[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]


-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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'').
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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