July 10, 2009
Ladies and gentlemen:
I am a member of the Financial Planning Association and the Investment Management Consultants Association. I am also the founder and President of an SEC-registered investment adviser that has been registered since 1983 and specializes in financial planning and investment management consulting. I am writing to state my strong opposition to the requirement in the proposed amendments to the custody rule that would subject investment advisers to a surprise audit by an accounting firm.
The proposed surprise audit appears to be more of a knee-jerk response to the Madoff scandal and is not an effective regulatory response. The Madoff and other Ponzi schemes resulted from a lack of aggressive enforcement by the SEC and FINRA of current rules and ignoring repeated warnings from the media and whistle blowers. The SEC should hold FINRA accountable for its shared oversight of Bernie Madoff in conducting the Ponzi scheme for decades as a broker-dealer before registering two years ago as an investment adviser.
Recent schemes that have come to light had nothing to do with fees deducted by investment advisers. I do not believe there have been systemic problems in this area and are unnecessary, costly and burdensome, particularly for small, independent investment advisers. The advisory fees charged to client accounts are done so (1) under prior written agreement with the client and (2) with full disclosure on the client account statement. With such written agreement and disclosure, the client is already protected from fraudulent withdrawals when a qualified, third-party custodian is involved.
Such an additional requirement will add costs to my business that will ultimately be passed on to my clients. Such audits have both direct costs (i.e. the fee paid to the audit firm) and indirect cost (i.e. time and focus taken away from advising clients) that will ultimately erode value provided to clients. In effect, this requirement would do more to subtract client value than to add it.
I support the SEC making changes to provide appropriate protection to consumers. My suggestion, in place of the proposed rule change, is to better train examination staff and improve the cooperation between SEC regional offices to improve the regular audit cycle of investment advisers.
Thank you for considering my views, as well as those from many other investment advisors. I look forward to an outcome that does not add this onerous requirement.
W. Richard Smith, III. CFP®, CIMA®, AIFA®
President - Capital Advisory Group