July 28, 2009
In order to custody the assets for a client, custodians are now requiring audited financial statements of alternative investments. These new custodial requirements combined with the proposed rule would require many firms to have two separate audits on an annual basis.
While we already complete a general surprise audit on an annual basis, the new proposals would require us to continue the surprise audit and conduct a financial audit of ALL funds managed (this would include all private investments and partnerships) on an annual basis to meet the custodial requirements. This would greatly increase the cost of the audit, and in our opinion such a requirement would be considered unconscionable. To offset the increased cost to the RIA firms, the expenses associated with these audits could result in higher fees for clients.
In addition, an annual audit of each fund would not increase the accuracy level of the audit because these standards do not address the accounting differences between Level 1 to Level 3 assets and their valuations. There are funds (i.e. Level 3 assets) that cannot confirm their values. If the purpose of this proposal (and the surprise audit) is to verify the value of these funds, then the spirit of the legislation would be defeated in that CPAs audit on a tax cost basis (since they would not be able to confirm the funds level 3 values). Basically, this imposes a cost to all firms that doesnt have any valuable end result. The liability this would create for the CPAs is unrealistic and unfair. The more reputable CPA firms are not likely to perform these audits forcing RIAs to use smaller, unqualified CPA firms who do not have the experience or expertise to perform these audits. The end result is that this legislation could put good standing credible RIA firms out of business. This doesnt benefit the client or general public it hurts them by eliminating the pool of qualified investment advisors.
The requirement for CPAs to file form ADV-E within 120 days of the start of an audit is unrealistic. Due to the nature of these audits and reliance on confirmation responses from other parties (i.e. clients, etc), the timeframe to complete an audit should be at a minimum 210 days. It generally takes our accountants 180-210 days to complete a surprise audit of our company. The timeframe for completion would vary amongst firms as the number of days is in direct correlation to the number of alternative investments the firm holds. The impact of a shortened timeframe would likely increase the cost to complete the audit.
Due to higher overhead operating expenses, the additional costs may require a firm to increase their fees which could cause some firms to lose clients. Additional staff (CPA's, auditors, bookkeepers, etc.) may need to be added to conduct the multiple annual audits and increased reporting to firm's boards of director (if applicable). While we agree with more stringent controls and auditing measures, this seems burdensome and unrealistic.
In order to avoid these requirements, firms who currently pull their fees from clients accounts may stop this practice thereby, losing their best remedy for collecting delinquent fees. If a client doesnt pay, the only option left would now be to file with a collection agency which would probably result in losing the client and their fee altogether. The impact to the client would be that theyve lost their advisor and they now have an adverse penalty to their credit history report.
Your proposal questions whether or not it is feasible for you to specify minimum requirements for a CCO certification. Due to the individual nature of each firm, it would be very difficult to create an objective standard that would truly protect an account for all of the clients assets. If we cannot objectively certify, the end result would be different per certification and subject to various opinions and interpretations.
In a broad overview, this legislation would greatly impact our firm financially and would cost us thousands in additional dollars annually. Thus, dissolving the tools that allow RIAs to effectively run their business and prevent these firms from effectively doing their jobs.