Deloitte & Touche
April 17, 2003
Jonathan G. Katz
Re: Release Nos. IC-25925, IA-2107; Compliance Programs of Investment Companies and Investment Advisers (File No. S7-03-03)
Dear Mr. Katz:
Deloitte & Touche is pleased to have the opportunity to respond to the Securities and Exchange Commission's (the "Commission") request for comments on its proposed rule regarding Compliance Programs of Investment Companies and Investment Advisers, File No. S7-03-03. Our comments pertain to the proposed rule for investment advisers.
Deloitte & Touche's registered investment adviser subsidiary, Deloitte & Touche Investment Advisors LLC ("DTIA") is a non-discretionary, non-custodial investment adviser. DTIA provides comprehensive, independent and objective investment advice primarily to individuals and families, executives and owners of closely held businesses. DTIA does not offer advice on individual securities.
We strongly support the goal of the Commission to protect investors by enhancing
Compliance requirements for investment advisers. Overall we support the proposed rule, although we believe that certain aspects, particularly the proposals that all advisers undergo periodic compliance reviews by a third party, the imposition of an SRO, and a fidelity bonding requirement for all investment advisers, would impose an additional regulatory burden on all advisers and not, in all instances, provide a corresponding benefit of furthering the interests of the Commission in its charge to protect investors.
Adoption and Implementation of Policies and Procedures (reference Part II.A. of the proposed rule)
We concur with the Commission position that an effective internal compliance program provides the first line of investor protection. Such a program, administered by competent compliance personnel, increases an investment adviser's ability to implement controls that protect investors.
We would not support an exception to the requirement of an internal compliance program for certain advisers. We believe that all investment advisers need an internal compliance program. That program should be tailored to apply to each adviser's particular business activities.
DTIA supports the idea that a compliance program that includes written policies and procedures is a positive step to prevent violations of the federal securities laws. We appreciate the Commission's efforts to provide guidance rather than specific policies and procedures, as it allows each investment adviser to develop a compliance program that is compatible and practical in the context of the unique business of each adviser. Such a rule should allow each investment adviser to design their policies and procedures as they apply to their business rather than specifying certain minimum policies and procedures.
For example, the Insider Trading policies and procedures for DTIA, a non-discretionary and non-custodial investment adviser that does not advise on individual securities, may reasonably be shorter and less involved than those that would be needed in the case of a full-service, discretionary investment adviser.
Annual Internal Review (reference Part II.B. of the proposed rule)
DTIA agrees that an internal review of policies and procedures is essential to the continued effectiveness of the compliance program. A requirement of a minimum annual review is an appropriate industry standard. An annual review requirement allows advisers to engage in more frequent review if they determine that their particular situation requires it.
Chief Compliance Officer (reference Part II.C. of the proposed rule)
The policies and procedures of an adviser, no matter how well crafted, will be ineffective unless competent personnel administer them. The designation of a compliance officer who is competent and knowledgeable, and who is empowered with full responsibility and authority to develop and enforce policies and procedures, is critical to the success of the compliance program. Accordingly, DTIA supports a rule requiring the designation of a compliance officer who is competent and knowledgeable regarding the applicable federal securities laws and who is empowered, as a member of the investment adviser's senior management team, with full authority to develop and enforce appropriate polices and procedures for the adviser.
Recordkeeping (reference Part II.D. of the proposed rule)
DTIA agrees with the proposed amendment that would require advisers to maintain a copy of their policies and procedures and a record of the annual review. DTIA suggests that the Commission allow an initial recordkeeping requirement date within 12 months from the effective date of the rule.
Compliance Review (reference Part II.E.1. of the proposed rule)
We respectfully disagree with the suggestion that investment advisers be required to undergo periodic compliance reviews by a third party. We do not believe that third party reviews are necessary as an across-the-board prophylactic measure for all advisers. When the investment adviser has a strong compliance program, undergoing a third party compliance review is an unnecessary expense and does not enhance investor protection.
DTIA recommends that the Commission continue its current practice of requiring third party compliance reviews only for firms that have a Commission review that indicates additional reviews are needed to ensure compliance with the securities laws and enhance investor protection.
Non-discretionary, non-custodial investment advisers pose significantly lower risk to investors than those who have the ability to appropriate client assets. Therefore, in the event that a requirement for third party compliance reviews is adopted, we would strongly urge the Commission to exempt non-discretionary, non-custodial investment advisers from this requirement.
Self-regulatory organization (reference Part II.E.3. of the proposed rule)
We do not believe that the creation of an SRO is an effective solution to the oversight responsibility of the growing investment adviser industry.
Both the industry and the Commission are necessarily interested in rebuilding investor confidence in the securities markets. We believe that the imposition of an SRO -- a "middleman" between the industry and the Commission -- could further lessen investor confidence in the markets and the regulation of the markets. We feel that the SEC needs to continue its direct involvement with the industry at this time.
We do not believe that an SRO could establish better business practice rules and standards than the Commission. SRO regulation may be duplicative or inconsistent with Commission requirements. Advisers would become subject to two examination programs. Another consideration is the high cost to establish and maintain an SRO. These costs would have to be absorbed by the investment adviser industry and, ultimately, by customers of investment advisers. This increased burden could create competitive disadvantages for smaller advisers who would not have the resources to devote to increased compliance activities.
Non-discretionary, non-custodial investment advisers pose significantly lower risk to investors than those who have the ability to appropriate client assets. Therefore, in the event that an SRO for investment advisers is adopted, we would strongly urge the Commission to exempt non-discretionary, non-custodial investment advisers from membership requirements.
Fidelity Bonding Requirement (reference Part II.E.4. of the proposed rule)
Fidelity bonds and minimum capital requirements provide a source of compensation for advisory clients who are victims of fraud or embezzlement by investment advisers. We support the imposition of a fidelity bonding or minimum capital requirement for custodial investment advisers. The Background section of the proposed rule states that "Investment advisers are among the financial service providers handling client assets that are not required to obtain fidelity bonds" (emphasis added). We feel that the imposition of this requirement for advisers who do not handle client assets would impose an increased cost and regulatory burden on non-custodial advisers and not provide the corresponding benefit of enhancing investor protection. Therefore, we urge the Commission to carve out an exception for non-custodial investment advisers.
In summary, with regard to the proposed rule for investment advisers:
DTIA applauds the Commission's openness to dialogue on these matters. The Commission is on an appropriate course of action to maintain and improve good investment adviser regulation.
We appreciate the opportunity to comment on the above referenced rules. If you have any questions regarding our comments, please contact Phyllis Dawson at 513.929.3312.
Very truly yours,
DELOITTE & TOUCHE