Goldman Sachs Asset Management, et al.; Notice of Application

[Federal Register Volume 64, Number 127 (Friday, July 2, 1999)]
[Notices]
[Pages 36052-36054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16862]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IA-1806; File No. 803-132]


Goldman Sachs Asset Management, et al.; Notice of Application

June 25, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for exemption under the Investment 
Advisers Act of 1940 (``Advisers Act'').

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APPLICANTS: (Goldman Sachs Asset Management (``GSAM'') and Hirtle 
Callaghan Trust (``Trust'').

RELEVANT ADVISERS ACT SECTIONS: Exemption requested under section 206A 
of the Advisers Act from section 205 of the Advisers Act and Advisers 
Act rule 205-1.

SUMMARY OF APPLICATION: Applicants request an order permitting GSAM to 
charge a performance fee based on the performance of that portion of a 
Trust portfolio managed by GSAM (``GSAM Account''). Applicants further 
request that the order permit them to compute the performance-related 
portion of the fee using changes in the GSAM Account's gross asset 
value rather than net asset value.

FILING DATES: The application was filed on June 22, 1998, and amended 
on December 21, 1998, and May 25, 1999.

HEARING OR NOTIFICATION OR HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with copies of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on July 20, 1999, 
and should be accompanied by proof of service on applicants, in the 
form of an affidavit or, for lawyers, a certificate of service. Hearing 
requests should state the nature of the writer's interest, the reason 
for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, NW., Washington, DC 20549-
0609. Applicant, Goldman Sachs Asset Management, One New York Plaza, 
New York, New York 10004. Applicant, The Hirtle Callaghan Trust, 575 
East Swedesford Road, Wayne, Pennsylvania 19087.

FOR FURTHER INFORMATION CONTACT: Lori Price, Senior Counsel, at (202) 
942-0531, or Jennifer Sawin, Special Counsel, at (202) 942-0532 
(Division of Investment Management, Task Force on Investment Adviser 
Regulation).


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SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicant's Representations

    1. GSAM is a separate operating division of Goldman Sachs & Co. 
(``Goldman Sachs''), an investment adviser registered with the SEC 
under the Advisers Act.
    2. The Trust is an open-end management investment company 
registered with the SEC under the Investment Company Act of 1940. The 
Trust was organized by Hirtle, Callaghan & Co. (``Hirtle Callaghan''), 
an investment adviser registered with the SEC under the Advisers Act. 
The Trust is a series company that currently consists of seven separate 
investment portfolios. Shares of the Trust are available only to 
clients of Hirtle Callaghan or clients of financial intermediaries, 
such as investment advisers, that are acting in a fiduciary capacity 
with investment discretion and that have established relationships with 
Hirtle Callaghan.
    3. Hirtle Callaghan serves as a ``manager of managers'' for the 
Trust. Pursuant to its agreement with the Trust, Hirtle Callaghan is 
not authorized to exercise investment discretion with respect to the 
Trust's assets. Hirtle Callaghan is responsible for monitoring the 
overall investment performance of the Trust's portfolios and the 
performance of the portfolio managers who manage the Trust's 
portfolios. Hirtle Callaghan also may from time to time recommend that 
the Trust's Board of Trustees retain additional portfolio managers or 
terminate existing portfolio managers. Authority to select new 
portfolio managers and reallocate assets among the portfolio managers, 
however, resides with the Trust's Board.
    4. GSAM and Jennison Associates Capital Corp. (``Jennison'') 
provide portfolio management services to the Growth Equity Portfolio 
(``Portfolio''), one series of the Trust. Pursuant to a portfolio 
management agreement, GSAM provides portfolio management services for a 
portion of the Portfolio's assets that the Trust's Board allocates to 
GSAM (``GSAM Account''). Each of GSAM and Jennison manages a separate 
portion of the Portfolio, each acting as though it were advising a 
separate investment company. Percentage limitations on investments are 
applied to each portion of the Portfolio without regard to investments 
in the other adviser's portion of the Portfolio. Each adviser receives 
a printout of portfolio positions from the Trust or its custodian that 
contains only information about the portion of the Portfolio assigned 
to it and not about the positions held by the Portfolio as a whole. 
Each adviser generally is responsible for preparing reports to the 
Trust and the Board only with respect to its discrete portion of the 
Portfolio.
    5. Neither GSAM nor Goldman Sachs is affiliated with Hirtle 
Callaghan, the Trust, or Jennison.
    6. GSAM's services to the Trust are limited to investment selection 
for the GSAM Account, placement of transactions for execution and 
certain compliance functions directly related to such services. GSAM 
does not act as a distributor or sponsor for the Trust or Portfolio. No 
member of the Trust's Board is affiliated with GSAM. GSAM currently 
receives a fee at the annual rate of 0.30 percent of the average daily 
net assets of the GSAM Account, payable monthly.
    7. On November 12, 1997, the Trust's Board approved an amendment to 
the portfolio management agreement between GSAM and the Trust under 
which the existing fee structure would be replaced with a fee structure 
that includes a performance component. On January 13, 1998, the 
shareholders of the Portfolio approved the amendment to the 
agreement.\1\
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    \1\ The proxy statement associated with this meeting 
specifically informed shareholders that, if approved by the 
shareholders, the proposed fee would not become effective until the 
first calendar quarter following receipt of assurances from the SEC 
that calculating the fee as proposed would not be viewed as 
inconsistent with the Advisers Act, and that there could be no 
guarantee that the SEC would give such assurances. The shareholders 
of the Portfolio also approved the current agreement between GSAM 
and the Trust, which was approved by the Trust's Board on September 
12, 1997. The Trust's Board replaced another investment adviser with 
GSAM as a portfolio manager to the Portfolio on September 29, 1997.
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    8. Under the proposed fee arrangement, GSAM would receive an 
initial fee at the annual rate of 0.30 percent of the average daily net 
assets of the GSAM Account, payable quarterly, for each of the first 
three quarters following the date on which the proposed fee arrangement 
becomes effective. At the end of the fourth quarter, GSAM would begin 
to receive a base fee, payable quarterly, at an annual rate of 0.30 
percent of the average daily net assets of the GSAM Account. The base 
fee would be increased or decreased by a Performance Component. The 
Performance Component would equal 25 percent of the amount by which the 
gross performance of the GSAM Account, during the 12 months immediately 
preceding the calculation date, exceeded or underperformed the sum of 
(i) the total return of the Russell 1000 Growth Index (``Index'') plus 
(ii) 30 basis points. Gross performance does not give effect to the 
Portfolio's expenses, but does reflect the effect (i.e., reducing 
performance) of all applicable brokerage and transaction costs. The 
maximum annual fee payable for any 12 month period would not exceed 50 
basis points, and the minimum fee payable would be 10 basis points.\2\
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    \2\ If application of the Performance Component would result in 
an annual fee at a rate lower than 10 basis points, the amount of 
any excess fee paid for the first year would be credited to the 
Portfolio in subsequent quarters before additional fee amounts would 
be payable to GSAM. If the portfolio management agreement between 
the Trust and GSAM is terminated, the Trust would not recoup any 
outstanding excess fees that had been paid in previous quarters.
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Applicants' Legal Analysis

    1. Section 205(a)(1) of the Advisers Act generally prohibits an 
investment adviser from entering into any investment advisory agreement 
that provides for compensation to the adviser on the basis of a share 
of capital gains or capital appreciation of a client's account.
    2. Section 205(b) of the Advisers Act provides a limited exception 
to this prohibition, permitting an adviser to charge a registered 
investment company and certain other entities a fee that increases and 
decreases ``proportionately with the investment performance of the 
investment company or fund over a specified period inr elation to the 
investment record of an appropriate index of securities prices or such 
other measure of investment performance as the [SEC] by rule, 
regulation or order may specify.''
    3. Rule 205-1 requires that the investment performance of an 
investment company be computed based on the change in the net (of all 
expenses and fees) asset value per share of the investment company.
    4. Applicants request exemptive relief from section 205 and rule 
205-1 to permit them to charge the proposed fee (i) Applying the 
proposed fee only to the GSAM Account and not to the Portfolio as a 
whole, and (ii) computing the Performance Component measured by the 
change in the GSAM Account's gross asset value, rather than its net 
asset value. Applicants also request exemptive relief for GSAM and its 
affiliates \3\ to enter into similar fee arrangements with other 
investment

[[Page 36054]]

companies, provided certain criteria are met.
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    \3\ Affiliates in this context would include Goldman Sachs Funds 
Management, L.P., Goldman Sachs Asset Management International, and 
any other investment adviser that is both registered with the SEC 
under the Advisers Act and controls, is controlled by, or is under 
common control with, GSAM.
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    5. Applicants state that Congress, in adopting and amending section 
205 of the Advisers Act, and the SEC, in adopting rule 205-1, put into 
place safeguards designed to ensure that investment advisers would not 
take advantage of advisory clients.
    6. Applicants assert that the SEC required that performance fees be 
calculated based on the net asset value of the investment company's 
shares to prevent a situation where an adviser could earn a performance 
fee even though investment company shareholders did not derive any 
benefit from the adviser's performance after the deduction of fees and 
expenses.
    7. Applicants state that, unlike traditional performance fee 
arrangements, GSAM would not receive the Performance Component of its 
fee unless its management of the GSAM Account has resulted in 
performance in excess of the Index performance plus a ``performance 
hurdle'' equal to the 0.30 percent base fee. Applicants assert that 
increasing the performance of the Index by the 0.30 percent hurdle 
would have an effect similar to deducting GSAM's fees.\4\ Applicants 
therefore argue that the Portfolio's shareholders will have protections 
similar to those contemplated by the net asset value requirement of 
rule 205-1.
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    \4\ If the 0.30 percent fee changes, the performance hurdle also 
would be changed to match the fee.
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    8. Applicants suggest that Congress' concern, in enacting the 
safeguards of section 205, came about because the vast majority of 
investment advisers exercised a high level of control over the 
structuring of the advisory relationship. Applicants state that the 
proposed fee, however, was negotiated actively at arm's length between 
the parties. Applicants state that GSAM has little, if any, influence 
over the overall management of the Trust or the Portfolio beyond stock 
selection. Management functions of the Trust and the Portfolio reside 
in the Trust's Board. The Trust is directly and fully responsible for 
supervising the Trust's service providers and monitoring expenses of 
each of the Trust's portfolios. The Trust's Board is responsible for 
allocating the assets of the several portfolios among the portfolio 
managers. Neither GSAM nor any of its affiliates sponsored or organized 
the Trust or serves as a distributor or principal underwriter of the 
Trust. Neither GSAM nor any of its affiliates owns any shares issued by 
the Trust. No officer, director or employee of GSAM, nor any of its 
affiliates, serves as an executive officer or director of the Trust. 
Neither GSAM nor any of is affiliates is an affiliated person of Hirtle 
Callaghan or any other person who consults or provides investment 
advice with respect to the Trust's advisory relationships (except to 
the extent that such affiliation may exist by reason of GSAM or any of 
its affiliates serving as investment adviser to the Trust).
    9. Applicants argue that the proposed fee arrangement satisfies the 
purpose of rule 205-1 because it was negotiated at arms-length and the 
Trust does not need the protections afforded by calculating a 
performance fee based on net assets. Applicants argue that the proposed 
fee arrangement is therefore consistent with the underlying policies of 
section 205 and rule 205-1 and that the exemption would be consistent 
with the protection of investors.

Applicants' Conditions

    1. If the base fee changes, the performance hurdle will be changed 
to match the base fee.
    2. To the extent GSAM, or an affiliate of GSAM, relies on the 
requested order with respect to advisory arrangements with other 
investment companies that it advises, these arrangements will meet the 
following requirements: (i) The investment advisory fee will be 
negotiated between GSAM, or the applicable affiliate of GSAM, and the 
investment company or its primary investment adviser; (ii) the fee 
structure will contain a performance hurdle that is, at all times, no 
lower than the base fee; (iii) neither GSAM nor any of its affiliates 
will serve as distributor or sponsor of the investment company; (iv) no 
member of the board of the investment company will be affiliated with 
GSAM or its affiliates; (v) neither GSAM nor any of its affiliates will 
organize the investment company; and (vi) neither GSAM nor any of its 
affiliates will be an affiliated person of any primary adviser to the 
investment company or of any other person who consults or provides 
advice with respect to the investment company's advisory relationships 
(except to the extent that GSAM and/or its affiliates may be affiliated 
with another portfolio manager by virtue of the fact that GSAM or the 
affiliate serves as a portfolio manager to the investment company or to 
another investment company).

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-16862 Filed 7-1-99; 8:45 am]
BILLING CODE 8010-01-M