July 1, 2009
I am a Registered Investment Advisor with the SEC, a Certified Financial Planner(tm) professional, and a member of the Financial Planning Association. My offices are in Huntington Beach, CA and I live in Long Beach, CA.
I am writing to state my strong opposition to the requirement in the proposed amendments to the custody rule that would subject investment advisors to surprise audits by an accounting firm. Criminal activity by "financial advisors" over the past year has garnered strong public criticism of the SEC and congressional pressure to implement an improved regulatory response. The proposed surprise audit appears to be a political reaction to this pressure rather than an effective measure to protect consumers.
Madoff and other Ponzi schemes resulted from a lack of enforcement of current rules and ignoring multiple warnings from media and industry insiders. FINRA had oversight of Bernie Madoff as a broker dealer for decades prior to his registration as an investment advisor two years ago. The SEC and FINRA share responsibility for the terrible lapse in oversight that allowed his crimes. To the SEC's credit, it has already resolved one of the major problems with the custody rule by eliminating a loophole from PCAOB registration for certain accounting firms. Madoff's accountant used this loophole to avoid detection of its phony auditing practices.
I founded and own a boutique financial planning practice that uses a non-affiliated custodian (Fidelity), that pursues a predominantly-passive investment philosophy through no-load mutual funds (Dimensional Fund Advisors), and that does not retain physical custody of any client assets. We fall under the SEC's "custody" definition strictly because we deduct our client fees directly from their accounts on a quarterly basis. The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisers. I am not aware of any systemic problems in this area and the proposed surprise audit changes are unnecessary, costly and burdensome--particularly for small, independent investment advisers like me. These costs will be passed on to my clients and the time spent "hosting" the surprise auditors will be an unwelcome distraction from more important priorities like serving my clients during these difficult economic times.
I strongly support improved consumer protection but believe that this goal would be better served by Congress appropriating further resources to the SEC to hire and train additional examination staff to increase the regular audit cycle of investment advisers. Surprise audits by outside accounting firms will not enhance investor safety and would actually be counterproductive in the resources--time and money--wasted on them.
I appreciate your consideration and would be glad to speak with you if you have further questions.