Subject: File No. S7-09-09
From: Gerald I White
Affiliation: President, Grace White, Inc.

July 27, 2009

Grace White, Inc. is an investment advisor that has been registered with the Commission since its formation in 1977. We manage roughly $800 million of assets primarily for high net worth individuals.

I understand the reasons for the Commission's proposals and agree that all firms that have true custody of client assets should be subject to periodic checks. However I believe that the proposed definition of custody is overly broad in two respects.

First, firms that charge their fees to client accounts, when those accounts are held by independent custodians, should not be considered to hold custody. Their clients can be protected by requiring that the client both:
a) provide written authorization for such actions
b) be provided with a notice of the amount charged and the related fee computation within a short period of the charge
It would not be unreasonable to require advisors to have compliance policies in place that require that these steps be taken. Compliance could also be ascertained as part of the periodic examination of custodians.

Second. the proposal would define trustees as custodians in all cases, even when they do not hold physical possession of trust assets. I believe that this proposal would place individual trustees at a competitive disadvantage by imposing substantial costs on them. Trust beneficiaries are protected by the legal nature of the trust relationship, including reporting and accounting requirements, and the personal liability that a trustee faces for improper actions. I do not believe that the protection of trust beneficiaries is within the scope of the Commission's responsibilities.
If, however the Commission believes that it must take action in this area, it can protect trust beneficiaries by requiring that:
a) trust assets be held by an independent custodian
b) the beneficiary receive statements from the independent custodian periodically
c) the beneficiary be provided with a notice of any payment made to the trustee (trustee fee) and the related fee computation within a short period of the charge
d) (if the Commission wishes to go even further and believes it has the legal authority) the beneficiary or an independent party (such as a tax preparer) approve any payment to the trustee in advance.

In both of these areas the Commission could design "safe harbors" that would protect clients without requiring advisors to incur the expense of a surprise "audit" of assets that they do not even hold.

In my experience independent custodians review payment requests before acting on them, and are likely to question those that are unusually or possibly fraudulent. That is another reason why the Commission's proposals are overly broad.

Finally, I believe that the proposed rules would impose a substantial financial burden on smaller advisors, at the same time that fee income has shrunk due to the severe market decline. The Commission can achieve its objective without imposing that burden.

I would be happy to discuss my comments if that would be helpful to the Commission staff.