[Federal Register Volume 59, Number 210 (Tuesday, November 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26964]
[[Page Unknown]]
[Federal Register: November 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-20653; 812-7301]
Institutional Liquid Assets et al.; Notice of Application
October 25, 1994.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application for an order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: The taxable money market portfolios of Institutional Liquid
Assets (``ILA''), Financial Square Trust (``FST''), Trust for Credit
Unions (``TCU''), and Paragon Funds (``PF'') (the taxable money market
portfolios of ILA, FST, TCU and PF are referred to herein as the
``Funds''; ILA, FST, TCU and PF are referred to herein as the
``Trusts''), and any other registered investment company or series
thereof that is a taxable money market fund for which Goldman, Sachs &
Co., Goldman Sachs Funds Management, L.P. (``GSFM''), or Goldman Sachs
Asset Management International (``GSAMI'') serves as investment adviser
in the future (the ``Future Funds''), Goldman, Sachs & Co., Goldman
Sachs Money Markets, L.P. (``GSMM''), GSFM, and GSAMI. The application
is also being made on behalf of any successors to all or substantially
all of the business, assets, or property of Goldman, Sachs & Co. or
GSMM. Any such succession shall be solely by way of change of
organization, such as incorporation, reincorporation, or reorganization
as a partnership or similar entity.
RELEVANT 1940 ACT SECTIONS: Order requested under sections 6(c) and
17(b) for an exemption from section 17(a).
SUMMARY OF APPLICATION: Applicants seek a conditional order to permit
the Funds and the Future Funds to engage in certain principal
transactions with Goldman, Sachs & Co. and GSMM.
FILING DATE: The application was filed on April 20, 1989 and amended on
August 17, 1993, February 17, 1994, August 19, 1994, and October 21,
1994.
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 21,
1994, and should be accompanied by proof of service on the 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 5th Street, N.W., Washington, D.C.
20549. ILA, FS, TCU, and PF, 4900 Sears Tower, Chicago, Illinois 60606-
6303. Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004
and 32 Old Slip, 34th Floor, New York, New York 10005. GSMM, 85 Broad
Street, New York, New York 10004. GSFM, 32 Old Slip, 34th Floor, New
York, New York 10005. GSAMI, 140 Fleet Street, London EC4A 2BJ,
England.
FOR FURTHER INFORMATION CONTACT:
Marilyn Mann, Special Counsel, at (202) 942-0582, or Barry D. Miller,
Senior Special Counsel, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. Each Trust is a no-load, diversified, open-end management
investment company registered under the Act. Each Trust is a
Massachusetts business trust and has as its investment objective
maximizing current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing
in high quality taxable money market instruments. Currently, Goldman,
Sachs & Co. is the investment adviser and the principal underwriter of
each Fund.
2. Goldman, Sachs & Co., GSFM, and GSAMI are each registered as
investment advisers under the Investment Advisers Act of 1940 (Goldman,
Sachs & Co., through its division Goldman Sachs Asset Management
(``GSAM''), GSFM, and GSAMI may individually be referred to as an
``Adviser'' and collectively as ``the Advisers'').
3. Goldman, Sachs & Co., a registered broker-dealer, is one of the
largest international investment banking and brokerage firms in the
United States and is a major dealer in money market instruments
(excluding commercial paper). Commercial paper is handled by GSMM, a
subsidiary of The Goldman, Sachs Group, L.P. (``GS Group''),\1\ which
is a controlling person of Goldman, Sachs & Co. A registered broker-
dealer, GSMM is one of the largest dealers in commercial paper. The
broker-dealer operations at Goldman, Sachs & Co. are handled by
approximately 1,360 professionals worldwide within the Fixed Income
Division (including GSMM), with 750 professionals in New York.
(Goldman, Sachs & Co., in its capacity as dealer in securities and
financial instruments and as counterparty in repurchase agreement
transactions, and GSMM are collectively referred to herein as ``Goldman
Sachs'' or the ``Dealers.'')
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\1\GSMM Corp., the general partner of GSMM holding a 1% interest
in the profits and losses thereof, is a corporation owned by 35
individual general partners of GS Group, in order that GSMM Corp. be
accorded treatment under Subchapter S of the Internal Revenue Code.
GS Group is the limited partner of GSMM with a 99% interest in its
profits and losses.
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4. Goldman, Sachs & Co., GSFM, and GSAMI are directly or indirectly
partnership or corporate subsidiaries of GS Group. GS Group is a
Delaware limited partnership with more than 150 general partners and
over 90 limited partners, including certain institutional limited
partners, and is a general partner of Goldman, Sachs & Co., with a 99
percent interest in the profits and losses thereof. GSFM is a Delaware
limited partnership of which the general partner is a corporation
wholly-owned directly by GS Group and the sole limited partner is GS
Group. GSAMI is a English company indirectly wholly-owned by GS Group.
Neither GSFM nor GSAMI currently act as investment adviser to a Fund,
but may do so in respect of a Future Fund. The Advisers will maintain
offices physically separate from Goldman Sachs.
5. The investment advisory operations for the Funds are handled by
a group currently consisting of 10 persons (the ``Funds Group Trading
Desk'') within GSAM. The personnel assigned to the Funds Group Trading
Desk are exclusively devoted to the business and affairs of GSAM.
Subject to the supervision of the Trustees of the Funds, the executive
management of GSAM, the Investment Policy Committee (discussed below)
and the Credit Department (discussed below), all portfolio selection
and trading decisions made for the Funds are made by personnel assigned
to the Funds Group Trading Desk. All portfolio managers responsible for
the Funds are assigned to the Funds Group Trading Desk. Such personnel
are also responsible for U.S. dollar-denominated short-term taxable and
tax-exempt funds management for other GSAM clients, including tax-
exempt money funds registered under the Act.
6. Personnel in the Funds Group Trading Desk are not responsible
for the marketing or sales of the Funds' shares or other GSAM products,
although from time to time they participate in solicitations for
significant potential clients and client service. Because of their
expertise in and knowledge of the markets for short-term, money market
instruments, other GSAM personnel, and occasionally personnel from
other divisions within Goldman Sachs, solicit their views on the
viability (from the portfolio management perspective) of proposals for
pooled investment vehicles involving such markets or instruments.
Finally, Funds Group Trading Desk personnel, who are generally familiar
with instruments structured to satisfy various provisions of rule 2a-7,
are solicited from time to time by various dealers, including Goldman
Sachs, for their views on the structure of new instruments designed to
be eligible under the rule.
7. Credit analysis for the Funds Group Trading Desk, Goldman Sachs
and other affiliates of GS Group is performed by the Credit Department.
The Credit Department is a central department of Goldman, Sachs & Co.
which performs securities credit analysis, counterparty risk, customer
credit, and related issues. The Credit Department maintains a list of
eligible instruments which is used by the Funds Group Trading Desk for
portfolio management. The Funds Group Trading Desk is not authorized to
purchase instruments not on this list.
8. In general, the Funds Group Trading Desk develops and implements
portfolio investment strategies within a preselected average maturity
range. The average maturity range is selected in a weekly ``Investment
Policy Committee'' meeting (the ``Committee''). The Committee
determines the target average maturity range based on (a) Fundamental
economic analysis and technical market data, (b) anticipated trends in
monetary and fiscal policy and (c) anticipated customer activity. In
connection with (a) and (b), personnel of the Funds Group Trading Desk
solicit views of dealers, including Goldman Sachs, on economic and
market developments. For example, such personnel routinely canvas other
dealers and Goldman Sachs to determine the ``market'' consensus
regarding pending economic data releases, anticipated changes in
Federal Reserve policy, and the forecast gross supply of money market
securities available for investment. The Committee is currently
composed of seven GSAM employees (including personnel of the Funds
Group Trading Desk, but no other portfolio management personnel) and
one employee from the Investment Research Division of Goldman, Sachs &
Co. This Goldman Sachs' employee's input in the process is limited to
participation in the Committee's deliberations on economic policy
outlook, as it pertains to the very narrow issues for which the
Committee is responsible.
9. The Committee is not involved in review or approval of specific
securities to be purchased, the terms of any transactions or the types
of securities in which the Funds may invest. Security and sector
selection is exclusively the responsibility of the portfolio managers,
subject to the portfolio's prospectus and credit guidelines, and is
entirely outside the Committee process. The Committee's decisions on
average maturity ranges are made by consensus, and no member has a veto
over the decisions made by the Committee. Once decisions are made, the
Funds Group Trading Desk manages the Funds' average maturity ranges
until the ranges are changed at a subsequent meeting of the Committee.
10. The Funds Group Trading Desk monitors daily the portfolios of
each of the Funds and places purchase and sell orders and enters into
other transactions for the Funds by monitoring market quotations and
market information and placing orders with, or receiving orders from,
salesmen or dealers at investment or commercial banking institutions.
After a transaction has been completed, the Funds Group Trading Desk
employee completes a trade ticket evidencing the transaction and its
agreed-upon terms. The average weekly trading volume that the Funds
Group Trading Desk effected for the Funds was approximately $23.3
billion for the twelve-month period ended July 1, 1992.
11. As indicated above, neither GSFM nor GSAMI currently manage any
Funds. As a result, neither has established a unit corresponding to the
Funds Group Trading Desk or to an Investment Policy Committee. It has
not been determined whether, if GSFM or GSAMI manage a Fund, either
would do so, or alternatively whether GSFM and/or GSAMI would rely in
whole or in part on GSAM's Funds Group Trading Desk and Investment
Policy Committee. In any event, any analogue to the Funds Group Trading
Desk or the Investment Policy Committee established by either GSFM or
GSAMI would conform in all material respects with the respective unit
described herein and would comply with all of the conditions to the
order.
12. Applicants believe that the Advisers, on the one hand, and the
Dealers, on the other hand, are factually independent of each other, as
described in part by condition 7. Important among those elements are
the facts that the compensation of no person assigned to the Advisers
will depend on the volume or nature of trades with the Dealers; and
neither of the Dealers will share with the Advisers any portion of the
profits or losses on transactions associated with such trades.
13. GS Group is a large, multinational financial enterprise, the
net profits or losses of which arise from combined profits and losses
of many and disparate sources. As noted in condition 7, the general
partners, including those primarily responsible for the Advisers, are
allocated their respective percentages of such net profits or losses.
In addition, employees may be awarded general firmwide bonuses or
participate in deferred compensation plans the profit or loss on which
depend on GS Group's firmwide profits or losses. Applicants do not
believe the factual independence of the Advisers and the Dealers is
affected by the allocation of firmwide profits and losses.
14. General partners of GS Group allocate among themselves
specified percentages of GS Group's profits and losses, which are
determined on a firmwide basis. Such percentages are generally reviewed
and changes are agreed to on a biennial (alternate year) basis,
although there occasionally may be interim changes.
15. Nonpartner employees may be paid firmwide bonuses measured by,
for example, a percentage of normal, annual compensation or a number of
weeks of normal compensation. Other nonpartner employees are
compensated by reference to performance goals within their respective
divisions or departments. For example, a GSAM portfolio manager may
receive (or not receive) a bonus based on the comparison of the
performance of the portfolios under his or her supervision to standard
or specialized indices measuring the performance of similar securities
or funds with similar investment objectives. A Fixed Income Division
employee may receive (or not receive) his or her bonus based on a
variety of subjective and objective performance factors during a
pertinent time period.
16. In addition to nonpartner employees' bonuses, various operating
subsidiaries of GS Group, including Goldman, Sachs & Co., GSMM, and
GSAMI, offer to certain qualified professionals the opportunity to
participate in unfunded deferred compensation plans the profit (or
loss) on which is determined on the basis of GS Group's firmwide
profits and losses. The formula pursuant to which participants'
contributions are allocated profits or losses is determined annually by
GS Group on the basis of then current market conditions and applies
uniformly to all contributions made in that plan year. Qualifying
employees of the Advisers and the Dealers may be participants in these
plans.
17. The portfolio securities in which the Funds invest consist of
taxable money market instruments and repurchase agreements. Practically
all trading in money market instruments takes place in over-the-counter
markets consisting of groups of dealer firms which are primarily major
securities firms or large banks. Money market securities are generally
traded in round lots of $1,000,000 on a net basis and do not normally
involve either brokerage commissions or transfer taxes. The cost of the
Funds' portfolio transactions consists primarily of dealer or
underwriter spreads. Spreads vary among money market instruments but
generally do not exceed 12 basis points (.12%). It has been the
experience of the Funds Group Trading Desk that spreads have narrowed
and there is not a great deal of variation in the spreads charged by
the various dealers, except during turbulent market conditions.
18. The money market consists of an elaborate telephone
communication network among dealer firms, principal issuers of money
market instruments and principal institutional buyers of such
instruments. The dealer usually acts as principal for his own account.
Because the money market is a dealer market, rather than an auction
market, there is not a single obtainable price for a given instrument
that prevails at any given time. Price is determined by negotiations
between traders. Money market instruments are generally sold by each
participating dealer from inventory and the quotations of the dealers
will vary depending upon a number of factors. Only customers of the
dealer may obtain quotations and trade on them.
19. Because of the variety of types of money market instruments,
the money market tends to be somewhat segmented. The markets for the
various types of instruments will vary in terms of price, volatility,
liquidity, and availability. Although the rates for the different types
of instruments tend to fluctuate closely together, there are
significant differences in yield among the various types of
instruments, and even within a particular type, depending upon the
maturity date and the quality of the issuer. Moreover, from time to
time segmenting exists among money market securities with the same
maturity date and rating. The segmenting is based on such factors as
whether the issuer is an industrial or financial company and whether
the issuer is domestic or foreign. Because dealers tend to specialize
in certain types of money market instruments, the particular needs of a
potential buyer or seller in terms of type of security, maturity, or
quality may limit the number of dealers who can provide best price and
execution. Hence, with respect to any given type of instrument, there
may be only a few dealers who can be expected to have the instrument in
inventory (or add the instrument to inventory) and be in a position to
quote a favorable price.
20. Goldman Sachs is among the largest major dealers in the taxable
money market. As of November 1992, Goldman Sachs was the dealer in more
commercial paper programs for U.S. industrial companies and their
captive finance subsidiaries rated A-1/P-1 or better by Standard &
Poor's Corporation or Moody's Investors Service, Inc. than any other
dealer. Goldman Sachs' ranking in the repurchase agreement market has
in recent years fluctuated between second and fifth depending on
economic factors, the amount of its own commercial paper outstanding,
and its level of outstanding short-term borrowings. Goldman Sachs has
also consistently been one of the leading dealers in medium-term notes
(``MTNs''). Within the maturities permitted by rule 2a-7, the longer
term investment alternatives for the Funds are fewer than the shorter
term investment alternatives, since commercial paper cannot be issued
with a maturity greater than nine months, and bankers' acceptances
cannot be issued with a maturity greater than six months. Accordingly,
MTNs with nine months to one year maturities are important to the Funds
as alternative investments to United States Government securities and
bank certificates of deposit.
21. Since mid-1987, several dealers have terminated or
significantly reduced their money market dealer activities. These
terminations and reductions have had the effect of decreasing the
liquidity in the money market. Goldman Sachs has remained committed to
the taxable money market and has moved to fill the void left by
departing dealers. As the number of dealers with whom the Funds can
transact business decreases, it becomes more important for the Funds to
have meaningful access to all of the major dealers in the money market,
particularly Goldman Sachs, given its leading role in the money market.
22. Subject to the general supervision of the Trustees of the
Trusts, GSAM is responsible for portfolio decisions and the placing of
the Funds' portfolio transactions. The Funds have no obligation to deal
with any dealer or group of dealers in the execution of their portfolio
transactions. When placing orders, an investment adviser must attempt
to obtain the best net price and the most favorable execution of its
orders. In doing so, it takes into account such factors as price, the
size, type, and difficulty of the transaction involved, and the firm's
general execution and operation facilities.
Applicants' Legal Analysis
1. Applicants request an order pursuant to sections 6(c) and 17(b)
exempting certain transactions from the provisions of section 17(a) so
as to permit Goldman Sachs, acting as principal, to sell to or purchase
from the Funds and the Future Funds certain money market instruments,
subject to the conditions set forth below.
2. Because of the above-described affiliations of Goldman Sachs
with the Funds, the Funds are currently prohibited from conducting
portfolio transactions with Goldman Sachs in transactions in which
Goldman Sachs acts as principal. Section 17(a) prohibits an affiliated
person or principal underwriter of a registered investment company, or
any affiliated person of such a person, acting as principal, from
selling to or purchasing from such registered company, or any company
controlled by such registered company, any security or other property,
subject to exceptions not here relevant. Section 17(b) provides,
however, that the SEC, upon application, may exempt a transaction from
the provisions of section 17(a) if evidence establishes that the terms
of the proposed transaction, including the consideration to be paid,
are reasonable and fair, and do not involve overreaching on the part of
any person concerned, and that the proposed transaction is consistent
with the policy of the registered investment company and with the
general purposes of the Act.
3. Section 6(c) provides that the SEC may conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities, or transactions, from any
provision or provisions of the Act or of any rule or regulation
thereunder, if and to the extent that such exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act.
4. The rationale behind the proposed order is based upon the
decreased liquidity in the money market, the growing and significant
role played in the money market by Goldman Sachs, and the special
requirements of the Funds with respect to their portfolio transactions.
In particular, applicants note the following:
(a) With over $15.5 billion invested in money market instruments,
the Funds are major buyers and sellers in the money market with a
strong need for a constant flow of large quantities of high quality
money market instruments. Applicants believe that access to such a
major dealer as Goldman Sachs in these markets increases the Funds'
ability to obtain suitable portfolio securities.
(b) The policy of the Funds of investing in securities with short
maturities, combined with the active portfolio management techniques
employed by GSAM, will often result in high portfolio activity and the
need to make numerous purchases and sales of securities and
instruments. Such high portfolio activity makes the need to obtain
suitable portfolio securities and best price and execution especially
compelling.
(c) Goldman Sachs is such a major factor in the money market that
being unable to deal directly with it may, upon occasion, deprive the
Funds of obtaining best price and execution.
(d) The money market is highly competitive and removing Goldman
Sachs from the dealers with which the Funds may conduct principal
transactions may indirectly deprive the Funds of obtaining best price
and execution even when the Funds trade with unaffiliated dealers.
5. Applicants believe that the requested order will provide the
Funds with access to the money market, which is necessary to carry out
the policy of each of the Funds of obtaining the best price and
execution in effecting portfolio transactions, and will provide the
Funds with important new information sources in the money market,
thereby working to the benefit of the shareholders of the Funds.
Applicants believe that the transactions contemplated by the
application are identical to those in which they are currently engaged
except for the proposed participation of the Dealers therein and that
such transactions are consistent with the policies of the Funds as
recited in their registration statements and reports filed under the
Act.
6. Applicants believe that the procedures set forth with respect to
transactions with Goldman Sachs are structured in such a way as to
insure that such transactions will be, in all instances, reasonable and
fair, and will not involve overreaching on the part of any person
concerned, and that such exemption is appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. Transactions Subject to the Exemption--The exemption shall be
applicable to principal transactions in the secondary market and
primary or secondary fixed price dealer offerings not made pursuant to
underwriting syndicates. The principal transactions which may be
conducted pursuant to the exemption shall be limited to transactions in
Eligible Securities meeting the portfolio maturity and quality
requirements of paragraphs (c)(2) and (c)(3) of rule 2a-7, provided
that:\2\
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\2\Italicized terms are defined as set forth in paragraph (a) of
rule 2a-7, unless otherwise indicated.
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(a) No Fund\3\ shall make portfolio purchases pursuant to the
exemption that would result in the Fund investing pursuant to the
exemption more than 2% of its Total Assets in securities which, when
acquired by the Fund (either initially or upon any subsequent roll
over) were Second Tier Securities; provided that any Fund may make
portfolio sales of Second Tier Securities pursuant to the exemption
without regard to the percentage of its Total Assets involved:
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\3\References to the Funds include the Future Funds.
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(b) The exemption shall not apply to an Unrated Security other than
(1) A Government Security; or (ii) a security that is a rated security
and is the subject of an external credit support agreement that was not
in effect when the security (or the issuer) was assigned its rating,
provided that (A) the issuer of the external credit support agreement
is rated with respect to a class of Short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the credit support agreement, in one of the two highest
rating categories for Short-term debt obligations, (B) the external
credit support agreement is irrevocable, unconditional, and has terms
coextensive with those of the underlying security, and (C) for the
purposes of the exemption, the security covered by the external credit
support agreement will be deemed to have a rating no higher than the
rating described in subparagraph 2(b)(ii)(A).
(c) The exemption shall not apply to any security, other than a
repurchase agreement, issued by Goldman, Sachs & Co. or any affiliated
person thereof or to any security subject to a Put or Demand Feature
issued by Goldman, Sachs & Co. or any affiliated person thereof.
(d) The exemption shall not apply to any Asset Backed Security
unless it is an Eligible Security.\4\
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\4\The terms ``Asset Backed Security'' and ``Eligible Security''
as used in condition 1(d) refer to those terms as defined in
paragraphs (a)(2) and (a)(9)(iii)(C) of the proposed revisions to
rule 2a-7, as currently proposed and as they may be reproposed,
adopted, or amended. See Revisions to Rules Regulating Money Market
Funds, Investment Company Act Release No. 19959 (Dec. 17, 1993).
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2. Repurchase Agreement Requirements--The Funds may engage in
repurchase agreements with a Dealer only if the Dealer has: (a) Net
capital, as defined in rule 15c3-1 under the Securities Exchange Act of
1934, of at least $100 million and (b) a record (including the record
of predecessors) of at least five years continuous operations as a
dealer, during which time it engaged in repurchase agreements relating
to the kind of security subject to the repurchase agreement. The
Dealers shall furnish the Advisers with financial statements for their
most recent fiscal year and the most recent semi-annual financial
statements made available to their customers. The Advisers shall
determine that the Dealer complies with the above requirements and with
the repurchase agreement guidelines adopted by the Board of Trustees of
each Trust. Each repurchase agreement will be Collateralized Fully.
3. Volume Limitations on Transactions--Transactions conducted
pursuant to the exemption shall be limited to no more than 25% of (a)
The purchases or sales, as the case may be, by each Fund of Eligible
Securities other than repurchase agreements; and (b) the purchases or
sales, as the case may be, by each Dealer of Eligible Securities other
than repurchase agreements. Transactions conducted pursuant to the
exemption shall be limited to no more than 10% of (a) The repurchase
agreements entered into by each Fund and (b) the repurchase agreements
transacted by the Dealer. These calculations shall be measured on an
annual basis (the fiscal year of each Fund and of each Dealer) and
shall be computed with respect to the dollar volume thereof.
4. Information Required to Document Compliance With Price Tests--
Before any transaction may be conducted pursuant to the exemption, the
Funds or the Advisers must obtain such information as they deem
necessary to determine that the price test (as defined in condition (5)
below) applicable to such transaction has been satisfied. In the case
of purchase or sale transactions, the Funds or the Advisers must make
and document a good faith determination with respect to compliance with
the price test based upon current price information obtained through
the contemporaneous solicitation of bona fide offers in connection with
the type of security involved (the same instrument, credit rating,
maturity and segment, if any, but not necessarily the identical
security or issuer). With respect to prospective purchases of
securities, these dealers must be those who have, in their inventories,
money market securities of the categories and the types desired and who
are in a position to quote favorable prices with respect thereto. With
respect to the prospective disposition of securities, these dealers
must be those who, in the experience of the Funds and the Advisers, are
in a position to quote favorable prices. Before any repurchase
agreements are entered into pursuant to the exemption, the Funds or the
Advisers must obtain and document competitive quotations from at least
two other dealers with respect to repurchase agreements comparable to
the type of repurchase agreement involved, except that if quotations
are unavailable from two such dealers only one other competitive
quotation is required.
5. Price Tests--In the case of purchase and sale transactions, a
determination will be required in each instance, based upon the
information available to the Funds and the Advisers, that the price
available from the Dealer is at least as favorable as that available
from other sources. In the case of ``swaps'' involving trades of one
security for another, the price test shall be based upon the
transaction viewed as a whole, and not upon the two components thereof
individually. With respect to transactions involving repurchase
agreements, a determination will be required in each instance, based on
the information available to the Funds and the Advisers, that the
income to be earned from the repurchase agreement is at least equal to
that available from other sources.
5. Permissible Dealer Spread--The Dealers' spreads in regard to any
transaction with the Funds will be no greater than their customary
dealer spreads, which in turn will be consistent with the average or
standard spread charged by dealers in money market securities for the
type of security and the size of transaction involved.
7. Parties Must be Factually Independent--The Advisers, on the one
hand, and the Dealers, on the other, will operate on different sides of
appropriate Chinese Walls with respect to the Funds and Eligible
Securities. The Chinese Walls will include all of the following
characteristics, and such others as may from time to time be considered
reasonable by the Dealers and the Advisers to facilitate the factual
independence of the Advisers from the Dealers.
(a) Each of the Advisers will maintain offices physically separate
from those of Goldman Sachs.
(b) The compensation of persons assigned to any of the Advisers
(i.e., executive, administrative or investment personnel) will not
depend on the volume or nature of trades effected by the Advisers for
the Funds with the Dealers under this exemption, except to the extent
that such trades may affect the profits and losses of The Goldman Sachs
Group, L.P. and Goldman, Sachs & Co. (which includes those of GSMM).
(c) Neither the Fixed Income Division of Goldman, Sachs & Co. nor
GSMM will share any of their respective profits or losses on such
transactions with any of the Advisers, provided that the allocation of
the profits of The Goldman Sachs Group, L.P. and Goldman, Sachs & Co.
(which includes those of GSMM) to general partners thereof, and the
determination of general firmwide compensation to nonpartners, will be
unaffected by this undertaking.
(d) Personnel assigned to the Funds Group Trading Desk will be
exclusively devoted to the business and affairs of one or more of the
Advisers.
(e) Personnel assigned to the Fixed Income Division and GSMM will
not participate in or otherwise seek to influence the Funds Group
Trading Desk other than in the normal course of sales and dealer
activities of the same nature as are simultaneously being carried out
with respect to nonaffiliated institutional clients. Each Adviser, on
the one hand, and Goldman, Sachs & Co. and GSMM, on the other, may
nonetheless maintain affiliations other than with respect to the Funds,
and in addition with respect to the Funds as follows:
(i) GSAM has organized and any other Adviser may organize an
Investment Policy Committee the members of which include Funds Group
Trading Desk personnel, other GSAM personnel and one representative
from the Investment Research Department of Goldman, Sachs & Co. This
non-GSAM member's input on the Committee will be limited solely to
expressions of his or her opinion on interest rate and similar economic
matters, and will be included in the Committee only to the extent of
considering and ratifying the portfolio managers' average maturity
recommendations. The Investment Policy Committee will develop
recommendations only on average maturity ranges and will not develop
recommendations on specific securities or on types of securities.
(ii) Funds Group Trading Desk personnel may rely on research,
including credit analysis and reports prepared by the Goldman Sachs
Credit Department, which is responsible firmwide for credit analysis
and counterparty credit risk evaluations and recommendations.
(iii) Members of the Management Committee of Goldman, Sachs & Co.
and The Goldman Sachs Group, L.P. and certain other senior executives
with responsibility for overseeing operations of various divisions,
subsidiaries and affiliates of Goldman Sachs are not precluded from
exercising those functions over the Advisers because they oversee the
Fixed Income Division and GSMM as well, provided that such persons
shall not have any involvement with respect to proposed transactions
pursuant to the exemption and will not in any way attempt to influence
or control the placing by the Funds or any Adviser of others in respect
of Eligible Securities with Goldman Sachs.
8. Record-keeping Requirements--The Funds and the Advisers will
maintain such records with respect to those transactions conducted
pursuant to the exemption as may be necessary to confirm compliance
with the conditions to the requested relief. In this regard:
(a) Each Fund shall maintain an itemized daily record of all
purchases and sales of securities pursuant to the exemption, showing
for each transaction: the name and quantity of securities; the unit
purchase or sale price; the time and date of the transaction; whether
such security was a First Tier Security or a Second Tier Security; and
the name of the Dealer from whom purchased or to whom sold. Such
records also shall, for each transaction, document two quotations
received from other dealers for comparable securities, including: The
names of the dealers; the names of the securities; the prices quoted;
the times and dates the quotations were received; and whether such
securities were First Tier Securities or Second Tier Securities.
(b) Each Fund shall maintain a ledger or other record showing, on a
daily basis, the percentage of the Fund's Total Assets represented by
Second Tier Securities acquired from the Dealers.
(c) Each Fund shall maintain records sufficient to verify
compliance with the volume limitations contained in condition (3),
above. The Dealers will provide the Funds with all records and
information necessary to implement this requirement.
(d) Each Fund shall maintain records sufficient to verify
compliance with the repurchase agreement requirements contained in
condition (2), above.
The records required by this condition (8) will be maintained and
preserved in the same manner as records required under rule 31a-
1(b)(1).
9. Goldman Sachs Guidelines--The legal department of Goldman, Sachs
& Co. or such other department responsible for compliance (the ``Legal
Department'') will prepare guidelines for personnel of the Dealers and
the Advisers to make certain that transactions conducted pursuant to
the exemption comply with the conditions set forth therein, and that
the parties generally maintain arm's length relationships. In the
training of personnel of the Dealers, particular emphasis will be given
to the fact that the Funds are to receive rates as favorable as other
institutional purchasers buying the same quantities. The Legal
Department will periodically monitor the activities of the Dealers and
the Advisers to make certain that the conditions set forth in the
exemption are adhered to.
10. Audit Committee Guidelines--The Audit Committees of the
Trustees of the Trusts, consisting of the noninterested Trustees, will
prepare and periodically review and update guidelines for the Funds and
the Advisers to ensure that transactions conducted pursuant to the
exemption comply with the conditions set forth therein and that the
above procedures are followed in all respects. The respective Audit
Committees will periodically monitor the activities of the Funds and
the Advisers in this regard to ensure that these matters are being
accomplished.
11. Scope of Exemption--Applicants expressly acknowledge that any
order issued on the application would grant relief from section 17(a)
of the Act only, and would not grant relief from any other section of,
or rule under, the Act including, without limitation, rule 2a-7.
12. Board Review--The Trustees of each Trust, including a majority
of the noninterested Trustees, have approved the Fund's participation
in transactions conducted pursuant to the exemption and have determined
that such participation by the Fund is in the best interests of the
Fund and its unitholders. The minutes of the meeting of the Board of
Trustees at which this approval was given reflect in detail the reasons
for the Trustees' determination. The Trustees will review no less
frequently than annually the Fund's participation in transactions
conducted pursuant to the exemption during the period year and
determine whether the Fund's participation in such transactions
continues to be in the best interests of the Fund and its unitholders.
The minutes of the meetings of the Trustees of each Trust at which this
determination is made will reflect in detail the reasons for the
Trustees' determination.
For the Commission, by the Division of Investment Management,
under delegated authority.
Jonathan K. Katz,
Secretary.
[FR Doc. 94-26964 Filed 10-31-94; 8:45 am]
BILLING CODE 8010-01-M
