Investment Advisers Act of Rule 206(4)-2. November 20, 1990 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C

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1 Investment Advisers Act of Rule 206(4)-2 November 20, 1990 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT Wallington Asset Management, Inc. File No Your letter dated July 23, 1990, which this Office received on August 15, 1990, requests assurance that we would not recommend enforcement action to the Commission under Rule 206(4)-2 of the Investment Advisers Act of 1940 (the " Advisers Act") if, without compliance with that Rule, 1 Wallington Asset Management, Inc. ("Wallington"), a registered investment adviser, permits its employees and officers to serve as trustees of trusts that are advisory clients of Wallington in the manner described in your letter. You state that Commission staff informed you that Rule 206(4)-2 applies to the arrangement whereby the president of Wallington serves as trustee with power of attorney over the assets of a grantor trust that is under an advisory contract with Wallington. You also state that it would be costly for Wallington to comply with Rule 206(4)-2. Given those costs, and because you anticipate that other employees and officers of Wallington will serve in the future as trustees for other trusts for which Wallington provides advisory services, you propose the following arrangement which will permit Wallington to enter into advisory contracts with trusts with employees or officers of Wallington serving as trustees without violating Rule 206(4)-2. When trusts retain officers and employees of Wallington as trustees and Wallington as investment adviser, Wallington will instruct the investment firm or bank custodians of those trusts (collectively, the "custodian") to pay trustees' fees to the trustees and investment management fees to Wallington, provided that: * the grantor of the trust (or the attorneys for a testamentary trust), co- trustee (other than an 1 Rule 206(4)-2 requires that an investment adviser with custody of client funds or securities maintain them so as to protect them from, among other things, (i) unlawful activities by the investment adviser or its employees, or (ii) financial reverses, including insolvency, of the investment adviser. Investment Advisers Act Rel. No. 123 (Feb. 27, 1962) (adopting Rule 206(4)-2); Investment Advisers Act Rel. No. 122 (Nov. 6, 1961) (proposing Rule 206(4)-2). An investment adviser has custody of client funds or securities if the adviser directly or indirectly holds such funds or securities, has the authority to obtain or possess such funds or securities, or has the ability to appropriate such funds or securities. Investment Advisers Act Rel. No (Dec. 3, 1985) ("Release 1000").

2 officer or employee of Wallington), or a defined beneficiary of the trust, has given the Custodian written authorization to pay such fees; * the statements for such fees show the amount of the fees for the trustee and, in the case of statements for investment management fees, the value of the trust assets on which the fee is based and the manner in which that fee was calculated; and * at least quarterly, the Custodian will send to the grantor of the trust (or to the attorneys for a testamentary trust), the co- trustee (other than an officer or employee of Wallington), or a defined beneficiary of the trust a statement of disbursements from the account of the trust, including, but not limited to, the amount of investment management fees paid to Wallington and trustees' fees paid to the Trustees. 2 In addition, you state that the Custodian is authorized to transfer trust funds and securities only if directed by an officer or employee of Wallington whom the Custodian has accepted as an authorized signatory, and only to the following: * another trust company or bank trust department or brokerage firm independent of Wallington for the account of the trust to which the assets relate; * the named grantors or the named beneficiaries; * third persons independent of Wallington in payment of the fees or charges of such third persons, including, but not limited to, (i) attorneys, accountant's or custodian's fees for the trust, and (ii) if there is property other than securities or cash owned by the trust, taxes, interest, maintenance or other expenses; * third persons independent of Wallington for any other purpose legitimately associated with the management of the trust; or * a broker-dealer in the normal course of portfolio purchases and sales, provided that such transfer is made on payment against delivery basis or payment against trust receipt. 3 2 These are the conditions typically imposed in evaluating whether arrangements by which an investment adviser has access to client funds constitutes custody for purposes of Rule 206(4)-2. Investment Counsel Association of America, Inc. (pub. avail. June 9, 1982). See also Institute of Certified Financial Planners (pub. avail. Aug. 15, 1990) (imposing these conditions on investment advisers who receive fees directly from client assets and base their fees on, for example, hourly rates, a client's income or a written contract that stipulates a fixed dollar amount over a given time period (e.g., $ 250 per year), and not the value of trust assets); Release 1000 (setting forth these conditions as circumstances under which an investment adviser will be deemed not to have custody of a client's funds or securities). 3 In recent years, Division staff has required that restrictions similar to those developed here by Wallington be placed on the custodian's ability to transfer trust funds and securities to persons other than the trustees and adviser. See, e.g., Bennett Management Co. (pub. avail. Feb. 26, 1990); Guild Investment Management, Inc. (pub. avail. Aug. 31, 1988).

3 It also is essential that the Custodian include any transfers of trust assets to persons other than the trustees or Wallington in its quarterly report of disbursements from the trust account to the grantor of the trust (or to the attorneys for a testamentary trust), the co-trustee (other than an officer or employee of Wallington), or a defined beneficiary of the trust. 4 On the basis of the facts and circumstances in your letter, and, in particular, the conditions noted therein, we would not recommend that the Commission take enforcement action under Rule 206(4)-2 if the Custodian pays trustees' fees to the trustees and investment management fees to Wallington, and makes disbursements to persons other than the trustees and Wallington, directly from trust assets in the manner described in your letter. You should note that and different facts or circumstances may require a different conclusion. Patrice M. Pitts Attorney (..continued) 4 See Daniel H. Renberg & Associates, Inc. (pub. avail. Jan. 3, 1983). On November 6, 1990, Terence P. Weiss, president of Wallington, confirmed to Patrice M. Pitts of this Division that the Custodian's report of disbursements will include all deposits to and disbursements from the trust account made during the relevant time period.

4 INQUIRY-1: Wallington Asset Management 8900 Keystone at the Crossing Suite 1015 Indianapolis, Indiana July 23, 1990 Mr. Robert S. Driessen Securities Compliance Specialist Securities and Exchange Commission 450 Fifth Street, N.W., Mail Stop 5-2 Washington, D.C RE: Interpretive Advice With Respect To Rule 206(4)-2 Dear Mr. Driessen: Wallington Asset Management became registered as a Registered Investment Advisor pursuant to Section 203 of the Investment Advisor's Act of 1940 on June 10, The purpose of this letter is to request a "No Action" position with respect to the applicability of Rule 206(4)-2 to certain activities at Wallington Asset Management, Inc.. Wallington Asset Management, Inc. was founded by Donald W. Smith. Mr. Smith established a Grantor Trust in September Mr. Smith remained a principal of Wallington Asset Management until his death in November, The Trust which was initially funded with a $ contribution was to have as its purpose the following: 1. The provision of additional income for his wife upon Mr. Smith's death. 2. The principal balance of the Trust to eventually revert to Mr. Smith's children. Additional funding was made after Mr. Smith's death through insurance policies, etc.. In setting up this Trust, Mr. Smith initially named Wallington Asset Management as the sole Trustee. Since it was determined that Wallington Asset Management could not serve in this capacity, I, Terence P. Weiss, President of Wallington Asset Management, Inc. was named as successor Trustee. As Trustee, I have full power of attorney over the Trust's assets. Because of this relationship, the staff of the Commission in their examination of Wallington Asset Management through a follow-up letter dated May 25, 1990 indicated that funds of the Trust are in custody, control and possession making Rule 206(4)-2 applicable. This position has been taken even though the funds of the Trust are held by an outside investment firm whom also serves as custodian. Application of Rule 206(4)-2 results in various costs to this Trust because of yearly securities verification and other procedures required by Rule 206(4)-2. In addition to the application of Rule 206(4)-2 to the Donald W. Smith Trust, it is expected that certain officers and/or employees of Wallington Asset Management, Inc. may be asked to serve as Trustee at various points in time in the future on other Trust situations as well. Application of Rule 206(4)-2 would result in various costs to these trusts as well.

5 In revealing the recent staff positions articulated in Gofen and Glossberg, Inc. of July 20, 1983 and in Daniel H. Renberg and Associates, Inc., December 3, 1982 (available January 3, 1983), the Commission staff was of the position that Rule 206(4)-2 was inapplicable if certain procedures were followed by the trusts involved. Wallington Asset Management, Inc. proposes similar procedures. Wallington Asset Management, Inc. proposes to direct the investment firm or the bank custodian of securities and cash for each trust of which one of it's officers or employees is a Trustee, as follows: 1. You will not deliver trust securities to any officer or employee of Wallington Asset Management, Inc., nor will you transmit any funds to Wallington Asset Management, Inc. or any of its officers or employees except that you may pay trustee's fees to the trustee and investment management fees to Wallington Asset Management, Inc., provided that: (a.) the grantor of the trust or attorneys for the trust, if it is a testamentary trust, co-trustee (other than an officer or employee of Wallington Asset Management) or a defined beneficiary of the trust, has authorized you in writing to pay such fees; (b.) the statements for such fees show the amount of the fees for the trustee and, in the case of statements for investment management fees, show the value of the trust assets on which the fee is based and the manner in which said fee was calculated; (c.) you agree to send to the grantor of the trust, the attorneys for a testamentary trust, co-trustee (other than an officer or employee of Wallington Asset Management) or a defined beneficiary of the trust, at least quarterly, a statement of disbursements from the account of the trust including the amount of investment management fees paid to Wallington Asset Management, Inc. and trustee's fees paid to the trustee. 2. Other than as set forth in subparagraph (a.) you may transfer funds or securities or both of the trust only upon the direction of an officer or employee of Wallington Asset Management, Inc. whom you have duly accepted as an authorized signatory for such instructions to you, and only to the following: (a.) to another trust company or bank trust department or brokerage firm independent of Wallington Asset Management, Inc., for the account of the trust to which the assets relate; (b.) to the named grantors or the named beneficiaries; (c.) to third persons independent of the firm in payment of the fees or charges of such third persons, including, but not limited to, attorneys fees for the trust and accounting fees for the trust, the custodian and taxes, interest, maintenance or other expenses if there is property other than securities or cash owned by the trust;

6 (d.) to third persons independent of Wallington Asset Management for any other purpose legitimately associated with the management of the trust, or (e.) in the normal course of portfolio purchases and sales to a broker-dealer, provided that such transfer is made on a payment against delivery basis or payment against trust receipt. If the custodian agrees to the instructions above and is authorized to pay such fees, Wallington Asset Management, Inc. proposes to send to the grantor of the trust, the attorney for the trust if it is a testamentary trust, co-trustee (other than an employee or officer of Wallington Asset Management, Inc.), or a defined beneficiary at the same time that it sends any statement to the custodian, a statement showing the amount of the trustee's fee or advisory fee, the value of the assets on which the fees were based and the specific manner in which the fees were calculated. Based upon the above proposals and assuming they are implemented as set forth above, it is our opinion that Wallington Asset Management would not be deemed to have custody, control or possession of funds or securities of trusts which are advisory clients and which have an officer or employee of Wallington Asset Management, Inc. as a trustee. Accordingly, if the above proposals are implemented by Wallington Asset Management, Inc., Rule 206(4)-2 would not be applicable to the funds or securities of such trusts. Written concurrence on the opinions stated above would be appreciated at your earliest convenience. If you have any questions, please do not hesitate to contact me at Wallington Asset Management, Inc.. Thank you very much for your time and consideration.