Certified Public Accountants
(410) 771-0001
FAX (410) 785-9784

American Institute of Certified Public Accountants
SEC Practice Section
Maryland Association of Certified Public Accountants

Suite 200
201 International Circle
Hunt Valley, Maryland 21030

September 25, 2002

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

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

Dear Mr. Katz,

We appreciate the opportunity to respond to the request for comment by the Securities and Exchange Commission (the "Commission") on the proposed amendment to Rule 206(4)-2 (the "Custody Rule" or "Rule") under the Investment Advisers Act of 1940. As the independent auditor of various registered investment advisers, we support the Commission's goal of modernizing the Custody Rule by seeking to enhance protections to investment advisory clients while reducing the adviser's financial burdens.

We believe our clients will be especially interested in Section 206(4)-2(b)(2) of the Rule which exempts advisers from the Rule with respect to pooled investment vehicles that prepare and distribute audited financial statements to their clients within 90 days of the end of its fiscal year. While it appears that some of our registered investment advisers would be automatically exempted from the Rule due to this provision, many of them would not fall under this exemption due to their funds holding investments in other funds ("funds of funds"). Generally, a fund of funds cannot realistically be expected to deliver audited financial statements to its investors within 90 days after year-end. This is because a fund of funds needs to receive the audited financial statements of each of its underlying investee funds before its audit can be completed and in our experience, the audited financial statements of the investee funds are received close to, or sometimes much later than, 90 days after year-end.

We suggest that a fund of funds be required to provide audited financial statements annually as soon as reasonably practicable, or within a specified number of days after receipt of all necessary information from its investee funds. Alternatively, we suggest the Commission grant an extension to funds of funds in a manner similar to the process used by the Commodity Futures Trading Commission (the "CFTC") with respect to its 90 day annual report filing deadline. The CFTC permits pool operators to file a claim for an automatic extension of time to file the pool's annual report (normally due within 90 days after year-end) where the pool is a fund of funds and the pool operator's independent accountant cannot obtain the information necessary to file the annual report in a timely manner. In the first year, the pool operator must file a notice to the CFTC within 90 days after the end of the pool's fiscal year containing information about the pool, the date by which the annual report will be distributed and filed (generally no more than 150 days after year-end) and representations by the pool operator that the fund invests in other funds and that the named independent auditor cannot obtain the required information within the specified time period. In subsequent years, the requisite representations are made in a statement attached to and filed at the same time as the annual report.

We believe that using a system similar to that of the CFTC's to grant an extension to a fund of funds is consistent with the Commission's goals regarding investor protection. While we understand that the investor would benefit from earlier delivery of audited financial statements, we believe those benefits do not outweigh the increased costs to the funds of funds (and ultimately their investors) if the funds of funds were not exempted from the Rule and thus would be required to perform an annual surprise audit in addition to an annual audit.

In summary, we believe it would be an unfortunate technicality to exclude funds of funds from the exemption due to the unique nature of the fund of funds' audit process. We respectfully request that the Commission consider expanding the proposed exemption to specifically address the concerns of funds of funds. Please contact James Stangroom or Jennifer Garcia at 410-771-0001 if the Staff would like to discuss our comments.


                Arthur F. Bell, Jr. & Associates, L.L.C.