July 6, 2009
Regarding proposed change to Custody Rule for Registered Investment Advisors:
If overbilling of client accounts were really a problem, it would have already surfaced in some of the thousands of routine SEC examinations of advisors.
In the case of our own examination, SEC examiners asked us to produce the client invoices for quarterly fees, the investment management agreements those invoices were based on, and the client custodian statements showing the deductions for payment of quarterly invoices. Since everything matched up, there is no issue.
Because the SEC is verifying fee collection of each advisor during routine surprise examinations they make every few years, we would assert that plenty of data reside at the SEC already, to test the theory that RIAs have any pattern whatsoever of overbilling or not acting in good faith.
Fee deductions are clearly shown on the independent custodian statements, including the identity of the payee. Clearly, RIAs would be extremely unlikely to risk their client relationship on any client opening the custodian's monthly statement and finding an excess fee deduction. A thorough analysis of SEC data on Advisor fee billing is very likely to be constructive (and instructive) in this regard.
The SEC should be simply test this empirical evidence before saddling RIIAs with useless new burdens, both of cost and of time. If any new regulation is needed, it should be confined to advisors that do not require all of their clients to use independent third-party custodians that send monthly detailed account statements.
Millie Capital Management LLC