TD Ameritrade: Advisory firms registered with the SEC should be required to do annual custody reviews

Compliance officers at investment advisory firms registered with the SEC should be required to conduct annual custody reviews and to certify those results, according to TD Ameritrade Institutional. The firm made that recommendation and others in a July 24 comment letter filed with the Securities and Exchange Commission to oppose a controversial proposal that would subject thousands of investment advisers to surprise exams by outside auditors. The public-comment period on the proposal to require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to be subject to surprise audits ends tomorrow. The benefits of the SEC proposal “would be minimal at best, since the [investment advisory firms] do not have true custody, but the costs would be substantial,” Thomas Bradley, president of Jersey City, N.J.-based TD Ameritrade Institutional, wrote in the letter. TD Ameritrade provides custody services to about 4,000 advisory firms that manage about $80 billion in assets. It is encouraging its advisers to file their own comment letters to oppose the proposed rule change and has even offered them a sample letter that they can use and send to the commission. Both TD Ameritrade's comment letter and the one it is offering to advisers includes recommendations to protect investors from future scandals. In addition to requiring advisory firm compliance officers to certify annual custody reviews, the should SEC conduct more inspections of investment advisory firms and focus more heavily on matters involving custody assets, TD Ameritrade said. The commission should also provide guidance on the maximum fee that advisory firms can deduct through independent custodians, and investment advisers should be required to notify clients when fees are withdrawn from their accounts, TD Ameritrade suggested. “Rather than looking to [investment advisory firms] and their clients to bear the costs of surprise audits, the SEC should be enlarging its staff and greatly increasing the frequency of its [investment advisory firm] inspections, with a greater focus on client asset custody matters,” wrote Mr. Bradley in TD Ameritrade's comment letter.