June 30, 2009
Dear Sir or Madam:
I am a member of the FPA and am associated with an RIA and I am against this proposed rule as it is currently written. Accordingly, this proposed rule change to require “surprise” audits of RIA’s who automatically deduct fees from client accounts will affect me financially and operationally. Financially, the cost of these audits will be passed through to me by the RIA and the time needed to address the audit is time I could be spending with clients helping them address the issues of this crisis we are in.
The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisers. Further, the Madoff and other Ponzi schemes appeared to result from a lack of aggressive enforcement by the SEC and FINRA of current rules and ignoring repeated warnings from the media and whistle blowers. The proposed surprise audit appears to be more of a political reaction to public criticism of the SEC and congressional pressure after the Madoff scandal than an effective regulatory response. Given that Madoff’s firm was subject to annual audit’s by a CPA I am not sure what you expect to gain by requiring all RIA’s who collect client fees from accounts to be audited. Clearly, a firm can shop for an auditor they can ultimately compromise. Besides, the SEC already resolved one of the major problems with the custody rule, which was eliminating a loophole from registration for certain accounting firms with the PCAOB that Madoff's accountant used to avoid detection of its phony auditing practices.
I suggest that you consider only requiring audits of firms that take physical custody of a clients’ entire account, not those who custody assets at an independent third party clearing firm and who just collect fees from the account. When an advisor has physical custody of a client’s account is when most mischief can occur. I am also not opposed to more funds being allocated to the SEC to step up enforcement in this area if required.
Christopher L. Phelps, CPA/PFS, CFP®