July 24, 2009
To Whom it May Concern:
I am adamantly 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.
Here are some reasons for my opposition:
The proposed surprise audit appears to be more of a political reaction to public criticism of the SEC and congressional pressure after the Madoff scandal than an effective regulatory response.
The SEC already resolved one of the major problems with the custody rule, which was 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.
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.
The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisers. As far as we are aware, there have been no systemic problems in this area and are unnecessary, costly and burdensome, particularly for small, independent investment advisers.
The new surprise audit requirement will add additional costs to my business that will ultimately be passed on to my clients. This would hurt the client rather than help the client since the major things we as advisers can control in a client portfolio is cost which is always a drain on performance. Being part of a small, independent advisory firm, this will be a very large added expense. Most broker-dealers have already added thousands of dollars of unnecessary expenses related to the same compliance issues for broker-dealer affiliated investment advisors. This new ruling, if enacted, will basically double those added expenses to somewhere between $10,000 to $20,000 per year. For smaller firms such as ours that have less than $50 million under management, this is a huge added expense.
In closing, let me just add that a “mini-Madoff” incident happened near us a few years ago. The “advisor” was not registered with any agency, produced his own statements, did not use an outside custodian and had thousands of clients. He ran a Ponzi scheme for over 10 years and basically stole all the money. Investors ignored the red flags that were raised (one being touting 30% returns year after year on ficticious real estate holdings), antiquated statements, no full accounting of real estate holdings, etc. The SEC and California Department of Corporations never knew about the guy because as I said, he wasn’t registered or licensed with anyone. Basically, nobody was going to catch this guy ahead of time.
There is an enormous difference between being able to charge quarterly fees from a client account (held at a recognized custodian, i.e. Charles Schwab, Fidelity, TD Ameritrade, Pershing, etc.) and actually having custody of the client funds. We need to recognize that distinction.
Personally, I am always in favor of solutions that will actually fix a problem, not solutions that give the impression they may fix the problem but won’t.
Thank you for considering my input.
Steve K. Rumsey