July 10, 2009
This letter is on behalf of Convergent Capital Management LLC (CCM), a holding company with majority interests in six SEC-registered investment advisory firms.
CCM and its affiliates are opposed to the proposed requirement of a surprise audit for firms who are deemed to have custody of client assets only through their deduction of advisory fees from the client accounts. The reasons for this objection have been stated by many other commenters and do not need to be repeated here.
CCM is owned by a publicly-traded, financial services holding company. The bank and broker-dealer affiliated with our investment advisory affiliates may, at times, act as qualified custodian to investment advisory assets managed by affiliates. The custody and investment management are done in different offices and, in most cases, in different states. There is no management overlap between the advisors and the custodians. There are no shared systems between the advisers and the custodians.
Under circumstances like ours, we support the continued use of the factors set forth in the Crocker no-action letter (April 14, 1978), or new factors that are comparable, to determine whether there is risk to client assets based on custody by an affiliated custodian. Setting aside these factors entirely could increase costs to affiliates without adding any value to their clients. In our case, our affiliated bank and broker-dealer already obtain SAS-70 reports on their operations, so there would not be a direct effect on us. Nevertheless, I am writing on behalf of other firms who are set up comparably now or may be in the future.
We support additional reviews of truly integrated investment advisory and custody relations. However, we believe that the SECs proposed rules are overly broad and would create an undue burden on advisors who are not putting any client assets at risk.