FPA Questions SEC’s Proposed Suprise Custody Audits, Third-Party Compliance Audits & Internal Controls for RIAs

May 05, 2009

In a recent letter to Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (“SEC”), the Financial Planning Association (“FPA”) questions SEC Chairman Schapiro’s potential changes to the custody rule for registered investment advisers, third-party compliance audits of registered investment advisers, and internal controls of registered investment advisers.

With respect to the SEC Chairman’s proposed surprise audit of registered investment advisers with custody of client assets, the FPA noted that it is under the impression that the third-party surprise audit requirement proposed by the SEC Chairman would apply to registered investment advisers that custody assets with qualified custodians since a registered investment adviser is already subject to a surprise audit requirement under SEC Rule 206(4)-2 if the investment adviser has custody of client assets.

The FPA explained that if the SEC intends to apply the surprise audit requirement to registered investment advisers that custody client assets with a qualified custodians, the costs of such a surprise audits will be significant, especially for small investment advisers. Moreover, the FPA argued that a surprise audit will not offer any benefit to clients since the qualified custodian already possess the assets and sends a statement to the client.

In response to SEC Chairman’s proposed third-party compliance audits of registered investment advisers, the FPA asks whether such compliance audits will include only registered investment advisers with custody or a broader segment of investment advisers. The FPA is concerned that such a requirement would cause registered investment advisers to incur significant expense with no benefit to clients since the FPA believes that the problems of the financial marketplace are not due to registered investment advise failing to maintain effective compliance progra. As an alternative, the FPA supports increasing the resources of the SEC so its staff may evaluate registered investment advisers’ compliance programs.

Concerning the proposed requirement that a senior officer of the registered investment adviser attest or certify to the sufficiency of the registered investment adviser’s internal controls to protect client assets, the FPA asserts that the cost of such certification would not justify the protection afforded to clients. The FPA believes the senior officer will expend significant resources to reassure him or herself of the adequacy of the compliance controls, which will be especially burdensome for small registered investment advisers.

As more details emerge about the SEC’s proposals for registered investment advisers, RIA Compliance Consultants will update its readers on these developments.

Posted by Bryan Hill
Labels: Custody, SEC