Subject: File Number S7-09-09

July 2, 2009

Dear Commission Members,

This issue has come to my attention several different times in recent days since your announcement of the proposal regarding: Custody 'File Number S7-09-09'.

I believe it is important for you to know that this proposal may have unintended consequences, not least of which will result in higher costs to clients due to an increased cost of doing business for advisers. Specifically, this rule will disproportionately affect smaller SEC advisers because the cost of the audit required and other provisions have baseline costs that are likely to be higher than suggested.

When my firm considered the possibility of adding custody as part of our practice nearly 15 years ago the CPA firm that prepared our taxes estimated the cost of the annual audit at that time around $10-12,000. We were a smaller firm then (around $35,000,000). We are larger now, but still a small firm, and I don’t believe the cost of those services for surprise audits will have gone down.

We have made every effort to keep costs under control for clients and charge on average well below industry norms. This proposal would likely force us to increase our fees. We have specialized in providing services to the vastly underserved middle market with most of their funds tied up in some kind of company plan. Consequently, the client would have to find a way to finance the higher fees necessitated by this proposal in an environment where cash flow has become more tentative due to the uncertainty of employment. This emphasizes that the proposal is likely ill timed in addition to everything else.

Ironically, since the choice of auditor is in the hands of the adviser the chance for a fraudulent result remains. That would be especially true for a larger adviser that has the financial wherewithal to “buy” that result. Those with the intent of defrauding the public and even institutions will resort to whatever means to acquire their desired end. I don’t have an alarm system and live in a gated community to protect my family and home from professional criminals. I know that if a professional group of criminals decides to target our community we will not be able to prevent the act with any amount of so-called protection. We do hope our system will bring about justice once the act has been perpetrated by pursuing the criminals and prosecuting them to the fullest extent of the law. I believe the same holds true for the proposal of additions to an already effective set of rules, they won’t stop the criminal activity.

These recommended changes implies that all advisers should be painted with the same broad brush of “presupposed fraudulent intent,” and rather than accomplishing their intended end will only add more layers of monitoring to an agency that has already been overburdened. It is not the current rules that have been ineffective, but the monitoring of them. The underfunding of the Agency responsible has been one of the factors leading to the fraud that has become more evident in this recent period of excess. More adequate funding of the Agency is something I would support, rather than fruitless expansion of the number of rules or their scope.

However, I do believe the proposal could more effectively target the kind of adviser that has been the source of legislative scrutiny due to the Madoff and Stanford scandals. Most specifically advisers who have affiliated broker dealers. That is a type of relationship that obviously correlates closely to common ownership of Commercial and Investment Banks. Too easy to hide what is going within the walls of the institution.

If an adviser places a client’s assets with a recognized independent broker dealer/custodian (Schwab, Fidelity, TIAA-CREF), then the safeguards of concern in this proposal are automatic and adding the surprise audit is unnecessary. The current provision sufficiently addresses the concerns in those situations where fees are deducted from a client account with an independent custodian.

However, when the adviser places assets of a client with an affiliated custodian with common control, the proposal has merit. Please consider redrafting the proposal to focus only on advisers who place client assets with an affiliated custodian where adviser and custodian are under common control or ownership and leave the current rule as is affecting fee deduction when the assets are placed with an independent custodian.

Thank you in advance for your consideration of these points.

Dennis H Vogt
Managing Director
Personal Investment Management, Inc.