July 30, 2009
To whom it may concern:
We are writing to express our serious objection to the proposed custody rule IA-2876 which would subject registered investments advisor to an annual surprise audit by an independent public accountant. This proposal seems nothing more than an attempt to demonstrate that some type of action is being taken to protect the investing public from a system which has already failed them miserably. The irony here is that you are targeting a group of investment professionals that have structured their business operations to be as transparent as possible for the client. Any investment advisor, such as our firm, that utilizes an independent custodian has already taken measures to protect clients against fraud and abuse. Direct billing saves time and money for all involved parties leading to lower costs. An annual audit will serve no purpose other than to add expense to the system which will eventually need to be passed on to clients.
Every client whose account we manage is aware that our fee is deducted directly from the account. We have the authority to conduct trades on their behalf and charge our management fee, nothing more. Every client must initial and sign an account application allowing us to do so prior to any trading activity. Each monthly statement clearly highlights the management fee along with all activity in the account. In addition, the custodian imposes a limit on the management fee as a percentage the assets in the account. These mechanisms are put in place to not only prevent abuse, but to prevent billing errors.
If you are so determined on conducting an audit, why not simply request that the custodians provide you a list of the highest management fees on a percentage of assets under management and audit those firms? More importantly, why are the firms that actually custody client assets being excluded? We fail to understand how such a surprise audit further protects investors beyond the existing procedures. Quite simply, this proposal is obtrusive, burdensome and unnecessary.
Willard C. Lipe, CFA
Patrick M. Dalton, CFA