[Federal Register Volume 64, Number 127 (Friday, July 2, 1999)]
[Notices]
[Pages 36052-36054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16862]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IA-1806; File No. 803-132]
Goldman Sachs Asset Management, et al.; Notice of Application
June 25, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for exemption under the Investment
Advisers Act of 1940 (``Advisers Act'').
-----------------------------------------------------------------------
APPLICANTS: (Goldman Sachs Asset Management (``GSAM'') and Hirtle
Callaghan Trust (``Trust'').
RELEVANT ADVISERS ACT SECTIONS: Exemption requested under section 206A
of the Advisers Act from section 205 of the Advisers Act and Advisers
Act rule 205-1.
SUMMARY OF APPLICATION: Applicants request an order permitting GSAM to
charge a performance fee based on the performance of that portion of a
Trust portfolio managed by GSAM (``GSAM Account''). Applicants further
request that the order permit them to compute the performance-related
portion of the fee using changes in the GSAM Account's gross asset
value rather than net asset value.
FILING DATES: The application was filed on June 22, 1998, and amended
on December 21, 1998, and May 25, 1999.
HEARING OR NOTIFICATION OR 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 copies of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on July 20, 1999,
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 5th Street, NW., Washington, DC 20549-
0609. Applicant, Goldman Sachs Asset Management, One New York Plaza,
New York, New York 10004. Applicant, The Hirtle Callaghan Trust, 575
East Swedesford Road, Wayne, Pennsylvania 19087.
FOR FURTHER INFORMATION CONTACT: Lori Price, Senior Counsel, at (202)
942-0531, or Jennifer Sawin, Special Counsel, at (202) 942-0532
(Division of Investment Management, Task Force on Investment Adviser
Regulation).
[[Page 36053]]
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.
Applicant's Representations
1. GSAM is a separate operating division of Goldman Sachs & Co.
(``Goldman Sachs''), an investment adviser registered with the SEC
under the Advisers Act.
2. The Trust is an open-end management investment company
registered with the SEC under the Investment Company Act of 1940. The
Trust was organized by Hirtle, Callaghan & Co. (``Hirtle Callaghan''),
an investment adviser registered with the SEC under the Advisers Act.
The Trust is a series company that currently consists of seven separate
investment portfolios. Shares of the Trust are available only to
clients of Hirtle Callaghan or clients of financial intermediaries,
such as investment advisers, that are acting in a fiduciary capacity
with investment discretion and that have established relationships with
Hirtle Callaghan.
3. Hirtle Callaghan serves as a ``manager of managers'' for the
Trust. Pursuant to its agreement with the Trust, Hirtle Callaghan is
not authorized to exercise investment discretion with respect to the
Trust's assets. Hirtle Callaghan is responsible for monitoring the
overall investment performance of the Trust's portfolios and the
performance of the portfolio managers who manage the Trust's
portfolios. Hirtle Callaghan also may from time to time recommend that
the Trust's Board of Trustees retain additional portfolio managers or
terminate existing portfolio managers. Authority to select new
portfolio managers and reallocate assets among the portfolio managers,
however, resides with the Trust's Board.
4. GSAM and Jennison Associates Capital Corp. (``Jennison'')
provide portfolio management services to the Growth Equity Portfolio
(``Portfolio''), one series of the Trust. Pursuant to a portfolio
management agreement, GSAM provides portfolio management services for a
portion of the Portfolio's assets that the Trust's Board allocates to
GSAM (``GSAM Account''). Each of GSAM and Jennison manages a separate
portion of the Portfolio, each acting as though it were advising a
separate investment company. Percentage limitations on investments are
applied to each portion of the Portfolio without regard to investments
in the other adviser's portion of the Portfolio. Each adviser receives
a printout of portfolio positions from the Trust or its custodian that
contains only information about the portion of the Portfolio assigned
to it and not about the positions held by the Portfolio as a whole.
Each adviser generally is responsible for preparing reports to the
Trust and the Board only with respect to its discrete portion of the
Portfolio.
5. Neither GSAM nor Goldman Sachs is affiliated with Hirtle
Callaghan, the Trust, or Jennison.
6. GSAM's services to the Trust are limited to investment selection
for the GSAM Account, placement of transactions for execution and
certain compliance functions directly related to such services. GSAM
does not act as a distributor or sponsor for the Trust or Portfolio. No
member of the Trust's Board is affiliated with GSAM. GSAM currently
receives a fee at the annual rate of 0.30 percent of the average daily
net assets of the GSAM Account, payable monthly.
7. On November 12, 1997, the Trust's Board approved an amendment to
the portfolio management agreement between GSAM and the Trust under
which the existing fee structure would be replaced with a fee structure
that includes a performance component. On January 13, 1998, the
shareholders of the Portfolio approved the amendment to the
agreement.\1\
---------------------------------------------------------------------------
\1\ The proxy statement associated with this meeting
specifically informed shareholders that, if approved by the
shareholders, the proposed fee would not become effective until the
first calendar quarter following receipt of assurances from the SEC
that calculating the fee as proposed would not be viewed as
inconsistent with the Advisers Act, and that there could be no
guarantee that the SEC would give such assurances. The shareholders
of the Portfolio also approved the current agreement between GSAM
and the Trust, which was approved by the Trust's Board on September
12, 1997. The Trust's Board replaced another investment adviser with
GSAM as a portfolio manager to the Portfolio on September 29, 1997.
---------------------------------------------------------------------------
8. Under the proposed fee arrangement, GSAM would receive an
initial fee at the annual rate of 0.30 percent of the average daily net
assets of the GSAM Account, payable quarterly, for each of the first
three quarters following the date on which the proposed fee arrangement
becomes effective. At the end of the fourth quarter, GSAM would begin
to receive a base fee, payable quarterly, at an annual rate of 0.30
percent of the average daily net assets of the GSAM Account. The base
fee would be increased or decreased by a Performance Component. The
Performance Component would equal 25 percent of the amount by which the
gross performance of the GSAM Account, during the 12 months immediately
preceding the calculation date, exceeded or underperformed the sum of
(i) the total return of the Russell 1000 Growth Index (``Index'') plus
(ii) 30 basis points. Gross performance does not give effect to the
Portfolio's expenses, but does reflect the effect (i.e., reducing
performance) of all applicable brokerage and transaction costs. The
maximum annual fee payable for any 12 month period would not exceed 50
basis points, and the minimum fee payable would be 10 basis points.\2\
---------------------------------------------------------------------------
\2\ If application of the Performance Component would result in
an annual fee at a rate lower than 10 basis points, the amount of
any excess fee paid for the first year would be credited to the
Portfolio in subsequent quarters before additional fee amounts would
be payable to GSAM. If the portfolio management agreement between
the Trust and GSAM is terminated, the Trust would not recoup any
outstanding excess fees that had been paid in previous quarters.
---------------------------------------------------------------------------
Applicants' Legal Analysis
1. Section 205(a)(1) of the Advisers Act generally prohibits an
investment adviser from entering into any investment advisory agreement
that provides for compensation to the adviser on the basis of a share
of capital gains or capital appreciation of a client's account.
2. Section 205(b) of the Advisers Act provides a limited exception
to this prohibition, permitting an adviser to charge a registered
investment company and certain other entities a fee that increases and
decreases ``proportionately with the investment performance of the
investment company or fund over a specified period inr elation to the
investment record of an appropriate index of securities prices or such
other measure of investment performance as the [SEC] by rule,
regulation or order may specify.''
3. Rule 205-1 requires that the investment performance of an
investment company be computed based on the change in the net (of all
expenses and fees) asset value per share of the investment company.
4. Applicants request exemptive relief from section 205 and rule
205-1 to permit them to charge the proposed fee (i) Applying the
proposed fee only to the GSAM Account and not to the Portfolio as a
whole, and (ii) computing the Performance Component measured by the
change in the GSAM Account's gross asset value, rather than its net
asset value. Applicants also request exemptive relief for GSAM and its
affiliates \3\ to enter into similar fee arrangements with other
investment
[[Page 36054]]
companies, provided certain criteria are met.
---------------------------------------------------------------------------
\3\ Affiliates in this context would include Goldman Sachs Funds
Management, L.P., Goldman Sachs Asset Management International, and
any other investment adviser that is both registered with the SEC
under the Advisers Act and controls, is controlled by, or is under
common control with, GSAM.
---------------------------------------------------------------------------
5. Applicants state that Congress, in adopting and amending section
205 of the Advisers Act, and the SEC, in adopting rule 205-1, put into
place safeguards designed to ensure that investment advisers would not
take advantage of advisory clients.
6. Applicants assert that the SEC required that performance fees be
calculated based on the net asset value of the investment company's
shares to prevent a situation where an adviser could earn a performance
fee even though investment company shareholders did not derive any
benefit from the adviser's performance after the deduction of fees and
expenses.
7. Applicants state that, unlike traditional performance fee
arrangements, GSAM would not receive the Performance Component of its
fee unless its management of the GSAM Account has resulted in
performance in excess of the Index performance plus a ``performance
hurdle'' equal to the 0.30 percent base fee. Applicants assert that
increasing the performance of the Index by the 0.30 percent hurdle
would have an effect similar to deducting GSAM's fees.\4\ Applicants
therefore argue that the Portfolio's shareholders will have protections
similar to those contemplated by the net asset value requirement of
rule 205-1.
---------------------------------------------------------------------------
\4\ If the 0.30 percent fee changes, the performance hurdle also
would be changed to match the fee.
---------------------------------------------------------------------------
8. Applicants suggest that Congress' concern, in enacting the
safeguards of section 205, came about because the vast majority of
investment advisers exercised a high level of control over the
structuring of the advisory relationship. Applicants state that the
proposed fee, however, was negotiated actively at arm's length between
the parties. Applicants state that GSAM has little, if any, influence
over the overall management of the Trust or the Portfolio beyond stock
selection. Management functions of the Trust and the Portfolio reside
in the Trust's Board. The Trust is directly and fully responsible for
supervising the Trust's service providers and monitoring expenses of
each of the Trust's portfolios. The Trust's Board is responsible for
allocating the assets of the several portfolios among the portfolio
managers. Neither GSAM nor any of its affiliates sponsored or organized
the Trust or serves as a distributor or principal underwriter of the
Trust. Neither GSAM nor any of its affiliates owns any shares issued by
the Trust. No officer, director or employee of GSAM, nor any of its
affiliates, serves as an executive officer or director of the Trust.
Neither GSAM nor any of is affiliates is an affiliated person of Hirtle
Callaghan or any other person who consults or provides investment
advice with respect to the Trust's advisory relationships (except to
the extent that such affiliation may exist by reason of GSAM or any of
its affiliates serving as investment adviser to the Trust).
9. Applicants argue that the proposed fee arrangement satisfies the
purpose of rule 205-1 because it was negotiated at arms-length and the
Trust does not need the protections afforded by calculating a
performance fee based on net assets. Applicants argue that the proposed
fee arrangement is therefore consistent with the underlying policies of
section 205 and rule 205-1 and that the exemption would be consistent
with the protection of investors.
Applicants' Conditions
1. If the base fee changes, the performance hurdle will be changed
to match the base fee.
2. To the extent GSAM, or an affiliate of GSAM, relies on the
requested order with respect to advisory arrangements with other
investment companies that it advises, these arrangements will meet the
following requirements: (i) The investment advisory fee will be
negotiated between GSAM, or the applicable affiliate of GSAM, and the
investment company or its primary investment adviser; (ii) the fee
structure will contain a performance hurdle that is, at all times, no
lower than the base fee; (iii) neither GSAM nor any of its affiliates
will serve as distributor or sponsor of the investment company; (iv) no
member of the board of the investment company will be affiliated with
GSAM or its affiliates; (v) neither GSAM nor any of its affiliates will
organize the investment company; and (vi) neither GSAM nor any of its
affiliates will be an affiliated person of any primary adviser to the
investment company or of any other person who consults or provides
advice with respect to the investment company's advisory relationships
(except to the extent that GSAM and/or its affiliates may be affiliated
with another portfolio manager by virtue of the fact that GSAM or the
affiliate serves as a portfolio manager to the investment company or to
another investment company).
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-16862 Filed 7-1-99; 8:45 am]
BILLING CODE 8010-01-M
