SEC Division of Investment Management staff letter: Goldman, Sachs & Co.

July 22, 2010
1M Ref. No. 2010791141
RESPONSE OF THE OFFICE OF CHIEF COUNSEL Goldman, Sachs & Co.
We would not recommend enforcement action to the United States Securities and Exchange Commission ("Commission") under Section 206(4) ofthe Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-3 thereunder if any investment adviser that is required to be registered pursuant to Section 203 of the Advisers Act pays to Goldman, Sachs & Co. (the "Settling Firm") or any of its associated persons, as defined in Section 202(a)(l7) ofthe Advisers Act, a cash solicitation fee, directly or indirectly, for the solicitation of advisory clients in accordance with Rule 206(4)-3,1 notwithstanding an injunctive order issued by the United States District Court for the Southern District of New York (the "Judgment") that otherwise would preclude such an investment adviser from paying such a fee, directly or indirectly, to the Settling Firm or certain related 2 persons. Our position is based on the facts and representations in your letter dated July 21, 2010, particularly the representations ofthe Settling Firm that:
(1) it will conduct any cash solicitation arrangement entered into with any investment adviser required to be registered under Section 203 of the Advisers Act in compliance with the terms of Rule 206(4)-3 except for the investment adviser's payment of cash solicitation fees, directly or indirectly, to the Settling Firm, which is subject to the Judgment; (2) the Judgment does not bar or suspend the Settling Firm or any person currently associated with the Settling Firm from acting in any capacity under the federal securities laws;3 Rule 206(4)-3 prohibits any investment adviser that is required to be registered under the Advisers Act from paying a cash fee, directly or indirectly, to any solicitor with respect to solicitation activities if, among other things, the solicitor is subject to an order, judgment or decree described in Section 203(e)(4) ofthe Advisers Act. Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, No. 10-CY-3229 (July 20, 2010).
Section 9(a) of the Investment Company Act of 1940 (the "Investment Company Act")
provides, in pertinent part, that a person may not serve or act as, among other things, an investment adviser or depositor of any investment company registered under the Investment Company Act or a principal underwriter for any registered open-end investment company or registered unit investment trust if, among other things, that person, by reason of any misconduct, is permanently or temporarily enjoined from acting, among other things, as an underwriter, broker, dealer or investment adviser, or from 2 Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web
page for more information:
https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements

(3) it will comply with the terms of the Judgment, including, but not limited to, the payment of disgorgement and the civil penalty; and (4) for ten years frbm the date of the entry of the Judgment, the Settling Firm or any investment adviser with which it has a solicitation arrangement subject to Rule 206(4)-3 will disclose the Judgment in a written document that is delivered to each person whom the Settling Firm solicits (a) not less than 48 hours before the person enters into a written or oral investment advisory contract with the investment adviser or (b) at the time the person enters into such a contract, ifthe person has the right to terminate such contract without penalty within 5 business days after entering into the contract. This position applies only to the Judgment and not to any other basis for disqualification under Rule 206(4)-3 that may exist or arise with respect to the Settling Firm or any of its ;;~rn:UJ￾Wendy Friedlander Senior Counsel engaging in or continuing any conduct or practice in connection with any such activity, or in connection with the purchase or sale of any security. The entry of the Judgment, absent the issuance of an order by the Commission pursuant to Section 9(c) ofthe Investment Company Act that exempts the Settling Firm from the provisions of Section 9(a) of the Investment Company Act, would effectively prohibit the Settling Firm and its affiliated persons from, among other things, acting as an investment adviser to any registered investment company. You state that, pursuant to Section 9(c) of the Investment Company Act, the Settling Firm and certain affiliated persons, on behalf ofthemselves and future affiliated persons, submitted an application to the Commission requesting (i) an order oftemporary exemption from Section 9(a) ofthe Investment Company Act and (ii) a permanent order exempting the Settling Firm, certain affiliated persons and future affiliated persons from the provisions of Section 9(a) of the Investment Company Act. On July 21, 2010, the Commission issued an order granting the Settling Firm, certain affiliated persons and future affiliated persons a temporary exemption from Section 9(a) of the Investment Company Act pursuant to Section 9(c) ofthe Investment Company Act, with respect to the Judgment, until the date the Commission takes final action on the application for a permanent order. Goldman, Sachs & Co., et al., SEC ReI. No. IC-29366 (July 21, 2010). Therefore, the Settling Firm, certain affiliated persons and future affiliated persons are not currently barred or suspended from acting in any capacity specified in section 9(a) of the Investment Company Act as a result ofthe Judgment. 2

SULLIVAN & CROMWELL LLP

TELEPHONE: 1,212'558::40QO
FACSIMIL.E: 1-212'55~k3588 125 r?lJroad dltJ<eet WWW.5ULLCROM.COM JUio o/or,.( ,ACY1000/j~2IA9!1 LOS AfiG£LES -. PALO At.:ro ;,. WASJollNc.TON. O.c~ BE-WING .. HONG~KONG.-T~ MELBOURNE • SYON~ J*I~21,.2010 DoqglasJ,Scheidt,Esq. Assbciate"DifeCtOfari(fC:hief'~i:itll1sel, l)lviSio!lofInvestment.Management,

• U.S..~~curiti¢$.and:E:XGh~nge··CominissioIl'

IOOP··Street,N'.E"

W~$hitlgtgl1,P·C.20~49,
Re:§lE(}' v·~QIQl'tla~,S~(;Qs&:C:;Q;·arid

EabriceTourrc (S.D;N.Y:2010)

D¢atMr. SClleidt:
OUf client, Goldman,~achs& Co.. (the"Fi~';),i~}dcfehdant'inthe aoove..captionedd'vilaction (the. «Action")brought bythe Securities' and Exchange Commission (the "COmfuission")in the UnitedStates DistrictGourt for the .Southern Disfrictof New York (the "Court"). TheActionrelates toal1egedvioJationsofthe fcderaLsecurities laWs bytheFirri1 in connection with its sale of synthetic cOllateralized debtobligatioDsto twoinstitlitioilal investors. The Finn, a brpker-dealer registcrcdunderSection.15.ofthe Securities EXchang~Act of1934, and ari inv~strnent adviseri~gi~tereci underSeclign203 ofthe Inve$unent Advisers Act of 1940 (the."Advisers Act'')1seeksthcas$u;ance ofthestaffof thfiPivisionofInvestmentManagyrnent("Staff') that it would notrecol1Jrnend any enforcement action totheComtnissiotlunder Section 206(4) of the Advisers Act, or.Rtile 206(4)-3 thereunder (the "Rule"), lfan investment adviser paysthe Firm, or any of its associated persons,a cashpaymcntforthe solicitation of advisory clients,

Dpuglas J.SGl1eidt,Esq. -2 notwitbstail4}rig thec~i~~¢riceofJheji.ldgfueht (define<fbelow). ;WhiJe:thejudgment does pot'9P~ratetQprQhibitorstlspend the Firm or anyof±ts assoCiateaipetsonsfrom,being ;~sqci~t~dW:itt\or (:eX:c<;pt~WPI"oMiet~g J~Section 9(~)'Qffue Inv~tJpemC<~rnpMY Aot of 1946 Ctht;."Cdmpan:yAC:t"l~ ffomwHlcliSection reliet~s.sep<lfGltelt~eillgrequcs(~dby ~he fi®)I~p.tlllgasanj,I1Y:~tmeI1taQ.yj.·$~rand does npt relate,tQsQlicitation actiyitieson behalfbfin¥¢$trnentasl~i;s~~*'::i,tIIla¥;a:ft~ct the abll~tyof th« fiqn littd 11s associate,'!.'. .peI7S0I1sJPTcceiv¢paynient,s'forsuth:sQlicitation actiYities;TheStaff·iit'many·othet .~n$.ng~W,li~ .gran~eC:(*¢>-<lctiQI.Vr¢li9,f<tlnCler the·Rule in..sirilUardrcwnstances, 1heqondllct.,'Of'thcc:pirnNiJ'legedJ.:n.me.'.c,oIDPlaint.in4he,Attloh,·in,volved.. :~rrtlf:tc~f~i~~~~~~~i:~~~~~~~~~:e~~~};g;~i~fB;'~i:ll~1~::ri~~~~~~~tr;:a~ :i)1sti~tiqn:alb~Y~fs.in.reliance.onJhe:~xeInptionfroIn,ristratiomunderthe. Secwitics Act'p,rgvi4ed bY:I{ule'lA4J} thyr~gn~let·~riqto .• n{)p-'y,.~·!pers()Jl~:;Il·!¢lial1qedrttn~$,@~ "harbQrfrQInregi$tratiQnprovided,bx~¢gUlationS·thereundeJ" .. 'Specifically,'the ....' ' :1!~i~!~~~ii!~1~iliij~~~!;g:~ Iitcol1negtigD ""itl;imy?pcrve.;cil.ptipne:ci.:.prQceedlhgi;'tl1e·fifrrl atlQ,Jll¢, Division. QfEnfQrcement·teaChedan'agJ:eement.iJ:rprinciple>tosettlc,ifie'Action'as';

• described·.belo\v;and theFipn hasexe¢lJtCdaconsenU9thecIltry.dfajudgmentbythe
  'Court(the"Judgment')withoutadmittin:~ror deny{ogthe mattqrssetfortllin'the .Commis.sion:~$..:coIIlplaintin;tbe,ActiQnXexceptastQthejurisd1ction. ofthe Court). In,tllc JJ:l,dgm~l1t~ Ctiltccl J:riJY~'o; 2QJ.Q.,·;4;ie.cQurtpe~an«QtJy'.resv.ain:; and .enjoins tile Fitm2 from viofatirtgSectiort:17(a) ofthe Securities Attin lheoffcrorsale of .any security. The Juqgment:decrees thal the Einnisljable for'disgQrgem¢nt of ,$15 . The Firm andceftain affiliates,pursuant to ~ection9(c) of the Company Act, are separaielyfiling an. applkationf~questing(i). a t~llIpgr~ry6fderexell1Pting the FirIIlandc;~rtainaJfiliat~sfrom :the provisions ofSection9(a)ofthpCQrnpi!,TiyActpending thedeterrniflatiOnofthe Comrnission on an appli'cationfofIJfrnianentexempli6h ~iid(ii)ape(manentordetexemptingthe Firm and certain affiliatesfrom IhepT;o.;isibnsofSectioIi9(a) ofthe Company Act. .. . The injUnction also applies to the Firm's agents,servants, empioyees, attorneys andaHpers()ns in active concert or partid'pation with them who receive actual not{cc ofthe Judgrnent. .1

DOligJasJ. SGpeidt;Esq. '-3 million and a,civil penalty inilieamouIlt'of$535 million. Finally, tl:ieJurlgmentrequites the Birm to cO,hlPl}:witll certai1.i\lndert~I'\gs.r~1~ti,l1g,to.(i)thevettill&anq •. apPJ;9v<u process fotofferings of resident1al~IIlortgage~reiatc<i$ecuri~es,(li)r~,iew';ohnilrketing WilXerif.1JS!Jsed,inconnection' wlthresjdentitil mortg(.\ge~reJatedsecWiti~s.offerings by the FitrnrsItg~!?'¢pai'4ne,nt an4GqiJ:@iMce I)ep,@tfleilt, (m)<lIl!nhl.li"{lteJfl~laudit:s of the review ofsuchmarketing,matenals, (iv) 'wherethe.firtrlislhe leadunclerwrtterof an qfferind~()fre~identialJIlortgage~r~lgt~dsecwitiesandretainsOlltsigecQunSel to advise on theofferingireview ofthetelatedofferingriX~t¢ri}iiSby out$ideeol!ris'¢l'and:';(:v), equcaticm andfraining of:,personsinvolved.in thestrUCtID-ing· or marketingofteSid~mti.aI:In6qgage".• te.lateqsetUritjesof[erings.' . =~~~~~iSie!~=!fi~!!::t6t '~::ia~:lE:-~:~=£~~~~~~iW:l~:X::~~~t!>~:tid~¢r!irl~si~~~~dbn reli~f,.the lFii;m:may by,l;lnabl~ fQ~t:cef:ive:casb'payment~f()I:;th~s91iciJ~ti()n<ofadvisQry cHetlls? . 'DISCUSSION ',' Xn';tne;teIea.se,adopting the Rule, lhe'Col1lITlissjonstatedth~tit';'would entertain, .ahd,pep~pated tograntirtappropriate ~irc'llm~taTlC~s,reques~s'f9r'pcrroission to engage.asa~pliCitof. ·apersop.suqJeet1o a.sta.tuiorybar" f We.resp<:<etf~llysubmit that the., eire,UW,,;'$tal1cespresentin this case, ate pre¢iselythe sortthatwarrarifa,:graritofno ,-. - ," , '. . , - '. -_ .. actiQIlrelief. Tl1eRule's proposing and (l(iopting releases explain, th<:<CQmrnission's purpose iniricllJelirig tlw disqualifiCa~iori prov~srops in the Rule. The purpOse was to pn:~"entanjIl;Yestm:entadYiser fromhiring;Jlsa,soiicitor a persQRwhom theadvjset was. ) The Fiirii hasobtaiiled similarno-actionreIiefin the past. SeelllthiMarrer ojClrtaiii·liiuial Publi6,Of!eriftgAllbCiitions, SEC No-ActioJil.euer (puK avaiL,February 23; 2005); In ilzeMatter .ojCertain Analyst Conflicts oj IMerest, SEC No-AdibriLetter'(pub:avaiJ. OCt. 3 (2003); III the MatterojCert41n MimicipalBolidRejiiTldings, SEC No-AdionLelter (pub. avaiL Apr.. 13,2000). SeeRequirenrents'GovemiogPaymertts ofCash Referral Fees bylnvesttnent Advisers, lov. AM. ActRcL No. 688 (Jtily12, 1979),nS.E.c. Docket (CCH) 1293,1295, ai HarelO. .

Dougl<l.sJ.Scheidt, Esq. -4 not pennittedlo'hireas.an employee, thus doingindirectly what the advisercol.lldTlotdo directly. In the proposingrelease, the Commission stated that:
[b]f;cause itwoJild1?einappr()priateJoran ..1IJyestmcntadviser toby ~eI'mittedtoemplo)'indifect1)',asasolicitof~someonewhomif:tn.iglltTl()t

• beabletohireas. al1employee,theRll!eprohibits·paymentofarefe111l1·fee
  to someone wh() ..,.,h~seIigag¥iI1311yottllecoijdtlctset fortli inSectioIJ 203(c2Qfthe[Advisers) Act ..• andtherefore could be thesubjeclof a COII1rillssi()n<:)J:derbarringoT.susp~ndiJlgtheIight ofsuch perSon to'..)6 associated'/lthan inVestment adviser. 5 .'flleJlldgrnetlt does .• not?(ll",$~sgetld, •. ?rl~trrittheFinTl0r .anY8er~?Il ctntentIY<l§sociatydWit .. .,Einnfr()Px~ctingin.~I!ypapasity· .•under.. t!te.fegeml.J~~ptitiEic;~ laws (excqpta.sprovided., ..,.ectio? 9(~}Of.the.lnvestmentColIlgany.AC9.~'~heJ3inIlhas not1?een.,sancti?nedinconnectionWith theActi?n.,foraGtiYiti~sJ.:elatingtoits.agti'Vities.·••as an. investmentadviseroritssolititationof advisoryclie:nts} .Accordingly;co~slstent with the CptUlflissiou'sreasoninp' th~e.doer;nota~pearto.beanYJ.'cason to .prQhibitau,aOviser frompayingth.e. Finn .oritsass.oci~teOpersons·forengaging in solicitation·.•.ac:tivities.·.u.nder the Rule. Ihe.•. StaffRrt}vioJJ&lyhas~Wtt:e~·nu~~~()~SJequestsf9r •.no-actionr~lief frbrh··the·disqualification prpvisions···of•. the RuJetoindividuals•.and eIltities,fptlIldby·the•••. Commissiontohave violated a wide raIlge offederalsecurities Iaws>andrulesihereunder andSROtules ·ofpetii1a.nel1t1yenjoil1~dQycq,lIts of£pmpete.nljurisclictionfroITI·. engagitlginor continuingal1Y conductorpractice inconrtection with thcpl.lrchasco[sal¢ ofanysecurity.s 5 See ReqlliremclltsGoveming PaymentsofCashRefclTal Fees by Investment Adviscrs, Inv. Adv. ACtReL No. 615 (Feb. 2, 1978),J4S£C:Docket(CCH)89,91. 6 See footnote l. TheFirma.dditionallynotes that the Aetibndoes notallege.that it has violated, or aidedancJ abetted another person in violation of,. theRnle; g See; e.g., Gerzeral ELectric Company, SEC NocActipn Letter (pub. aV<tiL Aug, 12, 2009); Bane of AmericaSecurities LLC, SEeNo~ActionLetter (puO.avail. June 10,2009); .Citigroup Global Markets, Inc, SEC No-Action Letter (pub. avaiL l)~. 23;2008)~ PrudentiaL FinG/lcial, Inc., SEC No"ActionLetter(pub.·avail. Sept. 5,2008); .BarcLays BankPLC; SEC. No"Action Letter (pub. avaiL June 6, 2007): Emanuel l. Friedman alld ElF CapitaL LLC. SECNo-Action Letter (pub. avail. Jan. 16,2007); Aineriprise Financial Sen'iceslnc:, SECNo-AcrionLetter(pub. avail. Apr. ..5, 2006)~MiJl?nium Partners, LP.,etaL, SEC No"Action Letter (pub. avail. MaL9,2006)(no~

Douglas]. Scheidt, Esq. '-5 fu· conncctionwitnthis.re'lue.st;the,:Fitmundertakes:
1.'tocondnctanycash solidtationarrangemenrenteredlntowlthany inV~sth)eIlt.il.Qy~st¢<lW:tetitQn.e'f~mstetee;l·uiid¢fSectj611 ..• 2~3 .. ()ftneAcl¥is.~is •.Acfin coIIlPliance wiihtheJetmSofRule206(4).,:3,:,exc~pt·.for theinvestfilentadviser'spayment 6fgtishsolicitritipQ fe~s, ,diteptlyorindirettIy,:;tQtlleI3jTIl1~ WhiQllis subjecttQ.Jhe: ludgment; ... ... :2.· :10 complywiih:the telTIlS of:ihe·Jud,gmcnf",:llldu<.!ing!bti(;hot ~lJmlt~g.~o,·th~Yp*y.w~ij(;'Qfqi~gQig~mt·~Ii<f;~M:qNmIi~1i~lw};~~ , , s!~~E!f.f1iil~4il!11~ theperson enters irttc)"such:aconttact, if'lh'e persorthas the;iigh~totetmiriate;~\1gh, ¢onttaQhwith()l,1tpemilt:y.·withi1l5b\lsln.ess,~d~ys;llfterentering ..1rilOllie contra,Qt~ ... 'We,respectfdily'requesttheS'taf{to:'adVise'us that'lt·wili'not,teco!Jltriertd }entotGeinertt.aGt:i,()l)fq;m~<@iimfflissic>n··.m~h,MiY¢~t:ili'¢rtt·ad0:;erim~tis"rcqQir~qtQ'pe tcgisteted'.with·the,Gdmmlssiofipays·the.·Firtn,bt..artyof·itsassoc!<ite,d p#r§on~)atash paymentfor the'spUq1tfl,tion'OfadVisQrydients,notwithstandingthe Judgment.' . actiOllrequc:s! <lnQ relidencompassed paluril ~~sons); AllwicanintemaiiollutfJtoup, 'Illp., ?EC Nc>- AcfiOf,t-ettcI' (IJub. av~iLF~lJ.21 ,2,Qo?);Ql,Pe:11ello,i fn~t CClfllpany,'$)~c.N'O·ASlion . Letter(pub;' a-vaii. Feb. 24;200,5);Goldman; 'SaChs'&' Co, >. SECNo-Action 4~ter{pub,'avaii, Feb. 23, 2005);andMorgall Stanley & Co: lllcorporafed; SEC'No-Action Letter (pllb.,avail.Feb. 4, 2005).

DouglasJ.S,cheidt, Esq;
Ifyouhavean:y,questiQIiSr~gardingthis requcst"plei:l.se contact the·. undersig1J¢Q.;at (2].2) S58-497i,J.. 1&:;~~~j~:~' (Qj'vlsionofEnfOrcemeIlt)