[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