The financial advisory industry is rallying its troops against a controversial SEC rule proposal that would subject thousands of investment advisers to surprise exams by outside auditors.
The financial advisory industry is rallying its troops against a controversial SEC rule proposal that would subject thousands of investment advisers to surprise exams by outside auditors.
The public comment period on a proposal to require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to undergo surprise audits is slated to end Tuesday. To date, nearly 600 comments were filed with the Securities and Exchange Commission, with the vast majority of those filings coming from investment advisory firms expressing their opposition to the proposal.
SEC commissioners voted 5-0 in favor of the proposal. The move, part of a wider effort by the regulator to crack down on advisers with direct custody over client holdings, was spurred by criticism that the SEC received from lawmakers for missing Bernard L. Madoff's Ponzi scheme, which cost investors $65 billion.
FAR REACHING PROPOSAL
The proposal also would apply to roughly 3000 hedge funds that are registered with the SEC as advisory firms.
The SEC, for its part, has insisted the proposed rule is needed to protect investors. That said, it does not rule out the possibility that the proposal could change before it is finalized.
“We value the comment period,” said commission member Luis Aguilar. “We do go through them. You find out there's things you have missed.”
The commission will likely finalize some form of the proposal this fall, Mr. Aguilar said.
Many advisers filing comment letters were worried about the costs associated with the audits.
Scott Houser, vice president and chief compliance officer for Ronald Blue & Co. LLC investment advisory firm based in Roswell, Ga., estimated in his comments that the audits would “put at least a minimum of $10,000 of additional expense on any investment adviser who deducts fees.”
In the early 2000s, Ronald Blue & Co., which manages more than $4 billion, underwent a series of similar audits to verify some client assets. The cost of those audits ranged between $11,000 and $27,000 and involved between 10 and 150 client accounts, which were spread among the firm's 15 U.S. locations, Mr. Houser said.
“It's a specialized type of audit,” he added. “You're going to have a harder time finding an auditor. You're going to have to audit all of your accounts instead of what used to be deemed custody accounts because most advisers debit fees from all accounts.”
CALL TO ACTION
For many advisers, the decision to file a comment letter was spurred by an alert issued by the Financial Planning Association of Denver.
The FPA plans to file a comment letter on the issue before the deadline, said Duane Thompson, managing director of FPA's Washington office.
“The letters reflect the same concerns we have,” he said.
The National Association of Personal Financial Advisors, based in Arlington Heights, Ill., filed its comment letter July 21.
The proposed rule “will not effectively accomplish [the intended goals], may fail a reasonable cost/benefit analysis, and may cause consumers additional expense and inefficiency,” according to NAPFA's comment letter.
NAPFA suggested other measures the SEC could adopt instead, including encouraging investment advisory customers to read their statements, giving the SEC authority to pay whistleblowers who report fraud, and requiring advisory firms to give clients and employees information on how to submit anonymous tips when fraud is suspected.
Paying whistleblowers is one of the measures proposed by the Obama administration as part of its regulatory-reform effort.
The Financial Services Institute Inc. of Atlanta also plans to file comments on the proposal, said David Bellaire, general counsel and director of government affairs. FSI represents regional brokerage firms, most of which are dually registered as investment advisory firms.
“The proposal is overly broad. It's going to impose significant costs,” Mr. Bellaire said. “Those type of advisers engaging in fee-debiting aren't the source of all the problems the SEC is trying to deal with.”
