September 26, 2002

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

    Re: Release IA-2044, File No. S7-28-02; Proposed Rule:
    Custody of Funds or Securities of Clients by Investment Advisers

Dear Mr. Katz:

Legg Mason, Inc. ("Legg Mason"), on behalf of its nineteen federally registered investment adviser subsidiaries that manage over $166 billion, appreciates the opportunity to comment on the amendments to the custody rule under the Investment Advisers Act of 1940 (the "Act"), as proposed by the Securities and Exchange Commission ("Commission"). Legg Mason supports the Commission's efforts to modernize the rule and to clarify the circumstances in which an adviser is deemed to have custody of client assets.

Legg Mason endorses the comments and suggested revisions to the proposed amendments contained in the comment letter filed by the Investment Company Institute. In particular, Legg Mason recommends that the Commission:

  • Specifically exclude from the definition of "custody" those arrangements where advisers deduct advisory fees from client custodial accounts in accordance with the conditions specified in a line of no-action letters issued by the Commission since the adoption of Rule 206(4)-2 of the Act (the "Rule"). See, e.g., Investment Counsel Association of America (June 9, 1982). In these situations, clients simply do not need the protections afforded by the proposed amendments to the Rule.

  • Modify section (c)(1)(i) of the proposed amended Rule to exclude from the definition of "custody" those instances when an adviser inadvertently obtains custody of client funds or securities, so long as the adviser returns those funds or securities to the client or the appropriate custodian promptly, but no later than three business days.

  • Modify section (a)(3)(i) of the proposed amended Rule to conform to industry practice, the rules of self-regulatory organizations, and other securities laws regarding delivery of client statements. For example, an adviser should be allowed to satisfy the requirement of section (a)(3)(i) of the proposed amended Rule if the adviser has a reasonable basis for believing that the qualified custodian sends, to each of the adviser's clients for which the custodian maintains funds or securities, a monthly statement for accounts in which there was activity during the month and a quarterly statement for all other accounts.

Legg Mason appreciates the Commission's consideration of these comments.

              Very truly yours,

              Andrew J. Bowden
              Deputy General Counsel and
              Vice President