[Federal Register Volume 62, Number 222 (Tuesday, November 18, 1997)]
[Notices]
[Pages 61560-61563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30179]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22882/812-10050]
The Benchmark Funds, et al.; Notice of Application
November 12, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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SUMMARY OF APPLICATION: Applicants request an order under sections
6(c), 10(f) and 17(b) of the Act for an exemption from the provisions
of sections 10(f) and 17(a) of the Act. The order would permit
principal transactions effected in the ordinary course of business
between the Benchmark Funds, The Commerce Funds, and Goldman, Sachs &
Co.
APPLICANTS: The Benchmark Funds, The Commerce Funds (collectively, the
``Funds''), and Goldman, Sachs & Co. (``Goldman Sachs'').
FILING DATES: The application was filed on March 19, 1996 and amended
on October 15, 1996, and September 18, 1997.
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 December 8,
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 who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
The Benchmark Funds, 4900 Sears Tower, Chicago, Illinois 60606-6303,
The Commerce Funds, PO Box 16391, St. Louis, Missouri 63105, Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Staff Attorney, at
(202) 942-0574, 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 at the
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC
20549 (tel. 202-942-8090).
Applicants' Representations
1. The Benchmark Funds is a Massachusetts business trust that is
registered under the Act as an open-end management investment company.
The Benchmark Funds currently offers to institutional investors 17
equity, fixed income and money market Portfolios.\1\ The Benchmark
Funds is the proprietary fund of the Northern Trust Company
(``Northern''), which serves as investment adviser, transfer agent and
custodian for each of the Benchmark Funds' Portfolios. Northern, a
member of the Federal Reserve System, is an Illinois state-chartered
commercial bank and the principal subsidiary of Northern Trust
Corporation, a bank holding company.
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\1\ As used in this release, the term ``Portfolio'' refers to
any series of a registered open-end management investment company
relying on any order granting the application or, if the company
relying on any such order has a single investment portfolio, the
company itself.
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2. The Commerce Funds is a Delaware business trust that is
registered under the Act of an open-end management investment company.
The Commerce Funds currently consists of nine Portfolios, which are
offered to both individual and institutional investors. The Commerce
Funds is the proprietary fund of the Commerce Bank, N.A. (St. Louis)
and Commerce Bank, N.A. (Kansas City), which serve as the investment
advisers to the Commerce Funds. Each of these banks is a subsidiary of
Commerce Bancshares, Inc., a registered multi-bank holding company
(collectively, ``Commerce Bank'' and together with Northern, the
``Banks'').
3. At present, federal banking laws and regulations are interpreted
to restrict the ability of banks and bank holding companies, directly
or through affiliated persons, to act as distributors for mutual funds
or to provide personnel to act as officers and employees of the funds.
Consistent with these requirements, bank proprietary funds must find a
third party, independent of the bank, to act as the nominal
``distributor,'' and retain officers who are not affiliated with the
bank to perform certain administrative functions not associated with
the selection of investments or broker-dealers through which trades may
be effected.
4. Goldman Sachs is a registered broker-dealer that was founded in
1869.
[[Page 61561]]
It is one of the oldest and largest international investment banking
and brokerage firms, with offices in New York and other financial
capitals of the world.
5. Goldman Sachs has acted as principal underwriter/distributor and
administrator for the Funds since their inception. The primary
consideration for using Goldman Sachs is its capacity as an
administrator. Goldman Sachs is entitled to a fee from each Portfolio
of the Funds for its administrative services, but generally receives no
fee for its distribution activities.\2\
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\2\ The Commerce Funds is forming a class of shares that is
expected to bear a distribution fee pursuant to rule 12b-1 under the
Act at a rate of 0.25% of the class' net asset value. Although
Goldman Sachs would be the initial recipient of the fee because it
is the Funds' distributor, the fee is expected to be used primarily
to make ``trail commission'' or shareholder service payments to
third parties. If unsolicited trades are effected for which Goldman
Sachs is broker of record, Goldman Sachs may retain the trail
commissions attributable to those trades to help defray the cost of
Fund advertisements and other distribution expenses. In the future,
the Funds may create classes of shares that bear different
distribution fees or may change the distribution fees attributable
to their existing classes.
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6. It its capacity as administrator, Goldman Sachs supplies each
Fund with administrative officers, including an employee who serves as
president of one of the Funds, who are responsible for performing
administrative functions on behalf of the Funds. These officers are
also officers and/or employees of Goldman Sachs. No administrative
officer of a Fund who is an affiliated person of Goldman Sachs serves
as a director of the Fund, sets fund policies, or currently is
affiliated with any investment adviser to any Portfolio of a Fund. Such
administrative officers have no involvement in, or influence over, the
selection of any investment for the Fund or any broker or dealer
through whom transactions may be effected.
7. The Funds rely upon Goldman Sachs to perform the distribution
tasks that the federal banking regulators presently may restrict them
from undertaking. These tasks include: Entering into distribution
agreements with the Funds; being named as the distributor in Fund
prospectuses and sales literature; at the direction of the Banks,
entering into agreements with broker-dealers selling the Funds; acting
as broker of record for unsolicited direct sales of shares of the
Funds; paying the costs of printing and distributing the Funds'
prospectuses to potential investors; providing sales compliance
training; consulting with the Funds' investment advisers about new
market and product opportunities; and monitoring advertising and sales
literature compliance. Goldman Sachs does not solicit any trades or
provide any telemarketing services, and has no sales personnel
dedicated to the Funds. Shares of each Fund are made available through
a bank or its affiliated persons to their customers, or through other
intermediaries that are not affiliated with Goldman Sachs. If investors
are permitted to purchase shares by contacting the Funds' distributor,
Goldman Sachs acts as the broker of record for unsolicited trades, and
takes phone orders and redemption requests. Goldman Sachs does not
locate customers for the Funds, does not instruct its clients to
purchase shares from the Funds, and does not accompany Fund
salespersons in meetings with potential investors.
8. Applicants request an order under sections 6(c), 10(f), and
17(b) of the Act that would exempt applicants from sections 10(f) and
17(a). The order would permit principal transactions in the ordinary
course of business between any Portfolio and Goldman Sachs or any
entity controlled by, controlling, or under common control with Goldman
Sachs. Applicants request that the order also apply to any registered
open-end management investment company (i) for which officers or
employees of Goldman Sachs in the future act as officers as described
in the application, or (ii) for which Goldman Sachs in the future
provides distribution services as described in the application.
Applicants' Legal Analysis
1. Sections 17(a) of the Act generally prohibits any affiliated
person or principal underwriter for a registered investment company, or
any affiliated person of such affiliated person or principal
underwriter (a ``second-tier affiliate''), acting as principal, from
knowingly selling any security or other property to such registered
investment company and from knowingly purchasing any security or other
property from the registered investment company. Goldman Sachs may not
knowingly engage in principal transactions with a Fund absent an
exemptive order, because Goldman Sachs is the principal underwriter for
the Funds.
2. Section 17(b) of the Act authorizes the SEC to issue an order of
exemption from one or more of the provisions of section 17(a) if
evidence establishes that the terms of the proposed transaction are
reasonable and fair and do not involve overreaching on the part of any
person concerned, the proposed transaction is consistent with the
policy of each registered investment company concerned, and the
proposed transaction is consistent with the general purposes of the
Act.
3. Section 6(c) of the Act provides that the SEC may exempt persons
or transactions from any provision of the Act if 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. Applicants request an exemption under
sections 6(c) and 17(b) to allow the above transactions.\3\
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\3\ Section 17(b) applies to a specific proposed transaction,
rather than an ongoing series of future transactions. Keystone
Custodian Funds, 21 S.E.C. 295, 298-99 (1945). Section 6(c), along
with section 17(b), frequently is used to grant relief from section
17(a) to permit an ongoing series of future transactions.
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4. Applicants state that Congress enacted section 17(a) of the Act
to address the problems associated with transactions of affiliated
persons and underwriters or distributors that are able to control or
influence the investment decisions of investment companies. Applicants
assert that the prohibitions of section 17(a) were applied to
distributors of investment company shares because, at the time of the
enactment of the Act, distributors possessed enormous control over
investment companies.
5. Applicants argue that the prohibitions of section 17(a) apply to
distributors of the shares of open-end investment companies in
recognition of the extent of control and influence a distributor in
many circumstances is in a position to assert over an open-end
investment company. Applicants note that when a distributor serves as
the focal point for the purchase and sale of shares of an open-end
investment company, an investment company may be pressured to enter
into arrangements with the distributor that may not be benefical to the
company in order to assure the continued sale of the company's
securities. Applicants also note that the provisions of section 17(a)
relating to distributors of shares of open-end companies reflect a
recognition that an open-end company's distributor is often affiliated
with the company's investment adviser.
6. Applicants contend that Goldman Sachs' role as distributor of
the Funds does not raise the types of problems that section 17(a) is
designed to address. Applicants argue that the Funds are not captives
of Goldman Sachs as a matter of either contract of de facto influence.
Applicants state that Goldman Sachs has been chosen as the Funds'
distributor primarily because federal banking laws and regulations have
been interpreted to prohibit the Banks from
[[Page 61562]]
distributing Fund shares. Applicants note that although banks are
permitted to engage in most distribution activities, interpretations of
the federal banking regulations prevent full participation by banks in
the underwriting process.\4\ Applicants assert that the Banks retain
the services of an entity such as Goldman Sachs to provide
administrative and nominal distribution services consistent with these
interpretations.\5\
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\4\ Applicants cite OCC Interpretive Letter No. 648 (May 4,
1994) and Melanie L. Fein, Securities Activities of Banks Sec. 9.07
(1995).
\5\ Although Goldman represents that it provides nominal
distribution services to the Funds, Goldman acknowledges that it
continues to retain responsibility as principal underwriter for all
purposes under the federal securities laws.
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7. Applicants assert that Goldman Sachs does not serve as the focal
point for the purchase and sale of Fund shares. Applicants state that
Goldman Sachs plays no role in promoting the Funds to retail or
institutional customers. Sales of investment company shares are instead
conducted by each of the respective Banks and/or bank holding company
organizations with which the Funds are affiliated and have advisory
relationships or broker-dealers identified by those Banks. Applicants
state that all sales of the Funds since inception have resulted from
the institutional and retail relationships of the Banks. Applicants
emphasize that it is these institutions, and not Goldman Sachs, that
provide the organizational structures that actively promote the Funds.
Applicants state that if Goldman Sachs was replaced as principal
underwriter, the Banks and broker-dealers would merely enter into
agreements with a new underwriter, because the broker-dealers'
substantive relationship is with the Banks and/or bank holding company
organizations with which the Funds are affiliated and not with Goldman
Sachs.
8. Applicants state that investment decisions for each of the
Portfolios are made exclusively by the Banks or other investment
advisers that are not affiliated with Goldman Sachs. Applicants assert
that it has always been the intent of the Banks and their parent banks
and/or bank holding companies to retain control over the investment
decisions of the Funds which they advise, except to the extent that
third parties are to act as investment advisers or sub-advisers to the
Portfolios. Applicants also state that although not presently intended,
Goldman Sachs could become a sub-adviser or adviser to a Portfolio of a
Fund in the future. If Goldman Sachs became a sub-adviser or adviser to
any Portfolio, it would engage in principal transactions in reliance on
any order granting the application only with Portfolios advised by
parties other than Goldman Sachs or its affiliated persons, and would
do so only in conformity with applicable exemptive orders \6\ or no-
action letters.\7\ Applicants assert that the section 17(a) concern
regarding affiliated distributors would not arise in applicants' case
because in no instance will Goldman Sachs engage in principal
transactions with portfolios for which it acts as adviser or sub-
adviser except as permitted under condition 1.
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\6\ See North American Security Trust, Investment Company Act
Release Nos. 18860 (July 22, 1992) (notice) and 18899 (Aug. 18,
1992) (order); The One Group, Investment Company Act Release Nos.
19410 (Apr. 15, 1993) (notice) and 19470 (May 11, 1993) (order) (the
``Sub-Adviser Orders''). Under these orders, Goldman Sachs is
permitted to engage in principal transactions with portfolios of any
registered investment company of which Goldman Sachs may be deemed
to be an affiliated person of an affiliated person solely because of
its sub-advisory relationship with other portfolios of that
investment company. Goldman Sachs intends to reply on these orders
in conjunction with the exemptive order requested by this
application.
\7\ Salomon Brothers Inc., SEC No-Act. Letter (pub. avail. May
26, 1995).
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9. Applicants state that although Goldman Sachs' officers or
employees serve as officers of the Funds, none of such persons are
responsible for the formulation or establishment of the Portfolios'
investment objectives, policies or restrictions. The officers and
employees function only as administrative officers of the Funds,
handling administrative tasks necessary to maintain the Funds as going
concerns. Applicants contend that the performance of these functions by
Goldman Sachs' personnel does not result in any opportunity for control
of the Funds. The policy-making functions of each Fund rest with its
respective independent board of directors, which have been and will
continue to be responsible for the selection and review of the major
contractors to the Funds, including the advisers and the distributor.
Goldman Sachs' officers and employees do not and will not serve as
members of the Funds' boards of directors and, consequently, will not
be engaged in considering and approving the Funds' advisory and
distribution arrangements.
10. Applicants contend that since the proposed principal
transactions would not implicate the principal concerns reflected in
section 17(a), the inability of the Portfolios to engage in these
transactions with a major financial institution imposes opportunity and
execution costs on the investment company. Applicants contend that the
prohibitions of section 17(a) and the resulting costs to the Portfolios
are neither required nor appropriate because an independent third
party, with a vested interest in each Portfolio's performance, is
making all investment decisions for the Portfolio and the Funds are in
no way dependent on the distribution services of Goldman Sachs.
11. Section 10(f) of the Act, in relevant part, prohibits a
registered investment company from knowingly purchasing or otherwise
acquiring any security, during its underwriting or syndication, the
principal underwriter of which is a person who is an officer or
employee of the investment company or is a person affiliated with an
officer or employee of the investment company. Section 10(f) authorizes
the SEC to exempt any transactions or classes of transactions from the
prohibitions of section 10(f) if the exemption is consistent with the
protection of investors.
12. Under section 10(f), the Portfolios are restricted from
acquiring securities from Goldman Sachs during the securities'
underwriting or syndication period when Goldman Sachs serves as
underwriter of the securities. Applicants note that the only reason
that section 10(f) applies is because officers and employees of Goldman
Sachs serve as officers of the Funds. Applicants argue that the reason
for applying this prohibition to officers of the Funds--the control and
influence that an officer may have over the investment decisions of a
Portfolio--does not apply for the same reasons described above in
connection with section 17(a). Applicants contend that the Portfolios
presently are deprived of full access to the many securities
(especially in the fixed-income arena) of which Goldman Sachs is an
underwriter. Applicants assert that the terms and conditions set forth
in the proposed relief are reasonable and fair and do not involve
overreaching on the part of any person; they are consistent with the
general purposes of the Act, in general, and sections 17(a) and 10(f),
in particular, and the requested 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 any order of the SEC granting the requested
relief will be subject to the following conditions:
1. Neither Goldman Sachs nor its affiliated persons will engage in
principal transactions with a Portfolio for which Goldman Sachs or any
of its affiliated persons act as investment
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adviser except to the extent permitted by the Act, the rules under the
Act, no-action letter, or any exemptive order granted after the date of
an order granting this application, provided that the application
requesting the subsequent order refers specifically to this
application.
2. Goldman Sachs and its affiliated persons will engage in
principal transactions with a Portfolio in reliance on any order
granting this application only if (i) Goldman Sachs is not affiliated
with any investment adviser to the Portfolio, (ii) neither Goldman
Sachs nor any affiliated person of Goldman Sachs is responsible for the
selection of particular securities to be acquired for the Portfolio,
and (iii) neither Goldman Sachs nor any affiliated person of Goldman
Sachs is responsible for the selection of any particular broker-dealer
or other counterparty for transactions effected by the Portfolio.
3. Goldman Sachs and its affiliated persons will engage in
principal transactions with a Portfolio in reliance on any order
granting this application only if no affiliated person of Goldman Sachs
is serving as a director of the Fund of which the Portfolio is a part.
4. Transactions between Goldman Sachs or its affiliated persons and
any Portfolio made in reliance on any order granting this application
will be effected only pursuant to arm's length negotiations with the
Portfolio, acting through its investment adviser or other person
unaffiliated with Goldman Sachs, and will be consistent with the policy
of the Portfolio.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-30179 Filed 11-17-97; 8:45 am]
BILLING CODE 8010-01-M