From: Steve Bremner [SteveB@kennedyusa.com]
Sent: Sunday, September 22, 2002 11:11 AM
To: rule-comments@sec.gov
Subject: File No. S7-28-02


Dear Mr. Katz, 
 
In general, we support the proposed amendments to rule 206(4)-2, which 
are a positive step towards modernizing the current rule. The amendments 
could be improved by addressing some of the detailed interpretation 
questions raised below:
 
1. Definition of Custody 

*	Under any custodial structure, the custodian must receive instructions 
from the adviser to purchase or sell investment assets, pay expenses, 
disburse funds to the client, etc. Thus the adviser will always have some 
degree of "control" over client funds. Merely providing direction to the 
custodian to accomplish investment objectives that are within the scope of 
the investment advisory agreement is certainly not custody, and examples 
should be added to illustrate this point. 
 
*	The proposed definition appropriately focuses on the adviser's "authority 
to obtain possession" (paragraph (c)(1)). We understand that authority means 
"defined contractually between the client and the adviser". If an investment 
advisory agreement authorizes the adviser to withdraw funds for the adviser's 
own account (including an unrestricted power of attorney to withdraw funds), 
there is custody; if the adviser's authorization is limited to directing 
transactions necessary to render advisory services, the adviser does not have 
custody. An example should clarify this point.
 
2. Payment of Fees from Client Accounts

*	We believe that clients should always receive an invoice showing the 
calculation of fees; this should be presented to the client at the same time 
as the fee is debited to the client account. Payment of fees from client 
accounts should not constitute custody, provided that the client has authorized 
this means of payment, receives a timely copy of the bill showing the calculation, 
and receives a statement of account activity disclosing the payment.
 
3. Exemptions

*	An exemption is provided with regard to client assets held in pooled 
investment vehicles such as limited partnerships or LLCs if the vehicle is 
audited and distributes its audited financial statements within 90 days after 
the end of its fiscal year. The list of vehicles should be supplemented to 
include joint ventures. 

*	Also, examples should make it clear that the same exemption is afforded 
to LLCs or corporations which are wholly owned by a single client, provided 
that these vehicles are subject to the same requirements for audit and 
distribution of audited financial statements. As an illustration: an LLC is 
used to hold the title to an office building. The LLC is wholly owned by a 
single client. The LLC is audited on an annual basis, and the financial 
statements are distributed to the client within 90 days. Certainly these 
audited single-owner investment vehicles should be exempt, as they would 
clearly be if there were multiple owners. 
 
Thank you for the opportunity to comment on this issue. 
 
Very truly yours, 
 
Steven S. Bremner
Senior Vice President, Chief Financial Officer
Kennedy Associates Real Estate Counsel, Inc.
2400 Financial Center Building
Seattle, WA  98161
(206)623-4739