In what may be a reprieve for advisory firms, including those under pressure from tight budgets, Securities and Exchange Commission chairman Mary Schapiro seems to have backed off from an idea that would require some advisory firms to undergo third-party compliance procedure audits.
In what may be a reprieve for advisory firms, including those under pressure from tight budgets, Securities and Exchange Commission chairman Mary Schapiro seems to have backed off from an idea that would require some advisory firms to undergo third-party compliance procedure audits.
The concept, which she mentioned in a March 26 testimony before the Senate Committee on Banking, Housing and Urban Affairs and in an April 6 address to the Washington-based Council of Institutional Investors, was not part of the rule amendment proposal voted on by the commission May 14 and which is now posted for public comment.
In her remarks to the Senate in March, Ms. Schapiro said, “I have asked the staff to prepare a proposal for commission consideration that would require investment 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.”
While the SEC is still pursuing a proposal to require advisers that keep assets under custody for others to undergo 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 Denver-based Financial Planning Association which posted an item about the audit on its website, adding it was unclear why it wasn’t part of the proposal.
FPA had sent a letter to SEC chairman Mary Schapiro on April 30 outlining its concerns about her comments.
“It was never quite clear what was going to be intended by it,” Mr. Barry said. “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.”
In the letter he wrote on behalf of the association he said: “FPA is concerned that firms subject to the requirement would incur a significant added expense, with little tangible benefit to investor protection.”
The association also questioned the value to investors.
“Early detection of theft or misallocation of funds will best be determined through audits of the accounts, not through audits of compliance programs,” the letter said.
The SEC declined to comment because the rule amendment proposal for custody of funds or securities of clients by investment advisers is in a public comment period, said spokesman Kevin Callahan.
Council of Institutional Investors is based in Washington
