[Federal Register Volume 62, Number 205 (Thursday, October 23, 1997)]
[Notices]
[Pages 55285-55288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28124]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22858; 812-10700]
Goldman Sachs & Co., et al.; Notice of Application
Ocotber 17, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application under (a) sections 6(c) and 17(b) of the
Investment Company Act of 1940 (the ``Act'') requesting an exemption
from section 17(a) of the Act; (b) section 6(c) of the Act requesting
an exemption from section 17(e) of the Act and rule 17e-1 under the
Act; and (c) section 10(f) of the Act requesting an exemption from
section 10(f) and rule 10f-3 under the Act.
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SUMMARY OF APPLICATION: Applicants request an order to permit
registered investment companies that have one or more investment
advisers, and for which Goldman, Sachs & Co. or an affiliate
(``Goldman'') acts as an investment adviser, to engage in certain
principal and brokerage transactions and to purchase securities in
certain underwritings. The transactions would be between the investment
companies, or the portions of the investment companies' portfolios,
that are not advised by Goldman, and Goldman or a member of an
underwriting syndicate in which Goldman is a participant.
[[Page 55286]]
APPLICANTS: Goldman, Sachs & Co., Goldman Sachs Asset Management
International (``GSAMI''), and Goldman Sachs Fund Management, L.P.
(``GSFM''); and The Diversified Investors Fund Group, Diversified
Investors Portfolios, EAI Select Managers Equity Fund, The Managers
Funds, and The Hirtle Callaghan Trust (collectively, the ``Funds'').
FILING DATE: The application was filed on June 10, 1997. Applicants
have agreed to file an amendment to the application during the notice
period, the substance of which is included in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 12,
1997, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, c/o Goldman Sachs & Co., 85 Broad Street, New York,
New York, 10004.
FOR FURTHER INFORMATION CONTACT:
Joseph B. McDonald, Jr. Senior Counsel, at (202) 942-0533, or Mercer E.
Bullard, Branch Chief, at (202) 942-0564 (Office of Investment Company
Requlation, Division of Investment Mangement).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street N.W., Washington,
D.C. 20549 (tel. 202-942-8090).
Applicants' Representations
1. Goldman, Sachs & Co., is registered with the SEC as a broker-
dealer under the Securities Exchange Act of 1934 and an investment
adviser under the Investment Advisers Act of 1940 (``Advisers Act'').
Goldman, Sachs & Co. and entities controlling, controlled by or under
common control with Goldman, Sachs & Co. (collectively, ``Goldman
Sachs'') constitute one of the largest dealers in fixed income, money
market and equity securities.
2. GSAMI and GSFM are under common control with Goldman, Sachs &
Co. and are registered as investment advisers under the Advisers Act.
Goldman Sachs Asset Management (``GSAM'') is an operating division of
Goldman, Sachs & Co., and Liberty Investment Management (``Liberty'')
is an operating division of GSAM. GSAMI, GSFM, GSAM, and Liberty are
and act as investment advisers to one or more registered investment
companies or series of registered investment companies
(``Portfolios''). GSAMI, GSFM, GSAM and Liberty, and any other entities
controlling, controlled by, or under common control with a Goldman
Sachs entity and that are engaged in providing advisory services are
collectively referred to as the ``Goldman Advisers.''
3. Applicants request that the relief apply to any registered
investment company or Portfolio for which a Goldman Adviser currently
or in the future acts as investment adviser.\1\ Applicants also request
relief for any broker-dealer controlling, controlled by, or under
common control with Goldman, Sachs & Co. (collectively with Goldman,
Sachs & Co., ``Affiliated Broker-Dealers'').
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\1\ Any registered investment company that currently intends to
rely on the order is named as an applicant. Any other existing or
future registered investment company that relies on the order will
comply with the terms and conditions of the application.
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4. The EAI Select Managers Equity Fund, The Managers Funds, The
Diversified Investors Fund Group, and The Hirtle Callaghan Trust are
registered open-end management investment companies organized as
Massachusetts business trusts or, in the case of The Hirtle Callaghan
Trust, as a Delaware business trust. Evaluation Associates Capital
Markets, Inc. serves as the investment adviser to the only Portfolio of
the EAI Select Managers Equity Fund. The Managers Funds, L.P. serves as
investment adviser to each of the ten Portfolios of The Managers Funds.
The Diversified Investors Fund Group has thirteen Portfolios, all of
the assets of which are invested in a corresponding series of the
Diversified Investors Portfolios, a registered investment company.
Diversified Investment Advisors, Inc. is the investment adviser of each
of the Portfolios of Diversified Investors Portfolios. The Hirtle
Callaghan Trust currently consists of five portfolios each of which is
advised by one or more independent investment advisers.
5. Liberty or GSAM acts as investment adviser to a portion of one
or more Portfolios of the EAI Select Managers Equity Fund, The Manager
Funds, the Diversified Investors Portfolios, and The Hirtle Callaghan
Trust. In each case, the other portions are advised by investment
advisers that are not affiliated persons, or affiliated persons of an
affiliated person, of Goldman Sachs (each, an ``Unaffiliated Adviser,''
and each portion, an ``Unaffiliated Portion'').\2\ No Goldman Sachs
entity (other than a Goldman Adviser) is an affiliated person, or an
affiliated person of an affiliated person, of an investment adviser to
a Portfolio of an unaffiliated Fund.
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\2\ Portfolios for which no Goldman Adviser serves as investment
adviser are referred to as ``Unaffiliated Portfolios,'' and Funds
whose only affiliation with Goldman Sachs is that a Goldman Adviser
serves as investment adviser are referred to as ``Unaffiliated
Funds.''
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6. Certain investment companies use a multi-manager structure
(``Multi-Managed Portfolios'') \3\ in which separate investment
advisers (``Subadvisers'') are used to manage discrete portions of the
Portfolio.\4\ Each Subadviser acts as if it were managing a separate
investment company. The Subadvisers do not collaborate, and each is
responsible for making independent investment and brokerage allocation
decisions for its portion based on its own research and analysis. The
Subadvisers do not receive information about investment or brokerage
allocation decisions of another portion of the Portfolio before they
are implemented. Each Subadviser is compensated for advisory services
based only on a percentage of the value of assets allocated to it.
GSAM, Liberty or other Goldman Advisers act or may act as Subadvisers
to registered investment companies. Applicants state that Goldman Sachs
does not and will not control the Portfolio for which a Goldman Adviser
acts as Subadviser.
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\3\ For purposes of this notice, a Multi-Managed Portfolio is a
registered investment company or a Portfolio advised by a Goldman
Adviser and at least one Unaffiliated Adviser.
\4\ The term ``Subadvisers'' includes investment advisers that
manage discrete portions of Multi-Managed Portfolios whether or not
the Portfolios have a primary adviser that is responsible for the
overall investment performance of the fund and monitoring the
Subadvisers. In addition, the term ``Subadvisers'' includes a
primary adviser to the extent the primary adviser is responsible for
a portion of a Multi-Managed Portfolio.
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7. Applicants request relief to permit (1) Unaffiliated Portions to
engage in principal transactions with Affiliated Broker-Dealers and to
purchase securities in an underwriting in which an Affiliated Broker-
Dealer acts as a principal underwriter, (2) Unaffiliated Portfolios to
engage in brokerage transactions with Goldman, Sachs & Co., and
Unaffiliated Portions to engage in
[[Page 55287]]
brokerage transactions with Affiliated Broker-Dealers, when Goldman,
Sachs & Co. or the Affiliated Broker-Dealer acts as broker in the
ordinary course of business without complying with subsections (b) and
(c) of rule 17e-1, and (3) portions of Portfolios advised by a Goldman
Adviser (``Affiliated Portions'') to purchase securities in an
underwriting without aggregating that portion's purchase with purchases
of Unaffiliated Portions as required by rule 10f-3(b)(7).
Applicants' Legal Analysis
A. Section 17(a)
1. Section 17(a) of the Act generally prohibits sales or purchases
of securities between a registered investment company and an affiliated
person, or an affiliated person of an affiliated person, of the
company. Sections 2(a)(3) (C) and (E) of the Act define an ``affiliated
person'' of another person to be any person controlling, controlled by,
or under control with the person, and any investment adviser of an
investment company, respectively. Applicants believe that any Goldman
Adviser acting as a Subadviser of a Multi-Managed Portfolio would be an
affiliated person of that Portfolio, and each Affiliated Broker-Dealer
would be an affiliated person of the Goldman Adviser. As a result,
applicants believe that any principal transaction between an
Unaffiliated Portion and an Affiliated Broker-Dealer would be
prohibited by section 17(a).
2. Applicants request relief from section 17(a) to exempt principal
transactions entered into in the ordinary course of business between
the Unaffiliated Portion and an Affiliated Broker-Dealer. Applicants
state that the relief would apply only to transactions prohibited by
section 17(a) solely because a Goldman Adviser is an affiliated person
of the Portfolio under section 2(a)(3)(E).
3. Section 6(c) permits the SEC to exempt any person or transaction
from any provision of the Act, if the exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policies of the
Act. Section 17(b) permits the SEC to grant an order permitting a
transaction otherwise prohibited by section 17(a) if it finds that the
terms of the proposed transaction are fair and reasonable and do not
involve overreaching on the part of any person concerned, and the
proposed transaction is consistent with the policy of each registered
investment company and the general purposes of the Act. For the reasons
stated below, applicants believe that the proposed transactions meet
the standards of sections 6(c) and 17(b).
4. Applicants contend that section 17(a) is intended to prevent
persons who have the power to influence an investment company from
using that influence to the person's own pecuniary advantage.
Applicants assert that Unaffiliated Advisers will be solely responsible
for making investment decisions, and that they therefore will have no
incentive to cause Unaffiliated Portions to engage in transactions with
Affiliated Broker-Dealers. Applicants state that, because the
Unaffiliated Adviser will have no conflict of interest in deciding
whether to execute a principal transaction with an Affiliated Broker-
Dealer on behalf of an Unaffiliated Portion, there will be no danger of
overreaching on the part of any person concerned with the transaction.
Applicants argue that the pecuniary interests of the particular
Unaffiliated Adviser are directly aligned with those of the
Unaffiliated Portion it manages. Applicants contend that the
Unaffiliated Adviser's interests are served only to the extent that the
assets of the Unaffiliated Portion are increased as a result of the
transaction, which also benefits the Fund.
5. Applicants state that the proposed transactions will be
consistent with the policies of the Multi-Managed Portfolio, inasmuch
as each Unaffiliated Adviser is required to manage the Unaffiliated
Portion of the Multi-Managed Portfolio in accordance with the
investment objectives and related investment policies of the Portfolio
as described in its registration statement. Applicants also argue that
permitting the transactions will be consistent with the general
purposes of the Act and in the public interest, because the ability to
engage in the transactions will increase the likelihood of a Multi-
Managed Portfolio achieving best price and execution on its principal
transactions while giving rise to none of the abuses that section 17(a)
was designed to prevent.
B. Section 17(e) and Rule 17e-1
1. Section 17(e)(2) of the Act prohibits an affiliated person, or
an affiliated person of an affiliated person, of a registered
investment company from receiving compensation for acting as broker in
connection with the sale of securities to or by the company if the
compensation exceeds the limits prescribed by the section unless
otherwise permitted by rule 17e-1 under the Act. Rule 17e-1(a) provides
that brokerage compensation paid pursuant to the rule must be
reasonable and fair compared with compensation paid in comparable
transactions. Rule 17e-1(b) requires the investment company's board of
directors, including a majority of the directors who are not interested
persons under section 2(a)(19) of the Act, to adopt procedures
regarding brokerage compensation paid pursuant to the rule and to
determine at least quarterly that all transactions effected in reliance
on the rule complied with the procedures. Rule 17e-1(c) specifies the
records that must be maintained by each investment company with respect
to any transaction effected pursuant to rule 17e-1.
2. Applicants believe that Affiliated Broker-Dealers are affiliated
persons of an affiliated person of the Unaffiliated Portions for the
reasons discussed above. Applicants also believe that Goldman, Sachs &
Co. is an affiliated person of an affiliated person of the Unaffiliated
Portfolios because (a) the Affiliated Portfolios are affiliated persons
of Unaffiliated Portfolios because they are under common control, and
(b) Goldman, Sachs & Co., is an investment adviser to the Affiliated
Portfolios because GSAM and Liberty are divisions of Goldman, Sachs &
Co. and not separate legal entities.
3. Applicants request relief under section 6(c) for an exemption
from the provisions of section 17(e) Act and rule 17e-1 to the extent
necessary to permit Unaffiliated Portfolios to pay brokerage
compensation to Goldman, Sachs & Co., and Unaffiliated Portions to pay
brokerage compensation to Affiliated Broker-Dealers, when Goldman,
Sachs & Co. or the Affiliated Broker-Dealer, respectively, acts as
broker in the ordinary course of business without complying with the
requirements of rule 17e-1(b) and (c). Applicants state that the relief
would apply only to transactions prohibited by section 17(e) solely
because a Goldman Adviser is an affiliated person of the Portfolio
under section 2(a)(3)(E).
4. Applicants believe that the proposed brokerage transactions meet
the standards of section 6(c) of the Act for the same reasons that the
proposed principal transactions satisfy the standards. In addition,
applicants state the brokerage transactions will comply with the rule
17e-1(a) requirement that the brokerage compensation be fair and
reasonable compared with comparable transactions. Applicants also note
that the Unaffiliated Advisers will be subject to a fiduciary duty to
obtain best execution for the Fund. Applicants believe that compliance
with the procedural and recordkeeping requirements of rule 17e-1(b) and
(c)
[[Page 55288]]
would be unduly burdensome and unnecessary in view of the lack of any
conflict of interest.
C. Section 10(f) and Rule 10f-3
1. Section 10(f) of the Act prohibits a registered investment
company from purchasing securities in an underwriting in which certain
affiliates, including the company's investment adviser, act as
principal underwriter. Section 10(f) also provides that the SEC may
exempt by rule or order any transaction from section 10(f) to the
extent that the exemption is consistent with the protection of
investors.
2. Applicants state that a Goldman Adviser that acts as a
Subadviser to a Portfolio is an investment adviser to the entire
Portfolio. Applicant therefore believes that all purchases of
securities by an Unaffiliated Portion from an underwriting syndicate a
principal underwriter of which is an Affiliated Broker-Dealer would be
subject to section 10(f).
3. Applicants request relief under section 10(f) from that section
to permit Unaffiliated Portions to purchase securities in the ordinary
course of business during the existence of an underwriting or selling
syndicate, a principal underwriter of which is an Affiliated Broker-
Dealer. Applicants request relief only to the extent that section 10(f)
applies because a Goldman Adviser is an investment adviser to the
Portfolio.
4. Applicants believe that the proposed transactions meet the
standards set forth in section 10(f). Applicants state that section
10(f) was adopted in response to concerns about investment bankers
``dumping'' otherwise unmarketable securities on investment companies,
either by forcing the investment company to purchase unmarketable
securities from the underwriting affiliate itself, or by forcing or
encouraging the investment company to purchase the securities from
another member of the syndicate. Applicants submit that these abuses
are not present in the context of Multi-Managed Portfolios because, as
discussed above, the Unaffiliated Advisers will not have an incentive
to purchase the securities to benefit an Affiliated Broker-Dealer.
While the Funds could effect the relevant underwriting purchases by
complying with rule 10f-3, applicants assert that to do so would be
impracticable. Applicants believe that, to comply with rule 10f-3, the
Subadvisers would have to coordinate purchases in underwritings, thus
undermining their independence and interfering with the operation of
the Funds.
5. Rule 10f-3 exempts certain transactions from the prohibitions of
section 10(f) if specified conditions are met. Rule 10f-3(b)(7)
generally requires that the amount of securities of any class of an
issue to be purchased by the investment company, or by two or more
investment companies having the same investment adviser, not exceed 25%
of the principal amount of the offering.
6. Applicants believe rule 10f-3(b)(7) requires aggregation of the
purchases of all Affiliated and Unaffiliated Portions of a Multi-
Managed Portfolio. Applicants request an exemption under section 10(f)
to the extent necessary to permit Affiliated Portions to purchase
securities in an underwriting without aggregating that Portion's
purchase with purchases of Unaffiliated Portions. Applicants request
relief only to the extent that section 10(f) applies because a Goldman
Adviser is an investment adviser to the Portfolio.
7. The aggregation requirement of rule 10f-3(b)(7) is intended to
ensure that a significant portion of an underwriting is purchased by
persons other than a single fund complex under common management.
Applicants contend that aggregating the purchases would serve no
purpose because any common purchases would be mere coincidence, and not
the result of a decision by a single Subadviser, because there is no
collaboration among Subadvisers.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief will be subject to the following conditions;
1. Each Multi-Managed Portfolio will be advised by a Goldman
Adviser and at least one Unaffiliated Adviser and will be operated
consistent with the manner described in Section I.G. of the
application.
2. Neither the Goldman Adviser (except of virtue of serving as
Subadviser) nor the Affiliated Broker-Dealer will be an affiliated
person or a second-tier affiliated or any Unaffiliated Adviser or any
officer, trustee or employee of the Unaffiliated Fund engaging in the
transaction.
3. No Goldman Adviser will directly or indirectly consult with any
Unaffiliated Adviser concerning allocation of principal or brokerage
transactions.
4. No Goldman Adviser will participate in any arrangement whereby
the amount of its subadvisory fees will be affected by the investment
performance of an Unaffiliated Adviser.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28124 Filed 10-22-97; 8:45 am]
BILLING CODE 8010-01-M
