April 25, 2003

Shawbrook has already submitted comments regarding the Commission's proposed rule: "Compliance Programs of Investment Companies and Investment Advisers" (File No. S7-03-03). Subsequent to filing those comments, Shawbrook discovered a factual error in the Commission's proposed rulemaking. The following corrects that error and I hope the Commission will include this correction in the record.

In footnote 74 the Commission states that "many state laws require state-registered advisers to obtain fidelity bonds. See,

e.g.,... 21 Va. Admin. Code 5-80-180(B) (requiring $25,000 bond or $25,000 minimum capital for advisers)." The same footnote also shows several other states with bond or minimum capital requirements that apply only under certain conditions, the Virginia reference indicates no such conditions. The implication is therefore that the Virginia bond/minimum capital requirement applies to all investment advisors based in Virginia and subject to Virginia regulation. That is incorrect. In fact the Virginia bond/minimum capital requirements apply only to those investment advisors who are "required to provide a balance sheet pursuant to Part II, Item 14 of Form ADV"1 in other words those advisors who either have custody of clients assets or who require client prepayment of fees greater than $500, more than six months in advance.

The fact that the Virginia requirements, similar to the other states mentioned, are in fact not applied universally but rather are applied only to those advisors doing business a certain way re-enforces a point made in some of the comments, including those of Turf [NAPFA] and Pearson [Beach Financial Advisory Service]. They note that the current regulatory scheme generally recognizes a distinction between those advisors who accept custody of client assets and those who do not. Shawbrook agrees with those commentators that if the Commission feels it must make changes to the current regulatory scheme, those changes should continue to respect that distinction.


Geoff Foisie

1 Va. Admin. Code 5-80-180(A)