July 9, 2009
I am a member of the Financial Planning Association (FPA), and also employed by an SEC registered Investment Advisory Firm. This letter is an effort on my part to state that I am strongly opposed to the requirement in the proposed amendments to the custody rule that would subject investment advisers to a surprise audit by an accounting firm. It is my belief that this has been included as a reaction to the Madoff ponzi scheme. My understanding of the situation was that he registered as an investment advisor for only the last 2 years, and for a number of years prior was a broker-dealer. Also, I have seen that the main loophole with the SEC custody rule dealt with the fact that certain accounting firms were not registered with the Public Company Accounting Oversight Board (PCAOB). This was how Madoff’s accountant avoided detection of his phony auditing practices, and this loophole has now been closed.
This proposed amendment considers that even though we do not have physical custody of client assets, because we do bill client accounts for our fees, that we are considered to have custody. In all situations, copies of our invoices are sent to clients, and any fees deducted from their accounts are also reported on the custodian’s statements. This structure was in no way a factor in the recent Ponzi scheme news. The estimated annual cost to our firm for this surprise audit would be $10,000 to $20,000. It is important to note that this expense would likely result in higher fees to clients. Also, the time spent working with the accountant on the audit is time that could be spent working directly with our clients, who have been receiving extra support during the recent market crisis.
My firm was audited by the SEC in December 2007. The result of the audit was that we were able to demonstrate the high quality of our company, and used the recommendations by the audit staff to make further improvements. If the goal of any changes is to better protect the consumer, I would recommend that the SEC be given greater funding to add to their audit staff and increase the frequency of the audit cycle for investment advisors.
Matt Ulsas, CFP®