Subject: File No. S7-10-09
From: Steven S Bremner, CPA
Affiliation: Executive Vice President, Chief Compliance Officer, Kennedy Associates Real Estate Counsel, LP

July 7, 2009

I OPPOSE the proposed rule requiring all registered advisers with custody of client assets to undergo a surprise annual exam. I am the Chief Compliance Officer of Kennedy Associates Real Estate Counsel, LP ("Kennedy"). Kennedy is an SEC-registered adviser with $9 billion in real estate assets under management. Our clients are entirely institutional investors and we invest exclusively in real estate. Real estate investments are commonly structured using title-holding entities such as LPs, LLCs, or corporations. Due to the unique characteristics of this asset class it is not practical or cost-effective for separate accounts to use a custodian for real estate title-holding entities. The proposed new rule seems to require a surprise examination of each client's real estate account.

In my opinion, this rule would raise Kennedy's costs of doing business with no benefit to our clients. As required by current regulations and client agreements, all pooled investment vehicles and other title-holding entities are audited annually by an independant certified public accountant within 120 days of the end of the fiscal year and all clients receive audit reports. All client cash is held in custodial accounts by an independent bank custodian, and quarterly bank statements are sent to each client. We see no incremental benefit to our clients from an additional independent accountant's examination, whether surprise or scheduled. The proposed surprise examination is limited in scope, while the existing audits are much more extensive and are performed in compliance with generally accepted auditing standards. Therefore, I believe that, with regard to Kennedy's own scope of business, current regulations and procedures adequately safeguard our clients' interests. The effect will be to raise Kennedy's overhead cost while gaining nothing in improved controls.

From a broader investment perspective, I also question whether the proposed surprise examination will induce investors to place undue reliance on this procedure. Many small investors are likely to conclude that the new examination mandated by the SEC is sufficient to protect against all risks, when the plain fact is that such a limited audit scope is unlikely to detect any but the most egregious of frauds. To put it another way, at a considerable expense to the advisory industry, the surprise examinations will create a false sense of investor security while detecting few real problems. When frauds later surface in firms which were examined, this will lead to litigation directed against the public accountants who performed the SEC-mandated examinations, and potentially to litigation directed against the SEC. Neither outcome is in the public's interest.

For these reasons, please reconsider your proposed changes to the custody rule.