SEC Division of Trading and Markets no-action letter: Goldman, Sachs & Co.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
DIVISION OF
MARKET REGULATION
[Revised -- January 30,20071
Steven W. Stone, Esq.
Morgan, Lewis & Bockius LLP
1 Pennsylvania Avenue, NW
Washington, DC 20004
Re: Status of Service Providers in Goldman, Sachs & Co.'s Research XPRESSSM Program Dear Mr. Stone:
In your letter dated January 17,2007, on behalf of Goldman, Sachs & Co.
("GS&Co."), you request assurance that the staff of the Division of Market Regulation ("Staff') will not recommend enforcement action to the Commission under Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") against service providers participating in GS&Co.'s Research XPRESSSM program ("Service Providers") if those Service Providers receive compensation for products and services that are considered "research services" under the safe harbor set forth in Section 28(e) of the Exchange Act, as recently interpreted by the Commission ("Research services"),' without registering as broker-dealers pursuant to Section 1 5(b) of the Exchange Act. Based on the facts and representations set forth in your letter, the Staff will not recommend enforcement action to the Commission under Section 15(a) of the Exchange Act if a Service Provider receives payment for its Research Services from a commission pool set apart in a client commission arrangement under Section 28(e) of the Exchange Act without registering as a broker-dealer.2 In reaching this position, we note in particular the following:
The money manager is responsible for independently determining the value of the Research Services in accordance with its good faith determination under Section 28(e) of the Exchange Act, although the money manager's good faith determination may be based on input from the Service Provider that provides the Research Services; 1 See Securities Exchange Act Release No. 54165 (July 18, 2006), 71 FR 41978 at Section 1II.C (July 24, 2006); see also Sections 28(e)(3)(A)-(B) of the Exchange Act. 2 Through the Research XPRESS~ program, a money manager directs GS&Co. to record client commissions generated from transactions executed through GS&Co. in a separate pool. The money manager periodically directs GS&Co. to pay specified dollar amounts from that pool for Research Services.

Steven W. Stone, Esq.
GS&Co. is not involved in determining the value of the Research Services to the money manager; The Service Provider receives payment for Research Services from a pool of commissions that, by agreement between GS&Co. and the money manager, GS&Co. has set aside for obtaining the Research Services; Payment to the Service Provider is not conditioned, directly or indirectly, on the execution of any particular transaction or transactions in securities that are described or analyzed in the Research Services; and The Service Provider provides the Research Services in return for payment from a pool of commissions, but does not perform other functions that are typically characteristic of broker-dealer activity (e.g., the Service Provider does not solicit brokerage transactions by disseminating quotations, accept or otherwise handle customer orders, introduce or carry customer securities accounts, receive or hold customer funds or securities, execute, clear, or settle securities transactions, or engage in proprietary securities trading). This position is based on the facts presented and the representations you have made, and any different facts and circumstances may require a different response. Furthermore, this response expresses the Staffs position on enforcement action only and does not purport to express any legal conclusions on the question presented. The Staff expresses no view with respect to any other questions that the proposed activities may raise, including the applicability of any other federal or state laws or self-regulatory organization rules. Sincerely, *- Brian A. Bussey Assistant Chief Counsel u

Morgan, Lewis & Bockius LLP
11 11 Pennsylvania Avenue, NW
Washington, DC 20004
Tei: 202.739.3000
Fax: 202.739.3001 www.morganlewis.com
Morgan Lewis
CObNSELORS AT LAW
BY BAND DELIVERY
Catherine McGuire
Associate Director and Chief Counsel
Dikision of Market Regulation
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Status of Service Providers in Goldman. Sachs & Co.'s Research XPRESS"' Program Dear Ms. McGuire:
On behalf of Goldman, Sachs & Co. ("GS&Co."), we request assurances that the staff of the Division of Market Regulation ("Division") will not recommend enforcement action to the Securities and Exchange Commission (;'Commission") under Section lj(a) of the Securities Exchange Act of 1934 ("Exchange Act") against service providers participating in GS&Co.'s Research XPRESSU program ("Service Providers") if, as described below, the Service Providers receive compensation for products and services that are considered "research services" under the safe harbor set forth in Section 28(e) of the Exchange Act, as recently interpreted by the Commission (.'Research ~ervices")' without registering as broker-dealers pursuant to Section 15(b) of the Exchange Act. Background GS&Co. is a leading global investment banking and securities firm that prokides a broad range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, gokernments and high-net-worth individuals. GS&Co. is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. and is a member of the Nem York Stock Exchange and NASD, among other self-regulatory organizations. GS&Co. operates a program, known as Research XPRESS, that facilitates the delivery of research and other producrs and services from broker-dealers and other providers. Research XPRESS's services include delivering Research Services. Research XPRESS allows money I See Securities Exchange Act Release No. 54165 (July 18. 2006). 71 FR.11978 at Sectio~l 1II.C (Jul) 24,2006) ("2006 interpretive Release"); see al,so Sections 28(e)(j)(A)-(B) of the Exchange Act.

Morgan Lewis COUNIBLOBS hi LAW Catherine McGuire, Esquire managers to consolidate payments for Research Serx ices through one channel using accumulated client commissions from securities transactions executed through GS&Co. Through the Research XPRESS program, the money manager directs GS&Co. to record client commissions generated from transactions executed through GS&Co. in a separate pool. The money manager periodically directs GS&Co. to pay specified dollar amounts from that pool for Research Services. The money manager is responsible for independently determining the value of the Research Services in accordance with its good faith determination under Section 28(e) of the Exchange Act, although the money manager's determination may be based on input from the Service Provider that provides the Research Sewices. GS&Co. is not involved in determining the value of the Research Services to the money manager. Payment to the services provider is not conditioned, directly or indirectly, on the execution of any particular transaction or transactions in securities described or analyzed in the Research Services. Analysis and Request
Section 3(a)(4) of the Exchange Act defines the term "broker," in relevant part, as "any person
engaged in the business of effecting transactions in securities for the account ofothers." Section 3(a)(5) of the Exchange Act defines the term "dealer," in relevant part, as "any person engaged in the business of buying and selling securities for such person's own account through a broker or otherwise." In interpreting Sections 3(a)(4) and 3(a)(5), the Commission and the Division have considered the receipt of transaction-based compensation as a key factor in considering whether a person is "enga ed in the business" of transacting securities, and therefore subject to broker-dealer registration. 5 We recognize that paying Service Providers for Research Services from a pool of accumulated client commissions could, depending on the circumstances, raise a question of whether the Service Providers are receiving transaction-based compensation. To that end, GS&Co.'s standard master agreement with Service Providers includes a representation and warranty from the provider that it has all required licenses and registrations to conduct business under the contemplated arrangements. This has allowed GS&Co. to form a reasonable belief that the Service Providers are not subject to broker-dealer registration. However, GS&Co. believes it would be worthwhile to gain the clarity of the Division's views on the matter for the benefit of the Service Providers. "See. eg., tterbruck, Alder & Co.. SEC StaffNo-Action Letter (Ma? 3. 2002) (stating ..[t]he Division previously has noted that the receipt of compensation related to securities transactions is a ke) factor that may require an entit) to register as a broker-dealer. Absent an exemption, an entity that receives securities commissions or other transaction-based compensation in connection with securities-based activities that fall within the definition of "broker" or "dealer" generally is itself is required to register as a broker-dealer."); see ulso, e.g, Birchtree Financial Services, Inc., SEC Staff No-Action Letter (September 22. 1998); 1st Global, Inc., SEC Staff No-Action Letter (May 7, 2001 ).

Catherine McGuire, Esquire
Morgan Lewis COUNiiLDBI A1 LAW
Accordingly, we request assurances that the Division will not recommend enforcement action to the Commission under Section 15(a) of the Exchange Act against Service Providers participating in the Research XPRESS program if such Service Providers receive compensation ibr the Research Services out of a pool of commissions established by each money manager and GS&Co. without being registered as broker-dealers pursuant to Section 15(b) of the Exchange Act. In particular, we note the following regarding Research XPRESS:
The money manager is responsible for independently determining the value of the Research Services in accordance with its good faith determination under Section 28(e) of the Exchange Act, although the money manager's good faith determination may be based on input from the Service Provider that provides the Research Services; GS&Co. is not involved in determining the value of the Research Services to the monej manager; The Service Provider receives payment for Research Services from a pool of commissions that, by agreement between GS&Co. and the money manager, GS&Co. has set aside for obtaining the Research Services; Payment to the Service Provider is not conditioned. directly or indirectl), on the execution of any particular transaction or transactions in securities that are described or analyzed in the Research Services: and The Service Provider provides the Research Services in return for payment from a pool of commissions, but does not perform other functions that are typically characteristic of broker￾dealer activity (e.g.. the Service Provider does not solicit brokerage transactions by disseminating quotations, accept or otherwise handle customer ordersl introduce or carry customer securities accounts, receive or hold customer funds or securities, execute, clear? or settle securities transactions: or engage in proprietary securities trading). 3 The Division's staff has outlined a number of activities that may trigger broker-dealer registration requirements. See, eg., BondGlobe, Itlc. SEC StaffNo-Action Lener (February 6, 2001); BD Advantage, Inc., SEC Staff No-Action Letter (October 11.2000); see also Division of Market Regulation, Guide to Broker￾Dealer Registration (December 2005).

Catherine McGuire, Esquire
Morgan Lewis COCNIBLOZS AT LIV
If you have any questions regarding this request, please call me at 202.739.5453 or T.R. Lazo at
202.739.5250. On behalf of GS&Co., we appreciate your consideration of this request.
Very truly yours,
Steven W. Stone c: Brian Bussey, Esq.
Matthew Daigler, Esq.
Office of the Chief Counsel
Division of Market Regulation
Securities and Exchange Commission
David '1. Rusoff, Esquire
Goldman, Sachs & Co.