Subject: File No. S7-09-09
From: J. Harold Williams, CPA, CFP
Affiliation: Chief Compliance Officer, Linscomb & Williams, Inc.

June 30, 2009

Dear Sirs:

I am writing to comment on SECís Proposed Changes to the Custody Rule (Release No. IA-2876) concerning custody of client funds by Registered Investment Advisers and in particular the requirement for surprise audits annually of advisory firms which are considered to have custody of client assets for the sole reason that they deduct investment advisory fees from client accounts.

I serve as Chief Compliance Officer of Linscomb & Williams, an SEC-Registered Investment Advisory firm in Houston, Texas which manages more than $2 billion of assets for 1500+ individual clients. Our firm was founded in 1971. I am a member of the Financial Planning Association as are most of the professionals on our staff at Linscomb & Williams.

We strongly OPPOSE the proposed amendments to the custody rule that would subject investment advisers to a surprise audit by an accounting firm. I would like to set forth the reasons for our opposition to these proposed amendments.

There is noticeable public sentiment for regulatory authorities to "do something" about Ponzi schemes (like Madoff and other publicized abuses). However, the proposal to require surprise audits by CPA firms for the vast majority of advisory firms like Linscomb & Williams is a complete over-kill compared to the actual risks posed to client assets by virtue of clients authorizing our deduction of management fees from their portfolio. The vast majority of investment advisers do not have custody of client assets in a manner similar to situations like Madoff. Rather, they hold the limited authority to send, with client consent, invoices to independent third-party custodians for payment of regular investment management fees. This is a very limited form of "custody" not even remotely subject to the abuses imposed on clients of firms like Madoff's.

It is apparent with hindsight that an effective surprise audit requirement might have served to expose the Madoff scheme. Of course, the Ponzi scheme conducted by Madoff had nothing to do with the virtually universal practice of investment advisers deducting their advisory fees from client accounts (and by the way, there is no evidence of any type of widespread problem with this practice that has been followed for decades by advisers.) Rather, the essential condition permitting an unscrupulous adviser like Madoff to deceive and steal from clients is not having one of the two key controls in place: the use of an independent third-party custodian to hold client assets, or an effective surprise audit by a qualified CPA firm of related-party custodians (like Madoff's broker-dealer). This second key control failed in Madoff's case. However, the SEC has already resolved one of these major problems associated with the custody rule that existed in the Madoff case, by eliminating a loophole from registration for certain accounting firms with the PCAOB. This loophole enabled Madoff's accountant to avoid detection of its non-existent auditing practices. It is complete over-kill to now require the vast majority of investment advisers who already properly utilize the other principle (and arguably more effective) key control (an independent custodian which sends separate statements directly to clients confirming their assets) to be subject to the surprise audit requirement. It reminds one of the saying, "When all you have is a hammer, every problem looks like a nail."

Instituting the surprise audit requirement will unquestionably add compliance costs to our business, which ultimately must be passed along to our clients. At a time when clients are desiring cost-effective financial advice to attain returns that will recover some of the recent damage inflicted by the financial markets, loading on compliance costs that dilute those returns is both ill-advised and ill-timed. In our own case, we at least have a rather large client base over which to spread this cost. However, the vast majority of advisers in small firms who serve millions of American families with fee-based (and unbiased) investment advice generally have a smaller base of clients over which to spread this cost. The impact on each client is therefore more detrimental. This only considers the direct out-of-pocket cost of engaging the CPA firm. It does not count the less tangible indirect (but very real) cost of the adviser's attention that is diverted from actually working on improving client portfolios and instead must be focused on compliance with regulations that are not really needed and do not meaningfully improve the security of client's assets.

In summary, the proposed requirement, while high on cosmetic and political value and high on driving up costs of doing business is actually quite low in effectiveness at actually enhancing security of clients' assets.

Thank you for the opportunity to offer these comments.