[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