July 21, 2009
The proposed custody rule requiring a qualified independent audit pertaining to advisors that custody assets at a third-party custodian and are only permitted to withdraw fees is overly burdensome. I understand the intent is to limit improper appropriation of funds by the Registered Investment Advisor (RIA). However, the risk of improper appropriation of funds is significantly limited if assets are held by a qualified and respected third-party custodian. Clients receive monthly statements so they have the ability to see the fees being withdrawn from the account and the ability to compare the fees withdrawn to the billing statements received from the advisor.
While I understand and appreciate the need to protect investors from situations where they cannot adequately assess cash flows within their investment accounts, investors using an advisor who custodies at a third-party custodian and only withdraws fees from an account have sufficient protection under that arrangement. The exorbitant cost of the independent audit, if enacted as currently proposed, will be passed to these same investors increasing their costs, in some cases dramatically. Alternatively, many small RIAs are already on the brink of being forced out of business or into mergers for scale by compliance costs. This new requirement will impact the advisor environment negatively by reducing the number of options for investors.
I urge the SEC to exempt the RIA that custodies assets with a third-party and are only permitted to withdraw fees. This is in the interest of investors by keeping costs lower and investing options higher, as much as it is in the interest of RIAs.
Thank you for the chance to respond to the rule proposal,
Edward J. Durica, III, CFA
Johnston & Associates, Inc.