July 8, 2009
To Whom It May Concern:
I am a member of the Financial Planning Association and principal of an SEC-registered investment advisor. I am strongly opposed to the requirements in the proposed amendment to the custody rule that would subject investment advisors to a surprise audit by an accounting firm simply because firms deduct advisory fees from clients’ accounts. I understand and am sympathetic to the fact that the SEC wants to avoid all future Madoff scandals, and I wholeheartedly agree that doing so is a worthy effort; however, I fail to see how this proposed change will do anything useful whatsoever on that front. Unlike many broker/dealer firms, all of our fees are disclosed on our clients’ custodial statements (from Charles Schwab) and likewise from correspondence they receive from us. The Ponzi schemes had nothing to do with and were neither enhanced nor aggravated by the ability to deduct fees at those unlawful firms.
I am not aware of any systemic problem or risk in this area of fee deductibility, and to require these surprise audits are unnecessary, costly and burdensome – especially for small, independent investment advisors such as myself. I’ve seen cost estimates ranging from $5,000 to $10,000 for these proposed surprise audits, which is real money to our firm and the other 9,000 + firms this would effect. That cost will either have to be passed on to our clients or will result in lower capital expenditures or other cost-cutting measures. And for what purpose will that $45,000,000 to $90,000,000 been spent? In what way will the end client be safer from the Madoffs of the world?
It is mindboggling to me that in a time when the federal government is supposedly doing everything in its power to keep our economy from sliding into a deeper recession/depression, one of its agencies is entertaining the notion of slapping what amounts to a $5,000 to $10,000 tax on small businesses that will neither protect clients nor stop Ponzi schemes from occurring in the future. While this proposal could be viewed as a stimulus package for accounting firms, it’s going to hurt lots of other businesses around this country and/or the end client, depending on whether firms cut back on expenses or pass the cost on to clients in the form of higher fees. Rather than saddle ethical small businesses with this unproductive requirement, why doesn’t the SEC conduct an investigation into the so-called regulatory efforts at FINRA that missed Madoff’s shenanigans for decades or its own internal processes that failed to catch Madoff for the years that he was under the SEC’s supervision?
As I stated before, I am in complete support with the idea of creating a better regulatory structure/process to stop crooks such as Madoff from ever again getting a foothold in our industry, but it seems to me that the proposed rule requiring surprise audits on any advisor who deducts a fee is completely unrelated to the problem at hand and will fail to protect/serve the consumers of financial firms. It seems to me that Madoff could have been stopped simply by stopping self-custody. So why not adopt that rule? Or why not require surprise audits on firms that choose to self-custody client assets, provided that fee deductibility is not deemed to be “custody”. Alternatively and/or in addition, why doesn’t Congress appropriate more resources to the SEC’s enforcement division to get more boots on the ground?
Thank you for your consideration.
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Jimmy Kull, CFA
Cypress Wealth Management, LLC