November 4, 1998

Mr. Robert Burns

Chief Counsel, Office of Chief Accountant

Mail Stop 11-3

Securities and Exchange Commission

450 5th Street N.W.

Washington, DC 20549

RE: Proposed AICPA Audit and Accounting Guide for Investment Companies

Dear Mr. Burns:

Reference is made to our telephone conversation, in which you asked that I send you a letter about this matter. By way of introduction, I am co-lead counsel in Rodney v. KPMG Peat Marwick, 143 F.3d 1140 (8th Cir. 1998). This is a class action in which plaintiffs, who were shareholders in the Piper Jaffrey Institutional Government Income Portfolio, are asserting claims against KPMG as the auditor of the fund. These claims are based on allegations that KPMG failed to detect and disclose violations by the Piper fund of its investment objective, policies and restrictions and prohibitions relating to maintaining a three to five year weighted average life, investing in illiquid securities (CMO derivatives) and borrowing money (in the form of mortgage dollar rolls) or otherwise limiting the fund’s investment practices to those suitable for a short-term bond fund, which is how the fund represented itself.

In Rodney, which was decided May 12, 1998, the Eighth Circuit held that summary judgment in favor of KPMG was precluded in light of the issues raised by plaintiffs regarding whether KPMG's silence on the alleged violative conduct deprived investors of material information about the Piper fund. I am enclosing a copy of the decision.

The American Institute of Certified Public Accountants has issued an exposure draft of its proposed Audit and Accounting Guide, Audits of Investment Companies, dated September 22, 1998. In at least one important respect, relating to an auditor’s responsibility for compliance by the audited investment company client with its investment policies and restrictions, this draft appears to be a substantial revision of the current AICPA Audit Guide for Investment Companies.

The AICPA Audit Guide for Investment Companies, as in effect in 1993, provided as follows in paragraph 2.116: "The principle objectives in auditing the investment accounts are to determine whether - ...there is reasonable assurance that the investment company has complied with restrictions under its stated investment objectives and policies." This provision also appears in the AICPA Audit Guide for Investment Companies dated May 1, 1997. See paragraph 2.129 of the AICPA Audit Guide for Investment Companies, dated May 1, 1997.

In the exposure draft, this provision has been deleted. Compare paragraph 2.104 of the exposure draft (entitled "principle audit objectives") with paragraphs 2.116 and 2.129 of the respective 1993 and 1997 versions. The AICPA proposes replacing the existing requirement with the following provisions:

Thus, the AICPA is proposing to replace the much stronger requirement that, among principle audit objectives, auditors obtain "reasonable assurance that the investment company has complied with restrictions under its stated investment objectives and policies" - an affirmative duty - with the much weaker provision that auditors merely determine whether or not management has a program in effect to detect noncompliance. This would be an "auditing procedure," not an "audit objective." Under the proposal, the auditor is responsible for violations of investment policies only if such violations are specifically brought to its attention by the investment company itself or through learning of the existence of a regulatory investigation from documents uncovered in the course of an audit. Additionally, the exposure draft seeks to reduce the materiality of such violations as having merely an "indirect effect" on the financial statements of the fund, thereby again reducing both the level of diligence required of the auditor and the auditor’s responsibility for such violations.

The proposed changes to the auditor’s responsibility would appear to be inconsistent with the SEC’s Codification of Financial Reporting Policies, § 404.03.a:

The exposure draft reflects that comments should be received by December 22, 1998, and addressed to Sheila H. Yu, Technical Manager, Accounting Standards, File 3170, AICPA, 1211 Avenue of the America’s, New York, New York, 10036-8775, or via the Internet to syu@aicpa.org.

I would very much appreciate your directing this to the appropriate persons at the SEC. Hopefully, the SEC will vigorously oppose this effort by the auditing profession to substantially dilute its responsibilities with respect to audits of investment companies and the protection of investors in mutual funds. I would appreciate being advised of the staff’s response to this proposal.

Very truly yours,

Vernon J. Vander Weide

VVW:ke

Encl

C: Richard A. Lockridge