Subject: File No. S7-09-09
From: William C Jerome

May 23, 2009

Like many Registered Investment Advisors, we use a third party custodian to custody our clients' assets, and we conduct our business under a Limited Power of Attorney which allows us to make trades in their accounts and to have our fees deducted from those accounts. This business model has become extremely common, and is the standard used at our custodian, TD Ameritrade, as well as Charles Schwab Co., Fidelity, and many others.

One of the purposes of our using an independent third party custodian is to avoid the 'Madoff effect', the risk that we would in some fashion be able to run off with our clients' assets, or that they would not be invested on their behalf in the first place, which is apparently what happens in most Ponzi schemes. We are already conducting our business in such a fashion as to eliminate this possibility. Our clients receive independent statements, mailed directly to them from the custodian, and they also have the option to directly go online at any time and look for themselves at what they own and the history of the transactions in their accounts, including fees and trading costs.

Adding the extreme cost of an independent audit, plus the major disruption a surprise audit would insert into our operations, would be something I could support if it would generate some sort of useful result, but in this situation it just appears to be a waste of our resources. Personally I would think a rule prohibiting an advisor from also being the custodian would be the best solution, but if you want to go the audit route I believe you should limit the audit requirement to those advisors who either have custody themselves, have custody with a related party, or have a custodian who's only client is the advisor. There may be other types to include, but those of us who went out of our way to specifically choose a large, independent custodian for our client in order to avoid the possitibility of this type of fraud should not be burdened with these costs just because some advisors chose an approach less protective of their clients.

William C. Jerome, CFP, RIA