[Federal Register Volume 62, Number 59 (Thursday, March 27, 1997)]
[Notices]
[Pages 14710-14713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7785]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 22578; 812-10478]
Goldman Sachs & Co.; Notice of Application
March 21, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANT: Goldman Sachs & Co. (`'Goldman Sachs'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from sections 12(d) (1) and 14(a) of the Act, and
under section 17(b) of the Act for an exemption from section 17(a) of
the Act.
SUMMARY OF APPLICATION: Goldman Sachs requests an order with respect to
the Automatic Common Exchange Security Trusts and future trusts that
are substantially similar and for which Goldman Sachs will serve as a
principal underwriter (the ``Trusts'') that would (a) permit other
registered investment companies to own a greater percentage of the
total outstanding voting stock (the ``Securities'') of any Trust than
that permitted by section 12(d)(1), (b) exempt the Trusts from the
initial net worth requirements of section 14(a), and (c) permit the
Trusts to purchase U.S. government securities from Goldman Sachs at the
time of a Trust's initial issuance of Securities.
FILING DATES: The application was filed on January 7, 1997. Applicants
have agreed to file an amendment during the notice period the substance
of which is incorporated herein.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on April 15, 1997,
and should be accompanied by proof of service on applicant, 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. Applicant, 85 Broadway, New York, New York 10004.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Senior Attorney, at (202) 942-0572, or Mary Kay
Frech, Branch Chief, 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 from
the SEC's Public Reference Branch.
Applicant's Representations
1. Each Trust will be a limited-life, grantor trust registered
under the Act as a non-diversified, closed-end management investment
company. Goldman Sachs will serve as a principal underwriter (as
defined in section 2(a)(29) of the Act) of the Securities issued to the
public by each Trust.
2. Each Trust will, at the time of its issuance of Securities, (a)
enter into one or more forward purchase contracts (the ``Contracts'')
with a counterparty to purchase a formulaically-determined number of a
specified equity security or securities (the ``Shares'') of one
specified issuer, and (b) in some cases, purchase certain U.S. Treasury
securities (`'Treasuries''), which may include interest-only or
principal-only securities maturing at or prior to the Trust's
termination. The Trusts will purchase the Contracts from counterparties
that are not affiliated with either the relevant Trust or applicant.
The investment objective of each Trust will be to provide to each
holder of Securities (``Holder'') (a) current cash distributions from
the proceeds of any Treasuries, and (b) limited participation in, or
limited exposure to, changes in the market value of the underlying
Shares.
3. In all cases, the Shares will trade in the secondary market and
the issuer of the Shares will be a reporting company under the
Securities Exchange Act of 1934. The number of Shares, or the value
thereof, that will be delivered to a Trust pursuant to the Contracts
may be fixed (e.g., one Share per Securities issued) or may be
determined pursuant to a formula; the product of which will vary with
the price of the Shares. A formula generally will result in each
Securities Holder receiving fewer Shares as the market value of such
Shares increases, and more Shares as their market value decreases.\1\
At the termination of each Trust, each Holder will receive the number
of Shares per Securities, or the value thereof, as determined by the
terms of the Contracts, that is equal to the Holder's pro rata interest
in the Shares or amount received by the Trust under the Contracts.
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\1\ A formula is likely to limit the Holder's participation in
any appreciation of the underlying Shares, and it may, in some
cases, limit the Holder's exposure to any depreciation in the
underlying Shares. It is anticipated that the Holders will receive a
yield greater than the ordinary dividend yield on the Shares at the
time of the issuance of the Securities, which is intended to
compensate Holders for the limit on the Holders' participation in
any appreciation of the underlying Shares. In some cases, there may
be an upper limit on the value of the Shares that a Holder will
ultimately receive.
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4. Securities issued by the Trusts will be listed on a national
securities exchange or traded on the National Association of Securities
Dealers Automated Quotation System. Thus the Securities will be
``national market system'' securities subject to public price quotation
and trade reporting requirements. After the Securities are issued, the
trading price of the Securities is expected to vary from time to time
based primarily upon the price of the underlying Shares, interest
rates, and other factors affecting conditions and prices in the debt
and equity markets. Goldman Sachs currently intends, but will not be
obligated, to make a market in the Securities of each Trust.
5. Each Trust will be internally managed by three trustees and will
not have any separate investment adviser.
[[Page 14711]]
The trustees will have limited or no power to vary the investments held
by each Trust. The day-to-day administration of each Trust will be
carried out by Goldman Sachs. A bank qualified to serve as a trustee
under the Trust Indenture Act of 1939, as amended, will act as
custodian for each Trust's assets and as paying agent, registrar, and
transfer agent with respect to the Securities of each Trust. Such bank
will have no other affiliation with, and will not be engaged in any
other transaction with, any Trust.
6. The Trusts will be structured so that the trustees are not
authorized to sell the Contracts or Treasuries under any circumstances.
The Trusts will hold such Contracts until maturity, at which time they
will be settled according to their terms.
7. The trustees of each Trust will be selected initially by Goldman
Sachs, together with any other initial Holders, or by the grantors of
such Trust. The Holders of each Trust will have the right, upon the
declaration in writing or vote of more than two-thirds of the
outstanding Securities of the Trust, to remove a trustee. Holders will
be entitled to a full vote for each Securities held on all matters to
be voted on by Holders and will not be able to cumulate their votes in
the election of trustees. The investment objectives and policies of
each Trust may be changed only with the approval of a ``majority of the
Trust's outstanding Securities'' \2\ or any greater number required by
the Trust's constituent documents. Unless Holders so request, it is not
expected that the Trusts will hold any meetings of Holders, or that
Holders will ever vote.
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\2\ A ``majority of the Trust's outstanding Securities'' means
the lesser of (a) 67% of the Securities represented at a meeting at
which more than 50% of the outstanding Securities are represented,
and (b) more than 50% of the outstanding Securities.
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8. The Trusts will not be entitled to any rights with respect to
the Shares until any Contracts requiring delivery of the Shares to the
Trust are settled, at which time the Shares will be promptly
distributed to Holders. The Holders, therefore, will not be entitled to
any rights with respect to the Shares (including voting rights or the
right to receive any dividends or other distributions in respect
thereof) until receipt by them of the Shares at the time the Trust is
liquidated.
9. Each Trust will be structured so that its organizational and
ongoing expenses will not be borne by the Holders, but rather, directly
or indirectly, by the counterparties, or another third party (which
could include Goldman Sachs), as will be described in the prospectus
for the relevant Trust. At the time of the original issuance of the
Securities of any Trust, there will be paid to each of the
administrator, the custodian, and the paying agent, and to each
trustee, a one-time amount in respect of such agent's fee over its
term. Any expenses of the Trust in excess of this anticipated amount
will be paid as incurred by a party other than the Trust itself (which
party may be Goldman Sachs).
Applicant's Legal Analysis
A. Sections 12(d)(1) and 14(a)
1. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions 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.
2. Section 12(d)(1)(A) of the Act prohibits any registered
investment company from owning more than 3% of the total outstanding
voting stock of any other investment company. Section 12(d)(1)(C) of
the Act similarly prohibits any investment company and other investment
companies having the same investment adviser from owning more than 10%
of the total outstanding voting stock of any other closed-end
investment company.
3. Applicant believes, in order for the Trusts to be marketed most
successfully, and to be traded at a price that most accurately reflects
their asset value, that it is necessary for the Securities of each
Trust to be offered to large investment companies and investment
company complexes. Applicant states that large investment companies and
investment company complexes seek to spread fixed costs of analyzing
specific investment opportunities by making sizable investments in
those opportunities that prove attractive. Conversely, it may not be
economically rational for such investors, or their advisers, to take
the time to review an investment opportunity if the amount that they
would ultimately be permitted to purchase is immaterial in light of the
total assets of the investment company or investment company complex.
Therefore, applicant argues that, in order for the Trusts to be
economically attractive to large investment companies and investment
company complexes, such investors must be able to acquire Securities in
each Trust in excess of the limitations imposed by section 12(d)(1).
Applicant requests that the SEC issue an order under section 6(c)
exempting the Trusts from such limitations.
4. Section 12(d)(1) is intended to mitigate or eliminate actual or
potential abuses which might arise when one investment company acquires
shares of another investment company. These abuses include the
``pyramiding'' of control over portfolio funds by fund-holding
companies and the layering of costs to investors.
5. The pyramiding concerns fall into two categories. One arises
from the potential for undue influence resulting from the pyramiding of
voting control of the acquired investment company. Applicant believes
that this concern generally does not arise in the case of the Trusts
because neither the trustees nor the Holders will have the power to
vary the investments held by each Trust or to acquire or dispose of the
assets of the Trusts. To the extent that Holders can change the
composition of the board of trustees or the fundamental policies of
each Trust by vote, applicant argues that any concerns regarding undue
influence will be eliminated by including a provision in the charter
documents for the Trusts that will require that any investment
companies owning voting stock of any Trust in excess of the limits
imposed by sections 12(d)(1)(A) and 12(d)(1)(C) will vote their
Securities in proportion to the votes of all other Holders.
6. The second concern with respect to pyramiding is that an
acquiring investment company might be able to influence unduly the
persons operating the acquired investment fund. This undue influence
could arise through a threat to redeem assets invested in the
underlying fund at a time, or in a manner, which is disadvantageous to
that fund, or to threaten to vote shares in that fund in a manner
inconsistent with the best interests of that fund and its shareholders.
Applicant believes that this concern does not arise in the case of the
Trusts because the Securities will not be redeemable and because the
trustees' management control will be so limited.
7. The second major objective of section 12(d)(1) is to avoid
imposing on investors the excessive costs and fees that may result from
multiple layers of investments. Excessive costs can result from
investors paying double sales charges when purchasing shares of a fund
which, in turn, invests in other funds, or from duplicative expenses
arising from the operation of two funds in place of one. Applicant
believes that neither of these concerns arises in the case of the
Trusts because of the limited on-going fees and expenses incurred by
the Trusts and the fact that generally
[[Page 14712]]
such fees and expenses will be borne, directly or indirectly, by
Goldman Sachs or another third party, not by the Holders. In addition,
the Holders will not, as a practical matter, bear the organization
expenses (including underwriting expenses) of the Trusts. Applicant
asserts that such organization expenses effectively will be borne by
the counterparties in the form of a discount in the price paid to them
for the Contracts, or will be borne directly by Goldman Sachs, the
counterparties, or other third parties. Thus, a Holder will not pay
duplicative charges to purchase its investment in any Trust. Finally,
there will be no duplication of advisory fees because the Trusts will
be internally managed by their trustees.
8. Applicant believes that the investment product offered by the
Trusts serves a valid business purpose. The Trusts, unlike most
registered investment companies, are not marketed to provide investors
with either professional investment asset management or the benefits of
investment in a diversified pool of assets. Rather, applicant asserts
that the Securities are intended to provide Holders with a security
having unique payment and risk characteristics, including an
anticipated higher yield than the ordinary dividend yield on the Shares
at the time of the issuance of the Securities.
9. Applicant believes that the purposes and policies of section
12(d)(1) are not implicated by the Trusts and that the requested
exemption from section 12(d) (1) is appropriate in the public interest
and consistent with the protection of investors and the purposes fairly
intended by the policies of the Act.
10. Section 14(a) of the Act requires, in pertinent part, that an
investment company have a net worth of at least $100,000 before making
any public offering of its shares. The purpose of section 14(a) is to
ensure that investment companies are adequately capitalized prior to or
simultaneously with the sale of their securities to the public. Rule
14a-3 exempts from section 14(a) unit investment trusts that meet
certain conditions in recognition of the fact that, once the units are
sold, a unit investment trust requires much less commitment on the part
of the sponsor than does a management investment company.
11. Applicant argues that, while the Trusts are classified as
management companies, they have the characteristics of unit investment
trusts that are relevant to the rule 14a-3 exemption. Rule 14a-3
provides that a unit investment trust investing in eligible trust
securities shall be exempt from the net worth requirement, provided
that the trust holds at least $100,000 of eligible trust securities at
the commencement of a public offering. Investors in the Trusts, like
investors in a traditional unit investment trust, will not be
purchasing interests in a managed pool of securities, but rather in a
fixed and disclosed portfolio that is held until maturity. Applicant
believes that the make-up of each Trust's assets, therefore, will be
``locked-in'' for the life of the portfolio, and there is no need for
an ongoing commitment on the part of the underwriter.
12. Applicant states that, in order to ensure that each Trust will
become a going concern, the Securities of each Trust will be publicly
offered in a firm commitment underwriting, registered under the
Securities Act of 1933, and resulting in net proceeds to each Trust of
at least $10,000,000. Prior to the issuance and delivery of the
Securities of each Trust to the underwriters, the underwriters will
enter into an underwriting agreement pursuant to which they will agree
to purchase the Securities subject to customary conditions to closing.
The underwriters will not be entitled to purchase less than all of the
securities of each Trust. Accordingly, applicant states that either the
offering will not be completed at all or each Trust will have a net
worth substantially in excess of $100,000 on the date of the issuance
of the Securities. Applicant also does not anticipate that the net
worth of the Trusts will fall below $100,000 before they are
terminated.
13. Applicant requests that the SEC issue an order under section
6(c) exempting the Trusts from any requirements of section 14(a).
Applicant believes that such exemption is appropriate in the public
interest and consistent with the protection of investors and the
policies and provisions of the Act.
B. Section 17(a)
1. Sections 17(a)(1) and 17(a)(2) of the Act generally prohibit the
principal underwriter of any investment company from selling or
purchasing any securities to or from that investment company. The
result of these provisions is to preclude the Trusts from purchasing
Treasuries from Goldman Sachs.
2. Section 17(b) of the Act provides that the SEC shall exempt a
proposed transaction from section 17(a) if evidence establishes that:
(a) the terms of the proposed transaction are reasonable and fair and
do not involve overreaching; (b) the proposed transaction is consistent
with the policies of the registered investment company involved; and
(c) the proposed transaction is consistent with the general purposes of
the Act. Applicant requests an exemption from sections 17(a)(1) and
17(a)(2) to permit the Trusts to purchase Treasuries from applicant at
the time of the Trust's entry into Contracts and issuance of
Securities.
3. Applicant states that the policy rationale underlying section
17(a) is the concern that an affiliated person of an investment
company, by virtue of such relationship, could cause an investment
company to purchase securities of poor quality from the affiliated
person or to overpay for any securities. Applicant argues that it is
unlikely that Goldman Sachs would be able to exercise any adverse
influence over the Trusts with respect to purchases of Treasuries
because Treasuries do not vary in quality and are traded in one of the
most liquid markets in the world. Treasuries are available through both
primary and secondary dealers, making the Treasury market very
competitive. In addition, market prices on Treasuries can be confirmed
on a number of commercially available information screens. Applicant
argues that because Goldman Sachs is one of a limited number of primary
dealers in Treasuries, Goldman Sachs will be able to offer the Trusts
prompt execution of their Treasury purchases at very competitive
prices.
4. Applicant states that it is only seeking relief from section
17(a) with respect to the initial purchase of the Treasuries and not
with respect to an on-going course of business. Consequently, investors
will know before they purchase a Trust's Securities the Treasuries that
will be owned by the Trust and the amount of the cash payments that
will be provided periodically by the Treasuries to the Trust and
distributed to Holders. Applicant also asserts that whatever risk there
is of overpricing the Treasuries will be borne by the counterparties
and not by the Holders because the cost of the Treasuries will be
calculated into the amount paid on the Contracts. Applicant argues
that, for this reason, the counterparties will have a strong incentive
to monitor the price paid for the Treasuries, because any overpayment
could result in a reduction in the amount that they would be paid on
the Contracts.
5. Applicant believes that the terms of the proposed transaction
are reasonable and fair and do not involve overreaching on the part of
any person, that the proposed transaction is consistent with the policy
of each of the Trusts, and that the requested
[[Page 14713]]
exemption is appropriate in the public interest and consistent with the
protection of investors and purposes fairly intended by the policies
and provisions of the Act.
Applicant's Conditions
Applicant agrees that the order granting the requested relief shall
be subject to the following conditions:
1. Any investment company owning voting stock of any Trust in
excess of the limits imposed by section 12(d)(1) of the Act will be
required by the Trust's charter document to vote its Trust shares in
proportion to the vote of all other Holders.
2. The trustees of each Trust, including a majority of the trustees
who are not interested persons of the Trust, (a) will adopt procedures
that are reasonably designed to provide that the conditions set forth
below have been complied with; (b) will make and approve such changes
as deemed necessary; and (c) will determine that the transactions made
pursuant to the order were effected in compliance with such procedures.
3. The Trusts (a) will maintain and preserve in an easily
accessible place a written copy of the procedures (and any
modifications thereto), and (b) will maintain and preserve for the
longer of (x) the life of the Trusts and (y) six years following the
purchase of any Treasuries, the first two years in an easily accessible
place, a written record of all Treasuries purchased, whether or not
from applicant, setting forth a description of the Treasuries
purchased, the identify of the seller, the terms of the purchase, and
the information or materials upon which the determinations described
below were made.
4. The Treasuries to be purchased by each Trust will be sufficient
to provide payments to Securities Holders that are consistent with the
investment objectives and policies of the Trust as recited in the
Trust's registration statement and will be consistent with the
interests of the Trust and the Holders of its Securities.
5. The terms of the transactions will be reasonable and fair to the
Holders of the Securities issued by each Trust and will not involve
overreaching of the Trust or the Holders of Securities threrof on the
part of any person concerned.
6. The fee, spread, or other remuneration to be received by Goldman
Sachs will be reasonable and fair compared to the fee, spread, or other
remuneration received by dealers in connection with comparable
transactions at such time, and will comply with section 17(e)(2)(C) of
the Act.
7. Before any Treasuries are purchased by the Trust, the Trust must
obtain such available market information as it deems necessary to
determine that the price to be paid for, and the terms of, the
transaction is at least as favorable as that available from other
sources. This shall include the Trust obtaining and documenting the
competitive indications with respect to the specific proposed
transaction from two other independent government securities dealers.
Competitive quotation information must include price and settlement
terms. These dealers must be those who, in the experience of the
Trust's trustees, have demonstrated the consistent ability to provide
professional execution of Treasury transactions at competitive market
prices. They also must be those who are in a position to quote
favorable prices.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-7785 Filed 3-26-97; 8:45 am]
BILLING CODE 8010-01-M
