July 16, 2009
Regarding: File Number S7-09-09
To whom it may concern:
I am emailing regarding the SEC’s proposed changes to the custody rule, Release No. IA-2876.
Proctor Financial is an SEC Registered Investment Advisor and all the financial planners in the firm are members of the Financial Planning Association (FPA), and Certified Financial Planner™ registrants.
I want to formally object to part of the proposed amendments to the custody rule. Specifically, requiring advisory firms that technically have custody of client assets -- solely because they are authorized by their clients to automatically deduct client fees from investment accounts -- to subject themselves to surprise audits is an attempt to fix a non-existent problem. To my knowledge, there haven't been any RIA issues concerning inappropriate fee withdrawal from client accounts.
If this regulation is passed, it would require surprise audits by independent accounting firms at approximately 11,000 SEC registered firms. The amount of extra expense that these audits would cause would inevitably force smaller firms out of business. During these especially turbulent financial times, the firms that may close and the loss of professional advice would directly impact the clients you serve.
The surprise audit proposal appears to be a political reaction to the very public criticism of the SEC in the wake of the Madoff scandal. While I can certainly understand and support the need for more effective regulation, imposing a surprise audit requirement on advisors with no custody other than fee deduction rights, especially when non-affiliated 3rd-party custodians are being used, does not appear to be necessary response.
With proper enforcement of current rules by the SEC and FINRA, the Madoff scandal and other Ponzi schemes that have happened could have been prevented. Because of this simple fact, new proposed regulations need to be carefully scrutinized to prevent an overreaction to problems that should have been corrected by more effective enforcement of current rules. FINRA (and its predecessor NASD) was the regulatory body in charge of reviewing Madoff's decades-old broker-dealer business, and rightly should be held most responsible for not catching Madoff's long-running fraud before it was a multi-billion dollar problem. Certainly the SEC should have initiated more stringent action, but Madoff was only registered with the SEC as an investment adviser for the past few years. This is another reason to carefully scrutinize new proposed SEC regulations. And in fact, the SEC has already resolved one of the major problems with the custody rule by eliminating a loophole from registration for certain accounting firms with the PCAOB that Madoff's accountant used to avoid detection of its phony auditing practices.
I think the most appropriate regulatory response to the Madoff scandal would be for Congress to appropriate additional resources to the SEC to hire additional examination staff. This staff should then focus more of its resources on firms that have actual custody of their client assets and do not use 3rd-party custodians. An established third party custodian does not allow withdrawals (other then fees) and delivers separate statements that give the client an automatic verification of their account balances and activities – this arrangement provides built in protection for consumers.
Advisors whose sole "custodial" position is client authorization to automatically deduct fees should be exempted from the surprise audit proposal, much in the same way that they were previously exempted from the former balance sheet requirement. So long as advisors use 3rd-party custodians who provide clients with periodic statements, there would be no decrease in consumer protection from this exemption. And advisors, which are mostly small businesses, would not be burdened with the tremendous additional cost of this proposed surprise audit requirement. This should help keep smaller advisors in business serving their clients, and allow all advisors to be able to afford to continue hiring new employees and growing their businesses, instead of having to cut back to afford this proposed new regulatory burden.
Thank you for your consideration – and for your support going forward. If you would like more input, please feel free to contact me.
Steve Doucette, CFP(r)
Proctor Financial, Inc.
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