July 21, 2009
To Whom It May Concern:
I am an SEC-registered investment adviser and a member of the FPA and I would like to voice my concerns with the SEC’s proposed changes to the Custody Rule, specifically the requirement for surprise audits of RIAs whose only “custody” lies in their ability to deduct fees from client accounts.
The ability to deduct client fees, especially when using a third party custodian, does not appear to be a big avenue for fraud. The Ponzi schemes uncovered by the SEC had nothing to do with fees deducted by investment advisors. To my knowledge there have been no systemic problems in this area.
The SEC has already resolved one of the major problems with the custody rule, which was eliminating a loophole from registration for certain accounting firms with the PCAOB that Madoff’s accountant used to avoid detection of its phony auditing practices.
The Ponzi schemes perpetrated by Madoff, and the others still coming to light, resulted from the SEC and FINRA ignoring repeated warnings over a period of years as well as a lack of enforcement of current rules. FINRA should be accountable for its shared oversight of Bernie Madoff in conducting the Ponzi scheme for decades as a broker-dealer before registering two years ago as an investment advisor.
I feel I must make it very clear that your proposal to require ‘surprise audits’ annually would be a very difficult burden, both financially and in terms of man hours, for many small firms to bear. I know that my time and efforts, and those of my staff, would be much better spent providing service to clients than providing support to auditors who would not find anything wrong in our practices.
Third party custodians such as Charles Schwab and TD Ameritrade provide monthly statements that our clients can compare (and often do) to the reports we provide. Firms that do not custody assets inherently provide an additional layer of oversight for client assets.
All in all, this proposal seems to be an (over) reaction to public criticism of the SEC and governmental pressure to “do something” rather than a well thought out and effective regulatory response to the actual deficiencies of the oversight process.
Thank you for considering my comments.
Sincerely,
Searcy Financial Services, Inc.
Registered Investment Advisor
Michael J. Searcy, ChFC, CFP®, AIFA®