July 8, 2009
Enactment of a mandatory annual surprise audit on all advisors would be an ineffective cost/benefit rule. It would create an extreme burden on the advisory industry (Your estimate of $77.5 million cost on nearly 10,000 advisors.) with little benefit since past problems have not, primarily, been with advisors properly using outside custodians. This rule is an example of regulation gone wild in response to the SEC failing to enforce existing regulations.
Alternate suggestions that would increase protection in a more cost effective manner for the industry and public would be:
1.Advisors who debt fees should be required to deliver to the client, by separate mailing – not part of the account statement – a detailed fee calculation each time (or at a minimum quarterly) that fees are deducted form accounts. (My understanding is that this requirement is still on the books but has not been enforced for a number of years.)
2.Custodians should be required to institute safeguards anytime a debited fee is equal to a pro-rated annual fee of more than 1.5%. The custodians required response could be as simple as obtaining an exception explanation from the advisor, to reporting to the SEC any advisor with such deductions, or a certain frequency of such deductions.
3.This new surprise audit requirements should be extended to advisors who do not have an independent custodian relationship. Again, in the past, it was standard that advisor were not brokers/custodians. The industry now has a large number of RIAs who also function as broker dealers. As an alternative, the industry should require complete separation of the advisory business form a broker/dealer business that charges commissions and sells product.
4. Rather than focus on layering on burdensome additional rules - the SEC should focus on enforcing the current rules.
For the majority of advisors who have all client assets held at outside, independent custodians in simple arrangements, client assets are already well protected. Hiring an outside auditor to review these arrangements will add significant expense at no benefit. Past problems are primarily related to advisors who did not have independent custodian arrangements, used complex custodial arrangements, pooled investment programs, or had other access to client funds.