Subject: File No. S7-09-09
From: Nathan Snodgrass
Affiliation: Evanston Advisors

July 1, 2009

While I agree that advisors with custody need more scrutiny than those that do not have custody, I believe that the audit requirement for merely collecting fees from client accounts is unduly burdensome. I would have no problem with a tighter format for the requirements to collect fees, but an audit is expensive and time consuming.

Prior to 2003, we were required to have an annual audit due to one of our principals serving as trustee on a small subset of our client accounts. There were 5 or 6 accounts that we were deemed to have custody of because of this. The annual audit cost us close to $7,000 (for a firm that had annual revenue of less than $600,000). Moreover, it is a not so minor disruption to the business when an accountant arrives unannounced to perform an audit, requiring that any tasks in process, trading, meetings with clients, etc., be postponed in order to meet with the auditor. Cancelling a meeting with a client because you are meeting with an auditor makes clients uneasy, even after it's explained.

The new rule will require an audit of much broader scope, as all client accounts will be affected. Moreover, the number of accountants who have the proper credentials to perform the audit is not going to increase simply because the requirement exists. As such, the premium to hire those accountants will increase. We estimate that the dollar cost to our company will be in the $15,000 range annually, just so we can collect fees from client accounts, held at a non-affiliated broker who sends monthly statements directly to the end client.

Has this been a problem in the past? Have advisors been collecting greater amounts than permitted by contract? Has this been an area of frequent fraudulent activity? When using a qualified custodian with whom the adviser shares no affiliation, I cannot imagine that the level of fraud potential would merit requiring the audit. For a dually registered advisor deducting fees from an account at an affiliated broker, yes. But I do not believe that is the case for most of the advisors that this rule would affect.