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September 25, 20002 VIA E-MAIL Mr. Jonathan G. Katz
Re: Proposed Amendments to the Custody Rule under the Advisers Act (File No. S7-28-02). Dear Mr. Katz: T. Rowe Price Associates, Inc., T. Rowe Price International, Inc., T. Rowe Price Global Asset Management, Inc., T. Rowe Price Stable Asset Management, Inc., and T. Rowe Price Advisory Services, Inc. (collectively, the "Price Advisers") appreciate this opportunity to comment on the proposed amendments to Rule 206(4)-2 under the Investment Advisers Act of 1940.1 The Price Advisers strongly support the Commission proposal which updates the current custody rule in a manner consistent with how business practices have evolved over time. We fully endorse the comment letters submitted by the Investment Council Association of America and the Investment Company Institute. Our own comments are set forth below for your consideration. Definition of Custody. The proposed amendments generally incorporate a definition of "custody" as the Commission and its staff have interpreted the term under the current rule. We support the proposal, but request that the Commission provide certain clarifications. Inadvertent Receipt of Client Funds or Securities. Under the proposed rule, an adviser would not be considered to have custody of client funds or securities that are received by the adviser inadvertently, provided the adviser returns the assets to the sender within one business day of receipt. In lieu of returning assets to the sender, it would be more efficient to be able to return the assets to the client's custodian bank or designee with a notice to the client. In addition, we believe the one day turn around is not practicable to return assets that are inadvertently received. By requiring an adviser to act promptly, however, we believe the rule satisfies concerns regarding client assets within a more realistic framework. Deduction of Adviser's Fees from Client Accounts. The proposing release provides that an adviser has custody of a client's assets when it has authority to withdraw advisory fees from its client's account. In a long line of no-action letters, however, advisers have been deemed not to have custody of client assets provided they comply with certain conditions. We believe the proposing release represents a dramatic departure from this line of no-action letters and will result in significant confusion for advisers. For example, advisers who withdraw fees in compliance with the staff no-action letters do not confirm that they have custody in Form ADV. In addition, significant insurance issues are raised when an adviser is deemed to have custody of client funds. We urge the Commission to clarify that an adviser would not have custody for purposes of the rule if the adviser has the authority to withdraw advisory fees, provided the adviser complies with the conditions specified by the staff in its no-action letters. Qualified Custodians. For securities for which the primary market is a country outside the U.S., the proposed rule would treat as qualified custodians financial institutions that customarily hold financial assets in that country. We are concerned that the assets which may be held with foreign custodians is too narrowly defined. Instead, we believe the assets should be more broadly defined to include all funds and securities in the account of a client held outside the U.S. We also believe that the proposal is unclear when it refers to "securities for which the primary market is in a country other than the United States." For example, it may be difficult to determine a primary market when a security trades both in the U.S. and in foreign markets. We recommend that the Commission provide further guidance on the definition of "primary market." Delivery of Account Statements to Clients. The proposed rule would exempt advisers from the requirement to send quarterly account statements and to undergo annual surprise examinations if the qualified custodian sends monthly account statements directly to each advisory client. We are concerned that the monthly reporting period may not be consistent with custodian practices. For example, broker/dealers would be required to send only quarterly account statements if there were no activity in the account during a given month. We would expect broker/dealers to continue this practice. Accordingly, we recommend that the Commission permit qualified custodians to send client statements in a manner consistent with the laws, rules or other regulations applicable to them. Elimination of the Balance Sheet Requirement. The proposed amendments would eliminate the requirement in Form ADV that Advisers with custody of client assets must include, in their disclosure brochure, an audited balance sheet. We agree with the Commission that eliminating the balance sheet requirement will not reduce protections to clients. We also agree that the provisions of Rule 206(4)-4, which requires advisers to disclose to their clients any financial condition that is reasonably likely to impair the adviser's ability to meet its contractual commitments to its clients, is likely to be more useful to clients than a balance sheet. Transition Period. We request that the Commission provide ample time for advisers to bring themselves into compliance with the proposed rule. We believe that a ninety day transition period will allow advisers ample time to make necessary changes to their business practices to come into compliance with the rule. * * * The Price Advisers appreciate the opportunity to provide comment on this proposal. If you have any questions regarding our comments or require further information, please contact Nancy Morris at (410) 345-4976. Sincerely, Henry H. Hopkins Nancy M. Morris cc: Paul F. Roye, Director
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