SECURITIES AND EXCHANGE COMMISSION

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

October 12,2010

DIVISION OF

INVESTMENT MANAGEMENT

Robert Van Grover, Esq.

Seward & Kissell LLP

One Battery Park Plaza

New York, NY 10004 US

Re:

Request for no-action relief under the Investment Advisers Act of 1940

Section 206(4) and Rule 206(4)-2

In your letter dated October 1, 2010, you asked the staff ofthe Division ofInvestment

Management (the "staff') to provide guidance regarding compliance by certain investment

advisers with rule 206(4)-2 (the "Custody Rule") under the Investment Advisers Act of 1940, as

amended (the "Advisers Act").

You represent that many investment advisers to one or more limited partnerships (or

limited liability companies or other types of pooled investment vehicle ("private funds")) have

custody of such private funds' assets as defined in the Custody Rule. Further, you represent that

most of such investment advisers to private funds obtain annual audits ofthe private funds for

purposes of complying with rule 206(4)-2(b)(4) (the "Annual Audit Provision"). Among other

conditions, rule 206(4)-2(b)(4)(ii) requires that the annual audit of the private fund be conducted

by "an independent public accountant that is registered with, and subject to regular inspection as

of the commencement of the professional engagement period, and as of each calendar year-end,

by, the Public Company Accounting Oversight Board ("PCAOB") in accordance with its rules."

Only auditors to public companies are currently subject to regular inspection by the

PCAOB. However, Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection

Act (the "Dodd-Frank Act"), signed into law on July 21,2010, provides the PCAOB with

authority to develop rules to establish a regular inspection program for auditors of brokers and

dealers as well. I You indicate that several of your investment adviser clients that manage private

funds have engaged auditors that are auditors to brokers or dealers but not to public companies.

These auditors are registered with the PCAOB but will not be subject to regular inspection until

the PCAOB rules referenced above are adopted and take effect. As a result, such auditors' audits

of private funds would not technically comply with the Annual Audit Provision of the Custody

Rule. Furthermore, even after such PCAOB rules are adopted and take effect, such audit firms

may not be able to represent that they were subject to regular inspection as of the commencement

ofthe professional engagement period, depending upon when the rules became effective and

when the engagement period commenced.

You represent that this aspect of the Custody Rule may be disruptive to certain advisers

that would be required to replace such auditors until the auditors become subject to regular

inspection by the PCAOB, as contemplated by the Act, even if the advisers contemplate re-

See Dodd-Frank Act Section 982.

engaging the auditors once subject to PCAOB regular inspection. You also note that this change

in auditors may result in additional expense to investors.

Based on the facts and representations in your letter, we would not recommend enforcement

action to the Commission under Section 206(4) of the Advisers Act and rule 206(4)-2 thereunder

against an investment adviser that engages an auditor that also audits a broker or a dealer to audit

the financial statements in connection with the Annual Audit Provision, subject to the following

conditions2 :

•

the auditor was engaged to audit the financial statements of one or more of the private funds

for the most recently completed fiscal year;

•

the auditor was registered with the PCAOB and engaged to audit the financial statements of a

broker or a dealer on July 21, 2010 and is registered with the PCAOB and engaged to audit

the financial statements of a broker or a dealer as of the issuance of audited financial

statements used to satisfy the Annual Audit Provision; and

•

the adviser provides written notification to each investor in each private fund prior to the

distribution of the financial statements that the private fund's auditor is not subject to regular

inspection by the PCAOB.

This response applies only to financial statements issued prior to the adoption of rules

concerning the inspection of auditors of brokers and dealers by the PCAOB or July 21, 2011,

whichever date is earlier.

Robert E. Plaze

Associate Director

2

Conditions conveyed during a telephone conversation between Bryan J. Morris of the staff and

Robert Van Grover of Seward & Kissell LLP on October 8, 2010.

SEWARD

& KISSEL LLP

ONE BATTERY PARK PLAZA

NEW YORK, NEW YORK

10004

1200 a

TELEPHONE:

(212) 574-1200

FACSIMILE:

(212)480-8421

STR~I:T,

WASHINGTON,

N.W.

c.c.

20005

n:c"'PHoN"': (202) 737-8833

f"ACSIMIC"': (202) 737-5184

WWW.SEWKIS.COM

October 1,2010

Investment Advisers Act/206(4)-2

Robert E. Plaze, Esq.

Associate Director

Office of the Associate Director, Regulatory Policy & Investment Adviser Regulation

U.S. Securities and Exchange Commission

Division of Investment Management

100 F Street, NE

Washington, DC 20549

Re: Investment Advisers Act of 1940, as amended, Rule 206(4)-2

Dear Mr. Plaze:

We represent many advisers to limited partnerships, limited liability companies and other types of pooled

vehicles (hereafter "private funds") that are deemed to have custody of such private funds' assets under

Rule 206(4)-2 (the "Custody Rule") under the Investment Advisers Act of 1940, as amended (the

"Advisers Act"). Most of such advisers to private funds rely upon obtaining annual audits of the private

funds that satisfy Rule 206(4)-2(b)(4) (the "Annual Audit Provision") to comply with the requirements of

the Custody Rule. Among other conditions, the annual audit of the private fund must be conducted by

"an independent public accountant that is registered with, and subject to regular inspection as of the

commencement of the professional engagement period, and as of each calendar year-end, by, the Public

Company Accounting Oversight Board in accordance with its rules." Rule 206(4)-2(b)(4)(ii)(italics

added).

Currently, only auditors to public companies are subject to inspection by the Public Company Accounting

Oversight Board (the "PCAOB"). Title IX of the Dodd-Frank Wall Street Reform and Consumer

Protection Act (the "Act"), signed into law on July 21, 2010, provides the PCAOB with authority to

inspect auditors of brokers and dealers as well. Act Section 982. The PCAOB rules concerning

inspections of broker-dealer auditors are not effective unless the SEC gives its prior approval under

Sarbanes-Oxley Act Section 107(b), including an opportunity for public notice and comment. Such rules

will not, in light of the required notice and comment periods, be effective in 2010.

Several of our clients that manage private funds have engaged auditors that are auditors to brokers or

dealers but not to public companies. Such firms' audits of private funds would not comply with the

Annual Audit Provision of the Custody Rule until the PCAOB rules referenced above take effect

subjecting those auditors to brokers and dealers to inspection. Furthermore, even after such PCAOB rules

take effect, such audit firms may not be able to represent that they were subject to regular inspection as of

the commencement of the professional engagement period, depending upon when the rules became

effective and when the engagement period commenced. Accordingly, this aspect of the Custody Rule

may be disruptive to certain advisers who would be required to replace such auditors until such auditors

become subject to regular inspection by the PCAOB, as contemplated by the Act, even if the adviser

contemplates re-engaging the auditor once subject to PCAOB regular inspection.

In light of the above, we ask the staff to provide guidance that it would not recommend enforcement

action against advisers that engage auditors to brokers or dealers that are not currently subject to regular

inspection by the PCAOB during the period through enactment of PCAOB rules requiring the regular

inspection of such auditors and further clarification on whether an auditor satisfies the Annual Audit

Provision if it is registered with and subject to regular inspection by the PCAOB at any time during the

engagement period.

If you have any questions please do not hesitate to contact me at (212) 574-1205 or

vangrover@sewkis.com. We appreciate your attention to this issue.

Sincerely,

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Robert Van Grover, Esq.

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