May 22, 2009
All submissions should refer to File Number S7-09-09.
With regard to the question:
Should we except from the surprise examination requirement advisers that have custody of client funds or securities solely as a result of their authority to withdraw advisory fees from client accounts? 18
I would suggest the answer:
Yes, advisers whose only limited power is to withdraw management fees through the custodian's fee withdrawal review and process should not be subject to a surprise examination of client funds.
Since we purposefully do not have custody of any client assets, we would have no means of verifying client funds and securities.
Our limited power of submitting billing to our custodian does not provide us with a way of supervising our custodian's compliance issues.
While we can and do review the general security principles during the process of selecting a custodian, we cannot review and audit specific securities at the custodian.
I believe that the "know your client" rules should apply to the custodian's understanding of advisers fee structures and that the custodian is in the best position to set restrictions and guidelines regarding withdrawing fees from client accounts.
Both we and our custodian have such a review process in place. Surprise audits would not prevent abuses, and be impossible to implement for those advisers who have purposefully separated custody from client fee withdrawal as much as possible