From: rth@fidcouns.com Sent: Wednesday, September 25, 2002 4:58 PM To: rule-comments@sec.gov Subject: S7-28-02 Sent via Electronic Mail Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549-0609 Electronic Mail Address: rulecomments@sec.gov Subject: File No. S7-28-02 Re: Request for Comments on Proposed Rule Regarding Custody of Funds and Securities by Investment Advisers Dear Mr. Katz: Fiduciary Counselling, Inc. respectfully submits this electronic mail document in response to a request for comments by the Securities and Exchange Commission (the "SEC") on the proposed amendments to Rule 206(4)-2 (the "Rule") under the Investment Advisers Act of 1940, as amended (the "Advisers Act") related to the custody of client funds and securities by registered investment advisers. We concur with the SEC's goal of modernizing the Rule while enhancing investor protection. Consistent with this goal, we offer the following comments to the proposed rule. Use of Qualified Custodians As proposed the Rule would require all client funds and securities to be maintained with a qualified custodian. We generally agree with the proposal, however, we believe the Rule should be clarified to specifically deal with two situations. The first situation involves book entry securities accounts with custodians that do not meet the proposal's definition of a qualified custodian. Examples include shares of stock held by the issuer's non-bank transfer agent in the "direct registration" program (which allows the shareholder to be individually carried on the issuers shareholder record) and limited partnership interests carried directly on the partnerships books by the general partner or a non-bank record keeping agent. We propose that the Rule specifically include such book entry registration systems in the definition of a qualified custodian. The second situation involves securities that for one of several reasons cannot be traded on the public markets. Examples include securities of closely held companies, restricted securities and securities that are otherwise not eligible to be held a central depository such as the Depository Trust Company ("Non-DTC or Non-Street Name Eligible Securities"). In many situations, custodians are willing to hold such securities in their physical safe keeping vaults. We have found, however, that in many cases custodians are reluctant to safe keep such securities due to the effort and expense involved and if they will hold them in safe keeping will charge a substantial fee. The problem occurs most often when securities are withdrawn and redeposited to the account. In our experience this often involves closely held securities that are the subject of frequent intergenerational gifts between family members. This can also occur with! the securities of start-up companies that experience several financing rounds. We propose that the Rule permit such securities to be held in the advisers safe deposit box at a bank, savings association or other private safe deposit organization providing comparable security. We realize that should our proposals be accepted that it would be difficult for advisers in such situations to avail themselves of the proposed exceptions to the Rule's requirements related to the delivery of quarterly account statements and annual surprise examinations. We further propose that should an adviser otherwise qualify for such exceptions that the quarterly report and surprise examination requirements apply only to securities held in the adviser's safe deposit boxes. We hope that the SEC will find our comments to be helpful. Should members of the Staff wish to discuss our comments please contact the undersigned at your convenience. Respectfully submitted, Richard T. Holm, Treasurer and Legal Counsel Fiduciary Counselling, Inc. 651-215-4414 ******************************************************* This email and any files transmitted with it are confidential and intended solely for the use of the individual or entity to whom they are addressed. If you have received this email in error please notify the system manager. This footnote also confirms that this email message has been swept by MIMEsweeper for the presence of computer viruses. *******************************************************