August 7, 2018
I am writing to comment on proposals relating to net capital requirements or annual audit requirements for RIAs with discretionary trading authority. My firm has just two employee/owners with no support staff so we are very sensitive to additional requlatory burdens and expenses. We are very well capitalized (far in excess of $35,000), but I worry about the amount of time that might be required to meet the record-keeping element of any such proposal. We currently have a net capital requirement as a California advisor and the forms we need to complete each month to demonstrate we meet this requirement by a wide margin take up valuable time to complete with no real benefit to our clients.
I am even more concerned about the expense of an annual audit which would have to be passed on to clients through our fees. We have discretionary trading authority but do not have custody of client funds other than the ability to deduct advisory fees from client accounts with client permission.
The proposed new regulatory burdens would substantially favor large firms with more staff and clients to do the work and absorb the costs over smaller firms.
I believe any such requirements should offer advisory firms the alternative of simply placing a certain amount of funds in an approved interest bearing escrow account that could only be released with SEC approval. Those funds would be secure and available to the firm's clients in the event of any wrongdoing by the firm. If the amount, for example, were $50,000, that would in most cases provide more protection for clients than the net capital or annual audit requirements, without the same burden on smaller firms that have sufficient assets to fund this alternative and thereby avoid the cost of an annual audit or the paperwork burden to demonstrate their ongoing net capital is sufficient.
Please remember that even among firms managing $100 million or more in assets, not every firm has large numbers of employees or clients. A bond or escrow account can likely protect clients better without the same burden on the business of smaller advisory firms.
Thank You,
David Spector