July 24, 2002

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

RE: Transactions of Investment Companies with Portfolio and Subadvisory Affiliates: SEC File No. S7-13-02

Dear Mr. Katz:

This letter is submitted on behalf of Goldman, Sachs & Co. in connection with a request by the Securities and Exchange Commission for comments on certain proposed regulatory changes under the Investment Company Act of 1940 (the "1940 Act"). The proposals respond to the growth of investment companies and changes in the organization of funds, and are designed to permit transactions between funds and certain affiliated persons under circumstances where it is unlikely that the affiliate would be in a position to take advantage of the fund. The proposed changes were published in Release No. IC-25557 (Apr. 30, 2002) (the "Release").

We support fully the Commission's efforts to modernize the regulatory framework of the federal securities laws, in general, and the 1940 Act, in particular. We believe that investors and the investment management industry will benefit from the Commission's efforts. Many restrictions that were adopted in an earlier time have not only ceased to serve any meaningful regulatory purpose, but have become an impediment to efficient regulation as a result of industry developments and changed market conditions. We believe that the proposed changes in the Release will further the Commission's goals with one exception, which is discussed more fully below.

The exception relates to the proposal in the Release to amend Rule 10f-3(b)(7)(i) under the 1940 Act (to be recodified as Rule 10f-3(c)(7)(i)). Currently, this provision states that the amount of securities of any class that may be purchased pursuant to the Rule by a registered investment company, or by two or more investment companies having the same investment adviser, may not exceed certain specified 25% limits. The proposal would change this provision to state that the amount of securities of any class of an issue to be purchased by an investment company, aggregated with purchases by any other investment company advised by the investment company's investment adviser, and purchases by any other account over which such adviser has discretionary authority or otherwise exercises control, may not exceed the specified 25% limits.

We believe this proposed change is unnecessary and inappropriate for several reasons.

First, since the time Rule 10f-3 was originally adopted in 1958, the percentage limitations on the amount of underwritten securities that could be purchased pursuant to its provisions have always applied only to investment company accounts. While the Release states that the proposed amendment is intended to close a "loophole," the Release does not state why the Commission believes that a "loophole" exists or how the current provision is being abused. On the other hand, several industry commenters have previously noted, and we agree, that the more restrictive method of calculating the percentage limitation under the proposed amendment is likely to limit a fund's ability to purchase underwritten securities that are considered to be attractive for the investment adviser's other accounts.

Second, the proposed amendment is contrary to the action taken by the Commission in 1997 when it recognized that the previous percentage limitations of Rule 10f-3 were unduly restrictive and presented problems for mutual funds. In response, the Commission increased the percentage of underwritten securities that could be purchased by investment companies pursuant to the Rule to its current limits in order to better enable funds to purchase desirable securities at prices that will benefit their portfolios.

Third, as worded the proposed change is unclear as to which accounts the new 25% limitation applies. For example, will the proposed 25% limitation apply to non-investment company accounts where the investment adviser acts as a manager of unaffiliated managers? In particular, for purposes of the proposed 25% limitation, will an investment adviser have "discretionary authority" or otherwise be deemed to "exercise control" in situations where it selects other, unaffiliated investment advisers to manage an account or does not itself participate in portfolio transaction decisions? If so, how would such an application relate to the purpose of Rule 10f-3 to prevent the "dumping" of unmarketable securities in an investment company? In a situation where an investment adviser acts as a manager of unaffiliated managers, it normally will not know beforehand nor have consultations with a particular manager regarding contemplated purchases of underwritten securities, and the application of the proposed 25% limitation in this situation would lead to the practically unimplementable result that such an investment adviser would need to interfere with another adviser's investment program to track such purchases.1

Similarly, we assume, but would like affirmative clarification, that the proposed 25% limitation will not apply to an investment adviser's discretionary advisory accounts in situations where the investment adviser obtains the consent of its clients to purchase particular underwritten securities. We note that the opposite interpretation of the proposed limitation would mean that an investment adviser's discretionary accounts would be treated differently than its non-discretionary advisory accounts that provide their consent to the same purchases. This result, we believe, would be contrary to the provisions of Section 206(3) of the Investment Advisers Act of 1940 (the "Advisers Act") which, like Rule 10f-3, is intended to address issues of price manipulation and the dumping of unwanted securities in client accounts, and relies on disclosure and client consent for both discretionary and non-discretionary advisory accounts to address these issues.

Further, we assume, but would like affirmative clarification, that the new 25% limitation will not apply to discretionary brokerage accounts in situations where the investment adviser is also registered as a broker-dealer. The Commission has traditionally viewed the Advisers Act as applying only to those clients to whom a registered broker-dealer provides investment advice that is not incidental to brokerage services or for which the firm receives special compensation.2 We assume, but would like affirmative clarification, that this view will also apply to the 25% limitation in Rule 10f-3, which refers only to "advisers" and not to "broker-dealers." We note that this distinction between advisory accounts and brokerage accounts for purposes of the proposed 25% limitation is especially appropriate in situations where the brokerage and investment advisory units of a securities firm, whether or not within the same legal entity, operate as separately managed businesses and are subject to informational barriers and procedures. The Commission and other agencies have recognized functional business separations based on informational barriers and procedures in many other situations.3

In summary, we believe that the current 25% limitation in Rule 10f-3 satisfactorily addresses the Rule's regulatory objectives and should not be changed. We believe further that if the Commission nonetheless concludes that the 25% limitation should be changed to cover discretionary advisory accounts, then the Commission should consider increasing the 25% limitation to 50% so as not to take away from investment companies the benefits that have resulted from the Commission's actions in 1997 and re-impose (through the inclusion of non-investment company accounts within the percentage restriction) the problems that the Commission's 1997 actions were intended to eliminate.

Finally, we believe that if the Commission concludes that the 25% limitation should be changed to cover non-investment company accounts, then the Commission should affirmatively clarify that, for purposes of the new limitation, accounts over which an investment adviser has "discretionary authority" or otherwise "exercises control": (a) do not include non-investment company accounts where the investment adviser is acting as a manager of unaffiliated managers; (b) do not include other types of non-investment company advisory accounts where the investment adviser does not exercise its discretion in the purchase of the particular underwritten securities for the accounts; (c) do not include accounts that do not subject the investment adviser to the Advisers Act4; and (d) do not include client accounts of independently managed businesses that are separated from the investment adviser by informational barriers and procedures.

We thank you for this opportunity to comment on your proposal.

Sincerely yours,

Gary D. Black
Managing Director
President, Goldman Sachs Funds

cc: SEC Commissioners
The Honorable Chairman Harry L. Pitt
Commissioner Cynthia A. Glassman
Commissioner Isaac C. Hunt, Jr.

1 Although the investment banking group of a securities firm participating in a securities underwriting may know the identities of the investors that purchase the underwritten securities, the firm's asset management group acting as a manger of managers would not have access to this information because of the informational barriers between the two groups that are necessary to comply with various federal securities law requirements.
2 See Release No. IA-626 (Apr. 27, 1978).
3 See, e.g., Release No. 34-39538 (Jan. 12, 1998) (adopting amendments to Regulation 13D-G under the 1934 Act); Release No. 34-38067 (Dec. 20, 1996) (modifying the definition of "affiliated purchaser" in Regulation M under the 1934 Act); 31 CFR Part 356 Appendix A (Department of Treasury regulations regarding sale and issue of U.S. Treasury securities); 17 CFR Part 420 Appendix A (Department of Treasury regulations regarding large position reporting).
4 We note that the language in clause (c) is similar to the language in proposed Rule 202(a)(11)-1 under the Advisers Act, which provides that certain broker-dealers will not be deemed to be investment advisers. See Release Nos. 34-42099, IA-1845 (Nov. 4, 1999).