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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks at SEC Open Meeting


Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Washington, D.C.
May 14, 2009

Thank you, Chairman Schapiro.

Safeguarding client assets is a critical function of investment advisers. Investors must feel safe knowing that the funds and securities they own on paper exist in reality. Investors need to be confident that their returns are not fictitious and that their assets have not been misappropriated. Today's rule proposal goes to great lengths to ensure that client assets are safeguarded through measures such as surprise examinations and internal control reports.

Although I support the proposal, I do have questions about some of its features.

The proposal adds to current regulatory requirements designed to safeguard assets, but these benefits must be weighed against the proposal's costs. Not only are there associated out-of-pocket costs, but the new rules would impose other burdens on entities. Any balancing of costs and benefits should account for more than out-of-pocket compliance costs.

In 2003, the Commission decided against a course of action similar, in key respects, to the one the Commission is considering today. We should not resist revisiting prior decisions as events warrant; we must be willing to adapt. But as we revisit the agency's prior 2003 decision, we must be mindful that the agency's earlier cost-benefit assessment, which led the Commission in a different direction, remains instructive.

Given this, I am particularly interested in comments on the following:

  1. whether the surprise examination requirement should cover investment advisers with an independent qualified custodian or be targeted to instances where the investment adviser or a related person is the qualified custodian, given that non-affiliated custodians already serve as an important safeguard of client assets;

  2. whether the rules should cover investment advisers who have custody only because they withdraw fees from client accounts;

  3. the extent to which the new requirements could adversely impact competition if they are disproportionately costly and burdensome for smaller entities; and

  4. the extent to which the new rules could foster moral hazard by promoting an undue sense of security that dissuades investors from doing their own diligence. It is worth considering the circumstances under which active investor diligence may do more to deter and detect misconduct than certain regulatory demands.

I look forward to considering all the comments, and I hope that they will address these topics.

* * *

I would like to join my colleagues in thanking the staff for its swift work on this proposal. In particular, from the Division of Investment Management, I would like to recognize Robert Plaze, Sarah Bessin, Daniel Kahl, and Vivien Liu, along with everyone from the other offices and divisions who helped craft this proposal.


Modified: 05/14/2009