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TD Ameritrade Criticizes SEC Surprise Audit Proposal

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In May the Securities and Exchange Commission called for comments on amendments to Investment Advisers Act Rule 206(4)–Custody of Funds or Securities of Clients by Investment Advisers–intended to address gaps in protections for investors who entrust their money to SEC-registered investment advisors that were exposed by the revelations in the Bernie Madoff Ponzi scheme and other recent investment scams.

Tom Bradley, president of TD Ameritrade Institutional, responded with a letter to SEC Secretary Elizabeth Murphy on July 24 outlining his firm’s general support for the Commission’s efforts to provide additional safeguards for client assets, but voicing concern about one of the proposed changes.

Bradley’s objection is to a change (Release IA-2876) that would subject RIAs who have the authority to debit advisory fees from clients’ custodial accounts to an annual surprise audit by an independent public accountant. Bradley’s letter makes the point that an estimated 6,000 advisors are deemed by the SEC to have custody only because of their fee withdrawal authority, but they don’t have custody of those assets in the sense that they could withdraw all the assets without being noticed by the independent custodian. “Hence, the likelihood of significant RIA client asset misappropriation is low,” he wrote.

In addition to Bradley’s letter, TD Ameritrade Institutional is encouraging advisors who would be affected to join the dialog and let their voices be heard through their own comment letters. To help facilitate that effort, the firm has distributed a “sample communication template” to its affiliated advisors. That document can be used as is with the insertion of the advisory firm’s name and a signatory or it can be used as an outline for the advisor’s own letter.

In a release outlining TD Ameritrade’s position, the firm noted that “mandating the annual surprise audit examination for RIAs deemed to have custody only because of their ability to withdraw fees from client accounts through their qualified custodians would entail relatively high costs to advisors and relatively little benefit to investors.”

Instead the firm suggests that the SEC require RIAs to give fee notifications to clients at or about the time fees are withdrawn from client accounts through independent custodians; provide clear fee guidance as to the maximum permissible advisory fee rate that an RIA can deduct through independent custodians; conduct more frequent inspections of RIAs, with more focus on custody matters; and require RIA chief compliance officers to conduct an annual custody review and related certification to the SEC. Bradley goes on to request that should action such as he recommends be taken, that the custody rule be revised to eliminate the fee deduction authority test as a basis for establishing advisor custody.

Bradley’s letter made it clear that his firm does not oppose the proposed changes in their entirety, and agrees with the Commission’s proposal requiring all RIAs to have a reasonable belief that the qualified custodian used for custody delivers client account statements directly to their clients at least quarterly. This would eliminate the prior exception available under certain conditions to RIAs that allowed their own delivery of client statements.

To read Bradley’s letter in its entirety, please click here.

To read the SEC’s proposed rule, please click here.


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