Goldman seeks to avoid SEC fund-amentalism | FT Alphaville

Goldman seeks to avoid SEC fund-amentalism

A tip-off, for any one who thinks Goldman got off lightly in the Abacus affair.

The Securities and Exchange Commission’s undertaking on the Abacus 2007 AC1 CDO ain’t over ’till it’s over — and it looks like that’s not yet. Even though the bank opted to settle the civil fraud suit for a fine of $550m last week, the District Court’s final judgement could still see Goldman disqualified from some of its bread and butter fund activities under Section 9(a) of the 1940 Investment Company Act.

No surprise then, that Goldman filed this to the Commission late on Friday:


And here’s how the potential restriction could impact the bank:

The entry of the Final Judgment would result in a disqualification of Goldman Sachs under Section 9(a)(2) because it would be permanently enjoined by the District Court from engaging in conduct in violation of Section 17(a) of the Securities Act in connection with the purchase or sale of any security. As a consequence Goldman Sachs would be unable to act as principal underwriter of Funds or engage in other Fund Servicing Activities. Taken together, Sections 9(a)(2) and 9(a)(3) would also have the effect of precluding the other Applicants from engaging in Fund Servicing Activities.

As the title of the application suggests, companies can apply to the SEC for an exemption.

We’ve no idea how often the SEC does or does not grant these releases, but according to the Act they’re done if the disqualification is judged “unduly or disproportionately severe,” or not in the public interest.

Which is exactly what Goldman is arguing:

The imposition of Section 9(a) on the Applicants would be unduly and disproportionately severe, given that (a) the violations did not involve divisions or employees of Goldman Sachs acting in the capacity of investment adviser, subadviser, depositor, or principal underwriter for any Fund; (b) Goldman Sachs has undertaken certain actions identified in the proposed Judgment that are intended to enhance Goldman Sachs’ compliance practices relating to the matters that are the subject of the Final Judgment; and (c) Goldman Sachs will be required to pay $550 million pursuant to the Final Judgment. The Applicants have committed substantial capital and other resources to be able to provide Fund Servicing Activities. Without relief under Section 9(c), the Applicants who act primarily as investment advisers would be prevented from offering advisory services that represent a valuable part of the total financial services they offer. In the case of GSAM L.P., the effects would be particularly dire, as provision of investment advice to the Funds and subadvisory services to funds managed by third parties is a very substantial part of its business.

. . .

The inability of the Applicants to continue providing advisory and subadvisory services to the Funds would result in the Funds and their shareholders facing potentially severe hardships. Neither the protection of investors nor the public interest would be served by permitting the Section 9(a) disqualifications to apply to the Applicants because it would deprive the shareholders of the Funds of the advisory or subadvisory services they selected in investing in the Funds. Uncertainty caused by the Applicants being prohibited from serving the Funds in an advisory or subadvisory capacity might result in large net redemptions of shares of the Funds, which could frustrate efforts to manage effectively the Funds’ assets and could increase the Funds’ expense ratios to the detriment of the non-redeeming shareholders. In addition, the disqualification of the Applicants would result in substantial costs because of the need to obtain shareholder approvals of new investment advisory or subadvisory agreements with a new adviser or subadviser. The costs of obtaining such approvals would be substantial and would include: (1) the costs of identifying a suitable successor investment adviser or subadviser; (2) the costs of calling a special meeting of the Boards; (3) the costs of preparing, printing and mailing proxy materials to all shareholders; (4) the cost of actively soliciting shareholder proxies and tabulating those proxies; and (5) the costs of actually holding the shareholder meetings. The prohibitions of Section 9(a) could, therefore, operate to the detriment of the financial interests of the Funds and their shareholders, none of whom were involved in conducting the activities that are the subject of the Final Judgment.

And so on for a full 45 pages.

Related links:
The Big Fume – FT Alphaville
Some thoughts on the Goldman settlement – Self-Evident
Full coverage of the Abacus affair – FT Alphaville series