July 28, 2009
Securities and Exchange Commission
RE: File Number S7-0909
As a partner of the SEC - registered investment advisor (RIA) firm Bills Asset Management, I would like to express my opinion of the proposed amendments to Rule 206(4)-2 (the “Custody Rule”), and more, specifically the surprise audit requirement proposal.
As part of SEC enforcement actions, I applaud the agency’s efforts to further protect the investing public. However, we oppose the surprise audit proposal for advisors who have “custody” of client assets only under the context of deducting client fees from an independent custodian.
As I understand it, the most recent public cases of fraud and Ponzi schemes resulted not from any actions related to fee deductions but rather unscrupulous investment advisors that actually held client assets in custody or used non-independent custodians. We are not aware of any particular situation where a client-agreed-to ability of investment advisor firms to deduct their fees from an independently custodied account resulted in any type of fraud. Why punish those advisors who are currently using independent custodians rather than requiring those that are not currently using independent custodians to make a change? The current political and public cases of investment fraud involved cases where independent custodians were not used not where any fee deductions from independent custodians were abused.
The cost and obstruction of a surprise audit of our business – one that our clients have hired us to do (manage risk and their assets in the financial markets) will negatively impact our ability to manage our client’s assets. The costs associated with the audit will have to be passed onto our clients and the time spent in dealing with any auditor will be time spent away from managing our client assets effectively. With all due respect, we see no benefit to administering this proposed Custody Rule. The SEC has stated that the reason for the audit would enable a “second pair of eyes” on the lookout for fraud. In reality, there are already two sets of eyes on our fee deductions, the client’s and the independent custodian’s. Would the benefit of a third set of eyes outweigh the negative impact and costs to our clients of such a rule? We do not believe that any benefit will be achieved from such rule and that, in fact, such a rule would negatively impact the investing public in the form of higher fees and more time spent in administrative tasks rather than the productive use of time in actually managing the client’s financial assets.
As a small independent advisor with client assets held only at large independent custodians, we fail to see the value of such a surprise audit requirement. Despite the fact that there is no documented fraud associated and/or arising from an advisor’s ability to deduct fees from an independent custodied client account, the Commission is proposing passing on in excess of an estimated $55 million in audit costs to these advisors and their clients. If we felt there was value to this requirement, then we would undoubtedly support such an action. However, in the instant case it is clear to us that the proposed Custody Rule solution solves none of the problems that the SEC is trying to correct and enforce.
In closing, the proposed rule will negatively impact both our firm and our clients. We see no benefits to such a Custody Rule and the costs, both monetarily and in terms of client services, will negatively impact our ability to provide the services our clients have entrusted us to deliver to them.
Sam C. (Bo) Bills, Jr. CPA, CFP™
Bills Asset Management