July 29, 2009
Thank you for the opportunity to comment on proposed changes to Rule 206(4)-2, specifically requiring advisors who are deemed to have custody solely based on the authority, granted by our clients, to pull advisory fees directly from the client account, to secure the services of an independent public accountant to conduct an annual surprise audit of client assets.
It is understandable in the wake of Madoff and the 278 plus enforcement actions listed on the SEC website for 2009 alone, that some type of further regulation to protect client assets would be necessary, but our position is that the proposed surprise audit for advisory firms who utilize a qualified custodian and whose clients receive monthly statements from said custodian would not necessarily provide the protection the SEC is seeking through the proposed rule change. The numbers suggest that approximately 94% of the 11,000 SEC registered investment advisors use an independent custodian and regulations that require all firms to custody assets with an independent custodian may be another alternative to the proposed surprise audit regulation.
We take our fiduciary duty, as we believe the majority of advisers do as well, to act in the best interests of our clients to heart, and work hard everyday to ensure we do not take the trust they have placed in us for granted. We do our due diligence with our custodian, Charles Schwab Co. to make sure they have appropriate controls in place to protect our clients assets as well. During our last audit, in 2008, we provided the examiner reports detailing client holdings and purchase and sales by security. We have the utmost confidence that our examiner would have found problems, should any have existed or at least he would have requested further information from us with regard to client assets, which he did not.
An alternate solution to engaging the services of a qualified accountant could be periodic sweep examinations in which a random sample of custodial statements are compared to adviser client holding reports resulting in an independent review of custody controls while sparing advisers an estimated annual $8,100 cost to undergo the surprise audit.
It has been reported that approximately 5.8% of SEC registered advisors are dually registered we believe that further inspection should be done with these firms as the opportunities for misuse of client assets would appear much greater than for firms who are only deemed to have custody.
Additionally, as an industry we should further encourage clients to closely review the statements they receive from their custodian with that provided by their advisers and to immediately raise any questions or concerns they may have if the statements do not match up as this is a partnership between adviser and client.
Prodigy Asset Management, LLC