IA-2876
File Number S7-09-09
We appreciate the continued efforts of the SEC to protect clients of registered investment advisors.
However, we believe the requirement of an annual surprise audit of registered investment advisors, who are deemed to have custody of clients' assets solely because they deduct their fees from client accounts held at a qualified custodian, to be excessive.
Clients currently decide whether management fees are deducted directly from their investment accounts or pay them directly by writing a check. We notify clients via a mailed statement and invoice when the deduction is made. The qualified custodian sends statements to clients, which disclose management fee deductions. Furthermore, clients are notified via the invoice that the custodian will not determine whether the fee is properly calculated therefore, clients also have a responsibility to verify the accuracy of the fee calculation. These existing safeguards seem reasonable.
Another concern is the cost of such audits, which we understand could be a minimum of $8,000 per year. Projecting this out ten years results in a cumulative cost of at least $80,000. This cost is a material burden for small advisors such as our firm.
In our judgment, the existing custody rule in conjunction with normal SEC audit and review process seems appropriate for registered investment advisors, who are deemed to have custody of clients' assets solely because they deduct their fees from client accounts held at a qualified custodian.
Thank you for your time and consideration.
Lederer Associates Investment Counsel