Mary Schapiro said to backtrack on third-party compliance audits

Custodian investment advisers still face surprise asset verification checkups

May 31, 2009 @ 12:01 am

By Sue Asci

In what may be a reprieve for advisory firms, Securities and Exchange Commission Chairman Mary Schapiro seems to have backed off from an idea that would require some advisory firms to face third-party compliance procedure audits. The concept wasn't part of the rule amendment proposal voted on by the commission May 14 and now posted for public comment. Ms. Schapiro mentioned the compliance procedure March 26 in testimony before the Senate Banking, Committee and again on April 6 in an address to the Washington-based Council of Institutional Investors. In her remarks to the Senate, she said: “I have asked the staff to prepare a proposal for commission consideration that would require in-vestment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets. I also expect the staff to recommend proposing a rule that would require certain advisers to have third-party compliance audits to review their compliance with the law.”
Although the SEC is still pursuing a proposal for the unannounced third-party audits to verify assets, the compliance audit was not part of the published proposal. “They were talking about doing a third-party [compliance] audit,” said Daniel Barry, director of government relations for the Financial Planning Association in Denver, which posted an item about the audit on its website, It is unclear why it isn't part of the proposal, he added. “Given that the SEC has the authority to go in and look at your compliance program, we didn't really see what they would gain out of a third-party compliance audit.” The FPA had sent a letter to Ms. Schapiro on April 30 outlining its concerns. “[The] FPA is concerned that firms subject to the requirement would incur a significant added expense, with little tangible benefit to investor protection,” the group wrote regarding the compliance audit. “Anytime you have increased regulation from the government at any level, it's going to lead to more expenses for the advisory firms,” said Greg Zandlo, president of Zandlo Financial Group Inc. of Minneapolis, which has $50 million in assets under advisement. “This proposal would have been another fee squeeze. It would also have been another thing we'd have to prepare for and which would take us away from what we do best.”

Clients may end up paying, industry observers said.

An audit could take a week to complete, said Gordon Bernhardt, president of Bernhardt Wealth Management Inc. of McLean, Va., which has $100 million in assets under management.

“If it's going to cost a significant amount, some firms will pass it on to clients and raise fees,” he said.

The idea seems redundant, others said.

The SEC already has the authority to conduct these audits, said Brian Terry, vice president of investments and chief compliance officer at Financial Management Concepts of Winter Springs, Fla., which has $85 million in assets under management.

Still, more regulations are likely.

“We are in an environment of much higher regulation,” Mr. Terry said. “The list of things that firms need to comply with just seems to grow.”

The SEC declined to comment, because the rule amendment proposal for custody of clients' funds or securities is in a public-comment period, said spokesman Kevin Callahan.

Comment letters opposing the proposal are due by July 28, the SEC's deadline for receiving such responses.

E-mail Sue Asci at


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