09/30/2009

Will SEC Ease Tough Surprise-Audit Plan?

The investment industry is hopeful the SEC will scale back its proposal that would require asset managers to undergo surprise reviews by private auditors in order to deter swindlers like Bernard Madoff.

Their optimism stems from closed-door sessions that representatives of the 470-member Investment Adviser Association held in recent weeks with SEC chief Mary Schapiro and two other commissioners. The group's executive director, David Tittsworth, said the agency officials appeared sympathetic to the concerns of his association, whose members include managers of hedge funds and mutual funds.

A follow-up meeting with a fourth member of the five-commissioner SEC is scheduled for today.

SEC officials stressed the seriousness of the issue and vowed action by yearend, but it was also clear that they had been sifting through some of the 700-plus letters filed in response to the proposal. "I felt there was a real sensitivity to what we in the industry, what real people who will be affected by this rule change would be put through," Tittsworth said.

He added that Schapiro had a firm grasp of the industry's concerns. "This was not some high-plane conversation," he said. "She was extremely knowledgeable about every issue we raised."

Under the May 20 proposal, the SEC would require annual "surprise audits" by independent accounting firms on all registered investment advisors and broker-dealers deemed to have "custody" of client assets. The commission has used a strict definition of "custody" to include even client assets held at banks that aren't affiliated with the advisors.

Virtually all fund managers would be required to pay for the private audits, whose results would be reported to the SEC - creating a boon for the auditing industry.

The SEC has been publicly lambasted because its numerous investigations of Madoff failed to uncover his multi-billion-dollar Ponzi scheme. An SEC spokesman declined to comment on the new rules, other than to say a vote on the plan hasn't yet been scheduled.

Although the SEC estimates each private audit would cost $8,100, the trade group said in a July 24 comment letter that such reviews would likely cost $20,000 to $300,000, depending on the size of the investment firm. The association said its estimates were based on its talks with accounting firms.

Last month, New York hedge fund giant Millennium Management conceded in a letter to the SEC that the Ponzi-scheme furor had spooked investors. But it added that for large firms the "sheer out-of-pocket costs" of the surprise audits would be "overly burdensome." Millennium added that it and many other firms already use reputable accounting firms to conduct independent audits, suggesting the supplementary inspections be scaled down to reduce costs.

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