Banking StandardsWritten evidence from Goldman Sachs International

Thank you for your letter of 14 February. We are grateful for the opportunity to assist the important work of the Commission. You asked us to respond to a number of questions. We have set out our answers in the attached document and included some additional materials.

The last few years have represented a difficult time for Goldman Sachs and our industry. We recognised that it was important for the firm to undertake a serious and comprehensive process of self-examination. We did so not only to improve or strengthen processes, but also to engage in meaningful discussion as an institution about learning the right lessons from the financial crisis and becoming a better firm because of it. It is incumbent upon us as a firm and as individuals to recognise what we could have done differently or better. And through that process, we have reinforced the importance of personal accountability, effectively managing reputational risk and serving the long-term interests of our clients.

Our culture emphasises the need to be self-critical and realistic about the environment in which we operate and we believe those cultural attributes provide a solid basis on which to improve and continue to contribute broadly to economic growth and opportunity.

We trust you find this submission helpful to your work and we look forward to reading your final report.

Submission

What are Goldman Sachs’ defining values and principles; how are these embedded through the organisation and impressed upon its workforce; and how has Goldman Sachs’ approach to instilling its values through the organisation changed since the 2008 financial crisis?

1. Our Business Principles define our fundamental expectations for the way we should interact with our clients, manage our business and attract, retain and motivate our employees. They were codified in 1979 by our then Senior Partner, John C. Whitehead, who said “…. I didn’t invent the Business Principles. I learned them from my predecessors…” Today, our Business Principles are one of the first items new employees receive when they join the firm. We have included the full text of the Business Principles at Appendix A.

2. The financial crisis and its aftermath has been a challenging time. Our industry and Goldman Sachs itself have been subject to considerable scrutiny. We established a Business Standards Committee (BSC) in May 2010 to undertake a comprehensive, firmwide review of our business standards. This Committee was comprised of members of the firm’s senior management, including several representatives based in London, and was overseen by four members of the Board of Directors of our parent company, The Goldman Sachs Group, Inc. (GS Group).1

3. The Committee conducted an eight-month review, encompassing every major business, region and activity of the firm. It published its report in January 2011. The report made 39 recommendations for change spanning client service, conflicts management and business selection, structured products, transparency and disclosure, committee governance, training and professional development and employee evaluation and incentives. The 39 recommendations, which we have implemented in full, are included at Appendix B and a copy of the full report accompanies our response. We plan to write a concluding report over the next few months, which we would be happy to share with the Commission.

4. The Committee stressed the need to reinforce certain aspects of our culture and set out a commitment to providing professional development programs to strengthen its key elements. The Committee also made clear that each employee of Goldman Sachs has responsibility for protecting the firm’s reputation: an employee can do more harm to the firm’s reputation through a single poor judgment than he or she can do to enhance it throughout an entire career. Building on previous work, the Committee recommended updating and strengthening our Code of Business Conduct and Ethics to signal its importance.

5. As the Commission has recognised, leadership commitment and tone from the top are critical to the culture of a firm. At Goldman Sachs senior leadership has been involved from the outset in the implementation of the Business Standard Committee recommendations. The day before the release of the final BSC report, our Chairman and CEO, Lloyd Blankfein, convened a meeting of the firm’s most senior leaders globally (Participating Managing Directors or PMDs—approximately 450 in number) to discuss the BSC, its recommendations and the implementation plan. This was followed by many other meetings, presentations and discussions with the firm’s Extended Managing Directors (EMDs—approximately 2000 in number), individual teams and smaller groups across the firm globally. There have been dozens of other communications to our people underscoring the key messages of client service, reputational risk management and accountability. Whenever possible, we have relied on senior management to communicate with our people, recognising the greater impact these messages have when delivered by senior leaders.

6. Our people have responded positively to these additional opportunities to hear directly from senior leadership about the firm’s culture. In feedback provided through various channels, they have said they would like the firm to continue this effort.

7. Senior leaders from across the firm were involved in setting the direction and the tone for the implementation effort, through the internal communications discussed above and by leading many training and professional development programs. Their direct involvement and frequent messaging have been critical to reinforcing the importance of reputational judgment and our culture to our people.

8. We have provided training and professional development to strengthen our culture, reinforce our core values and implement and embed the recommendations in the BSC report into our daily practices. More than 30 new BSC training programs have been created and we embedded BSC-related content into over 90 existing programs. The content for these programs spans leadership, culture and values, strengthening client relationships, reputational care, individual accountability, conflicts policies and procedures, and training on structured products.

9. The Chairman’s Forum on Reputational Excellence and Personal Accountability has been a key element of the overall BSC training effort. It was developed and rolled out to all of the firm’s PMDs and EMDs, in 23 sessions globally, including six sessions in London. It stressed the importance of, and our commitment to, client service, reputational excellence and individual accountability. Our Chairman and CEO, Lloyd Blankfein, led all the sessions in person and devoted more time to this initiative in 2011 than to any other. Each three-hour session included a brief documentary about the history of the firm and extensive remarks by Mr Blankfein followed by a question and answer session with him. In his remarks, Mr Blankfein focused on a number of key lessons and responsibilities, which highlighted the importance of sound and informed judgment, personal accountability and the shared responsibility for the firm’s reputation. A segment of each session was focused on a case study which is set in a hypothetical set of complex situations in a stressed market environment; the case study highlights issues which involve judgment and decision making and how we interact with clients. The discussion of the case study, which for sessions in London was led by senior management for the Europe, Middle East and Africa (EMEA) region, explored how individual judgments can have significant and unintended consequences for the firm, our clients and our reputation, particularly when related to complicated issues.

10. We recently launched the Chairman’s Forum for all of our Executive Directors and Vice Presidents (the level below EMD). Members of the European Management Committee and other senior leaders in the region have facilitated 11 sessions so far in EMEA with a further eight planned during the course of this year. The sessions included the same presentation on culture and case study together with a video presentation by our Chairman and CEO.

How does the legacy of the partnership model influence Goldman Sachs’ approach to business today? How has the culture changed since the flotation in 1999?

11. Our culture is rooted in our history as a partnership, when business decisions were conducted by consensus. We have a flat organisation built on mutual accountability and meritocracy. Core to generating returns in a client-service business is our reliance on collaboration, communication, escalation, personal initiative and integrity. We stress the importance of individual responsibility. Our managers have a hands-on approach. We encourage our people to challenge each other. These facets of our culture stem from our history as a partnership.

12. Our culture has adapted and evolved as the size and geographical scope of our operations has grown but our focus continues to be the long-term interests of our clients, shareholders, employees and other stakeholders, including the communities we serve. Our long-term orientation is supported by our promotion processes and by our compensation policies, both of which originate from our days as a partnership. Candidates for promotion to PMD are subject to the same rigorous appraisal by existing PMDs as candidates for partnership once were. One of the recommendations of the Business Standards Committee was that the firm strengthen its focus on the importance of leadership, culture and values in this process. This has been implemented starting with 2010 PMD promotions. While a partnership, the bulk of each partner’s annual compensation was reinvested back into the firm, aligning the long-term interests of Goldman Sachs with those of the partners. Our current PMDs receive a significant portion of compensation in the form of equity-based awards that deliver over time and are subject to a variety of restrictions, including at a minimum those required by local regulations. This compensation structure encourages a long-term, firmwide focus in the same way as when we were a partnership.

13. Good governance, accountability and prudent risk management have been hallmarks of our culture since our foundation as a partnership. Serving our clients requires us to take risk. As a result, effective management of all risk, including reputational risk, is critical; this relies upon accountability, escalation and over-communication, the independence of our control functions, the discipline of mark to market accounting and consistent investment in sophisticated risk management professionals, processes and systems. Our most senior management have long tenure and experience in managing risk. We have experienced low turnover in the ranks of our senior management and this has helped us to navigate the financial crisis. Our senior management are fully engaged in risk decisions, including through their participation in relevant committees. We discuss our approach to risk management in more detail below.

To what extent do you believe Goldman Sachs’ reputation enables it to command higher fees from clients? Do you believe this reputational advantage, if it exists, derives from the values set out in answer to Question 1?

14. Our reputation is critical to our ability to be successful. We operate across multiple business lines in highly competitive markets. We face different competitors in different markets: some competitors are global, some regional and some local. Our fees are determined by a whole range of different factors, including the competitive environment, the nature of the services we provide, the capacity in which we act and the amount of risk, including market, credit and liquidity risk, that we take on. Our focus is on serving our clients well for the long term. As our first Business Principle states, our experience shows that if we serve our clients well, our own success will follow.

Do Goldman Sachs’ corporate governance arrangements differ significantly from its competitors, and if so, how?

15. We believe that sound corporate governance is not only important for a well-run financial institution but also provides the basis for public trust in the institution itself and the financial system as a whole. We recognise our responsibility as stewards of our franchise for our stakeholders.

16. Our corporate governance arrangements in the UK differ significantly from some of our competitors in one obvious but important respect: we do not have a publicly-listed parent company in the UK. Our operations in the UK are conducted through subsidiaries which form part of a global governance structure and we do not rely on a branch structure in the UK. This has a significant bearing on how we think about corporate governance in London.

17. In 2011 the non-executive directors of our main UK subsidiary, Goldman Sachs International (GSI), conducted a review of its corporate governance arrangements and made 22 recommendations for enhancement. Those recommendations have all been implemented. For example, the Commission has discussed how smaller boards can be more effective and one of the changes we have implemented is to reduce the size of the GSI board. It now comprises six directors, three of whom are non-executive. One of the non-executives is also an independent member of the GS Group board.

18. The recommendations build on our global, regional and entity-level governance philosophy which we describe in more detail below.

19. The GS Group Board of Directors is responsible for, and committed to, the oversight of the business and affairs of the firm. The Board has established Audit, Compensation, Corporate Governance, Nominating and Public Responsibilities, and Risk Committees, each of which is comprised solely of independent directors, to oversee certain of its responsibilities.

20. While the GS Group Board provides oversight of senior management, the day-to-day running of the firm is the responsibility of management. The most senior executive management body, chaired by the Chairman and CEO, is the Management Committee which includes the two Co-Chief Executive Officers of GSI and one of the co-heads of the Securities Division based in London. In addition, the firmwide Client and Business Standards Committee2 and the firmwide Risk Committee3 report directly to the Management Committee, several committees report to these two committees and there are many additional committees further down the reporting chain. The firm relies heavily on committees to co-ordinate and apply consistent business standards, practices, policies and procedures across the organisation. Certain of these committees such as the Risk Committee, the Capital Committee4 and the Commitments Committee5 play a crucial role in managing risk. One of the co-heads of the Capital Committee is based in London, as is one of the co-heads of the Commitments Committee.

21. The regional dimension of corporate governance is concerned with implementing global strategy in the region and overseeing risk management, capital and liquidity at the local entity level. Certain global divisional heads sit in London. Regional management also deals with matters such as regulatory interface, recruitment, promotion and involvement in regional committees.

22. Our local subsidiaries are linked to the rest of the group through a matrix structure. Business activity is organised through divisions including Investment Banking, Securities, Investment Management, and Merchant Banking. Each division is run as a global business. This means, for example, that while the strategy of investment banking in the UK has a regional dimension, it is also critically part of the Investment Banking Division which will view business opportunities and strategy globally. The same is true for sales and trading, investment management and merchant banking activities.

23. Because our local subsidiaries are part of a global group, the governance of them is aligned with the culture, governance principles and structure of the group as a whole. This means that the boards of the local entities provide direction and oversight for implementation by senior regional management of global strategy, risk management, internal controls and compliance policies. In addition they have an important role in maintaining and enhancing the culture of the local entities consistent with the culture of the group.

24. The review of GSI governance conducted by our non-executive directors articulated general principles which informed the enhancements that we have made in implementing the recommendations of that report. The GSI Board is responsible for overseeing the management and control framework of GSI. Its primary governance responsibility is to oversee implementation by management of the firm’s strategy, risk appetite and systems and controls, as determined at a firmwide and regional level, as part of global firm governance. The Board and senior managers of GSI retain discretion on how to apply and respond to directions or proposals coming from individuals or committees in other group entities. There is a clear allocation of responsibilities between the GSI Board and senior management of GSI so that there is a clear organisational structure and decision-making process and the Board, including its non-executive directors, has the opportunity to challenge proposals put forward by executive directors and other senior managers of GSI.

What key factors determine Goldman Sachs’ risk appetite and tolerance levels? How does the Board monitor the effective implementation of the risk appetite? How have the structure, activities and remuneration of Goldman Sachs’ risk management and control operations changed since the 2008 financial crisis?

Determination of risk appetite

25. We have always understood the importance of capital and liquidity. Prudent risk management has been at the heart of our culture since our days as a partnership. We continually make enhancements to the way we manage risk but our fundamental approach to risk management pre-dates the financial crisis.

26. Since the financial crisis, the firm has further enhanced both the articulation of our risk appetite as well as the way in which we measure and quantify this appetite. We have developed a formal Risk Appetite Statement both for the Group as a whole and for our major subsidiaries within the UK. We take risk as an important component of the service we provide to clients. However, we endeavour not to undertake risk in form or amount that could potentially and materially impair our capital and liquidity position or our ability to generate revenues, even in a stressed environment. Consistent with this objective, we pay particular attention to evaluating risks that are concentrated, correlated, illiquid, or have other adverse characteristics, and we correctly and consistently price the risk we take. As we evaluate risk appetite, we take into consideration our key external constituents, in particular our clients, creditors, rating agencies, and regulators and shareholders. Finally, we have developed a culture and implemented a compensation structure (described further below) that do not reward or otherwise incentivise inappropriate risk taking.

27. Our risk taking has always been limited to circumstances where we believe that we: (i) understand the risks; (ii) manage the risks within prudent levels; and (iii) are adequately compensated for assuming these risks.

28. We believe that we must monitor and manage reputational risk with the same rigour as financial risk and that each employee must focus on reputational risk. Reputational excellence (both in terms of risk management and reputational judgment and compliance) is one of the key criteria in our annual performance review process, described in more detail below.

Implementation of risk appetite

29. We take the Risk Appetite Statement and the associated quantitative and qualitative metrics and objectives fully into account when considering the firm’s strategy, capital and liquidity plans, budgets and other actions. As an example, we evaluate business opportunities in the context not only of their revenue potential, but also against our risk limits and risk appetite set at multiple levels, from region/country to industry down to individual client.

30. At the legal entity and business unit level, the risk appetite is implemented through the limits and individual transactional approvals provided to each business unit. Daily monitoring of each limit ensures that exceptions are captured. The limits are set in such a way that we expect exceptions to be generated and limits are regularly increased or decreased on a temporary basis. This fosters an ongoing dialogue on risk among revenue-producing units, independent control and support functions, committees and senior management, as well as rapid escalation of risk-related matters.

31. These individual business approvals are continually calibrated to the prevailing and anticipated business climate, the firm’s available capital and liquidity, and other considerations such that they provide real time guidance. In addition we make ongoing real time adjustments of risk appetite and approvals. Our aim is to ensure that the exposures that result from the approvals given are not excessive in light of the environment we find ourselves in, or may find ourselves in. This process is enhanced by integrated technology systems and the discipline of marking to market that we describe below.

32. We perform stress tests on a periodic basis. The objective of these stress tests is to identify and measure material risks and to assess capital adequacy considering these identified risks. Results of the stress test are reported to the GS Group Board and to the boards of directors of the relevant local subsidiaries.

Structure, activities and remuneration of risk management and control operations

33. Our risk management and control operations are built around three core components: governance, processes and people.

34. Risk management governance starts with the Board of Directors of GS Group, which plays an important role in reviewing risk management, both directly and through its Risk Committee, which consists of all of its independent directors. The Board also receives periodic updates on firmwide risks from the firm’s independent control and support functions. The Board of Directors of GSI in London also regularly reviews risk management and receives updates on risks that impact the local entity from the GSI Risk Committee and from independent control and support functions. In 2011 we re-examined the process of review of risk by the GSI Board as part of the Governance Review described above and have introduced a more comprehensive risk report at each regular board meeting.

35. Day-to-day oversight of risk is the responsibility of various control, support and advisory functions, which report to the chief financial officer, general counsel, global head of Compliance and chief administrative officer, or in the case of Internal Audit, to the Audit Committee of the Board, and not to revenue-producing managers. This segregation of reporting lines is an important feature of maintaining independent and objective oversight of risk and has been a cornerstone of our approach to risk management going back several decades.

36. In addition, compensation for those employees is not determined by individuals in revenue-producing positions but by the management of the relevant control function. All employees with variable compensation above a particular threshold are subject to deferral of part of their variable compensation in the form of an equity-based award. Equity-based awards are subject to a number of terms and conditions that could result in forfeiture or recapture.

37. The firm makes extensive use of risk-related committees that meet regularly and facilitate and foster ongoing discussions between leaders in the revenue-producing units and leaders on the independent control and support side of the firm to identify, manage and mitigate risks. These include the Firmwide Risk Committee and the GSI Risk Committee.

38. The firm maintains various processes and procedures that are critical components of risk management. First and foremost is the daily discipline of marking substantially all the firm’s inventory to current market levels, with changes in valuation reflected in its risk management systems and in net revenues.

39. The mark-to-market process is reinforced through independent price verification by our Controllers department. The firm believes this discipline is one of the most effective tools for assessing and managing risk and for providing transparent and realistic insight into the firm’s financial exposures.

40. Active management of the firm’s positions is another important process. Proactive mitigation of market and credit exposures minimises the risk that the firm will be required to take outsized actions during periods of stress.

41. Finally, there is a great deal of focus on the rigour and effectiveness of the firm’s risk systems. The goal of risk management technology is to get the right information to the right people at the right time. The firm devotes significant time and resources to its risk management technology to ensure that it consistently provides complete, accurate and timely information.

42. However, even the best technology serves only as a tool for helping to make informed decisions in real time about the risks being taken. Ultimately, effective risk management requires people to make judgments about ongoing portfolio interpretations and adjustments. In both the revenue-producing units and the independent control and support functions, the experience of the firm’s professionals, and their understanding of the nuances and limitations of each risk measure, must guide the firm in assessing exposures and maintaining them within prudent levels.

Why is Goldman Sachs not a member of the BBA?

43. Historically the BBA has represented clearing banks in London while the London Investment Banking Association (LIBA) represented investment banks. Since our operations in London were primarily in investment banking, we became a member of LIBA in the 1980s as our business here expanded. LIBA has now become the Association for Financial Markets in Europe (AFME) of which we continue to be a member. We are also a member of a number of other industry associations with offices in London, including the International Swaps and Derivatives Association and the International Capital Markets Association. These associations frequently work together with the BBA on matters of common interest.

What is the balance between fixed and variable compensation across all Goldman Sachs employees? How is variable pay determined at individual level? How is adherence to corporate values reflected in remuneration?

44. Our compensation philosophy and the objectives of our compensation programme are reflected in our Compensation Principles, which we include at Appendix C.

45. In particular, we believe effective compensation practices should:

Encourage a real sense of teamwork and communication, binding individual short-term interests to the institution’s long-term interests;

Evaluate performance on a multi-year basis;

Discourage excessive or concentrated risk taking;

Allow an institution to attract and retain proven talent; and

Align aggregate remuneration for the firm with performance over the cycle.

46. The firm’s compensation programme is designed to avoid incentives to take imprudent risks that are inconsistent with the long-term health of the firm. We seek to balance risks and rewards in determining employees’ total compensation, including through robust up-front risk adjustments that take into consideration a full range of risks associated with an employee’s activities, combined with consideration of multi-year performance, and deferral of compensation into equity-based awards that deliver over time and are subject to transfer restrictions, retention requirements, prohibitions on hedging and forfeiture and recapture provisions (as described below).

47. Annual compensation for employees is generally comprised of salary and year-end variable compensation. Variable compensation is determined on a discretionary basis, based on multiple factors and is not set as a fixed percentage of revenue or by reference to any other formula. The variable compensation programme is flexible to allow the firm to respond to changes in market conditions and to maintain its pay-for-performance approach. Firmwide performance is an important factor in determining variable compensation.

48. Equity-based awards are made to employees earning variable compensation in excess of a specified threshold, and employees with higher variable compensation generally receive a greater proportion of their variable compensation in such awards. Our most senior employees receive at least 60% of their variable compensation in the form of equity-based awards. Paying a significant portion of variable compensation to our employees in the form of equity-based awards that deliver over time and are subject to forfeiture or recapture encourages a long-term, firmwide focus and discourages “cutting corners” or engaging in inappropriate behaviour that may only manifest itself at a later date. We apply this approach globally.

49. Employees are evaluated annually as part of a “360 degree” feedback process. This process reflects input from a number of employees, including supervisors, peers and those who are junior to the employee, regarding an array of performance measures. For example, the detailed performance evaluations include assessments of risk management and reputational judgment and compliance with the firm’s business principles and policies. These evaluations are an important input into the determination of variable compensation within the context of firmwide, divisional and business unit performance.

50. In addition, as part of the compensation determination process, members of the firm’s Compliance, Human Capital Management and Risk functions make recommendations to divisional management to take into consideration all compliance or policy-related disciplinary matters when determining compensation of individuals. These same factors are taken into account in promotion processes.

51. The firm’s global process for setting variable compensation (including the requirement to consider reputational, risk and compliance issues) is subject to oversight by the senior management of the firm in the region, the Board of Directors of GSI and the Compensation Committee of the Board of Directors of GS Group. The year-end variable compensation programme is approved each year by the Compensation Committee taking into account a variety of factors, including regulatory requirements and feedback, and financial and market conditions.

52. The firm’s compensation structure and processes are designed to comply with applicable regulatory standards consistent with the Financial Stability Board Principles for Sound Compensation Practices. However, we will need to take account of forthcoming European regulatory developments in this sphere.

As a place to do business, what are the main differences between London and New York, and what factors influence how Goldman Sachs allocates its business between the two cities? What are the key risks, if any, to London retaining its status as one of the world’s preeminent financial centres?

53. London and New York share a number of advantages that have supported the growth of vibrant capital markets: the availability of skilled local talent, a legal regime which recognises the enforceability of contracts and allows for a faster resolution to disputes, a reputation for consistent application of regulation, fair treatment of financial counterparties (including non-residents) and a supportive tax policy. It is important for London to remain competitive on these criteria and to retain its reputation as a strongly regulated and resilient financial centre.

54. In addition, London has obvious time-zone and geographical advantages that have allowed it to grow to become by far the largest hub for international capital flows globally. But perhaps most importantly, New York and London are preeminent financial centres because they sit within two of the largest financial markets in the world, the United States and Europe.

55. When it comes to executing individual transactions, the location of our clients and regulatory limitations on U.S. firms accessing European markets and vice versa will typically dictate whether we do the business from New York or London; we often do not have a choice between the two. By contrast, within Europe, because of the single market in financial services, firms have much more freedom to decide where to base their operations to best serve European clients.

56. We believe that a key risk to London’s retaining its status as a financial hub is an exit by the UK from the European Union. In common with financial institutions across the City our ability to provide services to clients and engage in investment activities throughout Europe is dependent on the passport that London-based firms enjoy to operate on a cross-border basis within the Union. If the UK leaves, it is likely that the passport will no longer be available, thereby forcing firms that wish to access EU markets to move their operations to within those markets.

57. It is important that the UK, underpinned by its expertise in the field of financial services regulation, leads the debate in the EU to ensure that reform is developed and implemented in a way that allows capital markets to continue to function efficiently. Markets need clear and proportionate rules that allow the financial services sector to contribute to the growth of the European economy and the creation of jobs. It will also be important to ensure that new taxes, particularly the proposed Financial Transactions Tax, are not introduced in a way that threatens the ability of governments and businesses to raise capital and dissuades providers of capital from investing in Europe. The Tax proposed by the EU Commission would have significant impacts in London, notwithstanding the decision by the UK not to participate.

Do you agree with the opinion, expressed in some quarters, that a regulatory “race to the top” is underway, with authorities competing to raise, rather than lower, standards and sanctions? Do you think this is a good thing?

58. We share and support the goals of global regulatory reform—to strengthen financial stability, reduce systemic risk, address the failure of a large financial institution and provide greater transparency—and believe they should reduce both the probability and potential impact of another financial crisis. Given the important role that financial institutions play in facilitating the free flow of capital, a healthy, stable, reputable and profitable financial sector is critical. We are strong supporters of the initiatives that are underway to achieve these goals. Higher standards, more effective supervision and appropriate sanctions will increase the confidence of investors in markets and bring greater depth to those markets to support jobs and economic growth.

59. Our industry faces multiple areas of regulatory change, including higher capital and liquidity requirements, expanded central clearing, greater price transparency and restrictions on business activity. We believe these changes, if implemented appropriately, will reduce systemic risk; we are working constructively with regulators to implement them.

60. The danger of an uncoordinated regulatory “race to the top” is that multiple and overlapping strands of regulation may reduce the ability of the financial system to support credit creation and economic growth. Duplicative regulation can raise the cost of, and divert resource to, compliance, and reduce market liquidity—all without realising corresponding benefits of greater financial security. This in turn can limit financial institutions’ ability to support the efficient allocation of capital. In addition, reforms should not be seen as addressing only discrete problems in isolation; rather, it is important that authorities maintain a clear view of the aggregate impact of all requirements on the financial services industry, including those being imposed outside Europe, and calibrate new regulation in a way that supports the effective functioning of capital markets and helps the real economy.

Does Goldman Sachs anticipate that differences in the implementation of global regulations (eg Basel III) at a national level, and “super-equivalence” and “front-running” in certain jurisdictions, will provide significant opportunities for regulatory arbitrage in the future?

61. It is important that authorities collaborate to implement regulatory change so that standards are raised at the same time and in a similar manner across the globe. The timing of implementation is critical. If rules are applied before there is any real progress toward international convergence, market activity will shift to less restrictive jurisdictions. It is unlikely that market participants, having moved once, will want to incur the cost of moving back—even if the rules are eventually harmonised.

62. The work of the G20 has provided an important foundation for harmonised rule-making. In some areas we have seen a relatively high degree of consistency in how the G20 commitments are being implemented. For example, the EU and the United States have been largely consistent in their approaches to central clearing requirements for standardised over-the-counter derivatives and have looked to ensure that market participants do not have to comply with two separate requirements to clear derivatives locally in each jurisdiction (which is physically not possible).

63. However, in other areas, regulators have elected to adopt different approaches in an attempt to achieve similar outcomes. This seems to be particularly the case for rules aimed at mitigating systemic risk for non-standardized over-the-counter derivatives, where regulatory proposals for capital, margin and other prudential measures are inconsistent. The recent Basel Committee work on risk weighted asset (RWA) inconsistencies shows wide variations in how banks measure risk for capital purposes, both globally and within the EU.

64. Inconsistencies in regulatory substance and implementation create a number of problems. They increase the cost of participating in global markets due to the need to comply with multiple conflicting rule sets, which in turn impedes the flow of capital to its most efficient uses. Inconsistencies distort market dynamics and reduce competition, as participants choose counterparties based on jurisdiction or regulatory regime rather than economic fundamentals. They also increase the risk of weaker regulatory oversight as markets become more fragmented and a comprehensive view of risks to financial stability becomes more difficult.

What changes has Goldman Sachs made to its business in preparation for the “Volcker Rule”? Has this caused Goldman Sachs any difficulties? How, if at all, has it affected Goldman Sachs’ business in London?

65. When the Volcker Rule becomes effective, U.S. banks will generally be prohibited from engaging in proprietary trading and from owning or investing in a hedge fund or private equity fund.

66. As you have heard from others, the rules to implement the relevant provisions in the Dodd-Frank Act have not yet been finalised. Draft rules were issued in October 2011 and included an extensive request for comments. The proposed rules are highly complex, and many aspects remain unclear. The full impact of the rules on us will depend upon the detailed scope of the prohibitions, permitted activities, exceptions and exclusions, and will not be known with certainty until the rules are finalised and market practices and structures develop under the final rules.

67. We expect to be required to be in compliance by July 2014 (subject to possible extensions). We also expect the proposed rules to apply throughout our global operations, including to our subsidiaries in the UK.

68. In our comments on the proposal6 we have highlighted a number of points that we believe need to be addressed. In particular, without substantial revisions, the proposed rules will define permitted market making-related, underwriting and hedging activities so narrowly that they will significantly limit our ability to help our clients—governments, businesses and investors around the world—raise capital, manage their risks, invest their wealth and generate liquidity from their holdings. For example, the proposed rules may affect the ability of impacted firms to make markets in, and act as a primary dealer for, UK gilt-edged and other securities, with consequent impact on liquidity in those markets.

69. While many aspects of the Volcker Rule remain unclear, we evaluated the prohibition on “proprietary trading” and determined that businesses that engage in “bright line” proprietary trading are most likely to be prohibited. In 2010 and 2011, we liquidated substantially all of our Principal Strategies and Global Macro Proprietary trading positions, both in London and elsewhere.

70. In addition, we evaluated the limitations on sponsorship of, and investments in, hedge funds and private equity funds. We expect that the fees that we earn from such funds, and gains and losses from our investments in the funds, will be impacted by the Volcker Rule. The limitation on investments in hedge funds and private equity funds requires us to reduce our investment in each firm-sponsored fund to 3% or less of the fund’s net asset value, and to reduce our aggregate investment in all such firm-sponsored funds to 3% or less of our Tier 1 capital.

8 March 2013

APPENDIX A

THE GOLDMAN SACHS BUSINESS PRINCIPLES

1. Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow.

2. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.

3. Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital, and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.

4. We take great pride in the professional quality of our work. We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest.

5. We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client’s problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry.

6. We make an unusual effort to identify and recruit the very best person for every job. Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm.

7. We offer our people the opportunity to move ahead more rapidly than is possible at most other places. Advancement depends on merit and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.

8. We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the firm and its clients.

9. The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success.

10. We consider our size an asset that we try hard to preserve. We want to be big enough to undertake the largest project that any of our clients could contemplate, yet small enough to maintain the loyalty, the intimacy and the esprit de corps that we all treasure and that contribute greatly to our success.

11. We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs. We know that the world of finance will not stand still and that complacency can lead to extinction.

12. We regularly receive confidential information as part of our normal client relationships. To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.

13. Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we must always be fair competitors and must never denigrate other firms.

14. Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.

APPENDIX B

BUSINESS STANDARDS COMMITTEE RECOMMENDATIONS

Client Relationships and Responsibilities

The Committee makes the following recommendations to strengthen client relationships and responsibilities:

1. The Business Standards Committee recommends that the firm reemphasize the client service values listed below. These values are embedded in our Business Principles and express how we intend to conduct ourselves in each and every client interaction. This recommendation reflects our objective of strengthening client relationships.

Integrity: Adhering to the highest ethical standards.

Fair Dealing: Pursuing a long-term and balanced approach that builds clients’ trust.

Confidentiality: Protecting confidential information.

Clarity: Providing clear, open and direct communication.

Transparency: Informing our clients so that our role in any transaction is understood by them.

Respect: Being respectful of our clients, other stakeholders and broader constituencies.

Professional Excellence: Consistently providing high quality service, responsiveness, thoughtful advice and outstanding execution.

2. The Business Standards Committee recommends that the firm implement the framework for Role-Specific Client Responsibilities to communicate with clients about our different roles and responsibilities and as a benchmark for training and professional development for employees. Above all, we must be clear to ourselves and to our clients about the capacity in which we are acting and the responsibilities we have assumed. This recommendation reflects our objective to strengthen client relationships.

3. The Business Standards Committee recommends that the firm increase its emphasis on client service and client relationships in our annual performance review and other incentive processes. Among other things, the performance review system will seek to assess how well our people represent the Goldman Sachs client franchise and how well they build long-term client relationships. This recommendation reflects our objective of strengthening client relationships.

4. The Business Standards Committee recommends that the new Client and Business Standards Committee design and implement a comprehensive firmwide program to strengthen client interactions and relationships to enhance our client franchise. This recommendation reflects our objectives of strengthening client relationships and committee governance.

5. The Business Standards Committee recommends that the firm implement a comprehensive training and professional development program on the firm’s Business Principles, client service values and the Role-Specific Client Responsibilities. Each division will tailor its program to emphasize its different roles and responsibilities to clients. This recommendation reflects our objectives of strengthening client relationships, reputational excellence and training and professional development.

6. The Business Standards Committee recommends that the leaders of each division play a critical role in the design and execution of a multi-faceted communication program to introduce the Committee’s recommendations to clients. This recommendation reflects our objectives of strengthening client relationships and enhancing transparency of communication and disclosure.

Conflicts of Interest

The Business Standards Committee and the BPC undertook a systematic review of the firm’s wall crossing procedures with a view to reducing the number and duration of wall crosses. The following enhancements were implemented during the summer of 2010 and resulted in a reduction in the number and duration of wall crosses.

7. With respect to Information Barriers and wall crosses, requests by Investment Banking Division (IBD) to initiate a wall cross for a Securities Division employee must be approved by a participating managing director (PMD) or a senior extended managing director (EMD) in IBD who is supervising the relevant transaction or project, as well as one of a small number of PMDs or senior EMDs in the Securities Division, designated by divisional management. One of the heads of the Securities Division or his designee must approve requests when more than five Securities Division employees are needed to cross the Wall in connection with any particular transaction or project. This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

8. The Business Standards Committee recommends that certain underwriting and origination activities be moved from the Securities Division to the Financing Group within IBD, including certain activities related to mortgage-backed and asset-backed securitization, emerging markets debt and money market instruments such as commercial paper. Business units of the Securities Division that continue to conduct origination activities will have policies and standards, approval processes, disclosure requirements and oversight that are consistent with those that apply to all origination activities in IBD. This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

9. The Business Standards Committee recommends that the firm’s existing policies regarding written communications during underwriting and advisory assignments be supplemented to restrict Securities Division and Private Wealth Management (PWM) personnel from disseminating broadly to clients written sales communications either (i) recommending an investment or transaction, or (ii) expressing a view7 regarding the issuer or client, its securities or its other financial instruments, or regarding other transaction parties and their securities or their other instruments as follows:

For offerings of equity or equity-linked securities or high yield debt offerings or loan syndications,8 the restriction would apply from the pricing date until 30 days thereafter.

For material strategic transactions in which Goldman Sachs is advising a party, the restriction would apply from public announcement through closing of the transaction.

This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

10. To strengthen client relationships and reputational excellence, the Business Standards Committee recommends as follows:

(i)Goldman Sachs will not be the sole financing source for acquisitions by Merchant Banking Division (MBD) private funds, other firm-managed private funds or portfolio companies controlled by those funds,9 except in special circumstances with the approval of senior management or an appropriate committee of the firm.

(ii)Goldman Sachs will carefully review requests to provide financing to competing bidders when a MBD fund or other firm-managed private fund is pursuing an acquisition as a bidder. Senior management or an appropriate committee of the firm will be part of the review process.

(iii)Goldman Sachs will carefully review requests to provide staple financing when IBD is selling a public company. This review will occur as part of the firm’s customary staple financing approval process. Senior management or an appropriate committee of the firm will be part of the review process.

(iv)The applicable transaction oversight committees—with the assistance of the Conflicts Resolution and Business Selection Group and the Legal Department—will undertake a heightened review before approving an underwriting for an issuer in which the firm or its affiliates, including MBD and other firm-managed private funds, have a material interest as a shareholder or creditor.

11. The Business Standards Committee recommends that Investment Management Division (IMD) funds that make alternative investments should be integrated into the firmwide Conflicts Resolution and Business Selection process in a manner consistent with their fiduciary duties. This recommendation reflects our objective of strengthening client relationships and reputational excellence.

12. To strengthen reputational excellence, the Business Standards Committee recommends that the firm review and update conflicts-related policies and procedures, as appropriate. The firm will make a consolidated and comprehensive compilation of these policies and procedures available to relevant personnel in connection with training and professional development initiatives. This compilation will also serve as an ongoing resource to the firm and its employees and facilitate monitoring by the Compliance and Internal Audit Departments. The Committee stresses that all employees share the responsibility to identify and elevate potential conflicts.

13. The Business Standards Committee recommends that the firm employ materials written in plain language that articulate:

(i)What it means that the firm has completed its conflicts resolution and business selection process in any particular situation; and

(ii)What other activities the firm may continue to conduct while we are advising or financing a particular client.

We recognize that the language in engagement letters and standard disclaimers is often complex. We will provide education and training for firm employees and encourage them to communicate with clients through discussions and plain language written presentations about our conflicts resolution and business selection process. We will tailor this material to the business of a specific division and update it over time. Each employee who interacts with clients will be responsible for understanding and communicating the guiding principles for conflicts resolution and business selection to clients and will be accountable for following them. This recommendation reflects our objectives of strengthening client relationships and reputational excellence and enhancing transparency of communication and disclosure.

14. The Business Standards Committee recommends that the firm enhance its training and professional development programs regarding conflicts resolution. These programs will be updated to focus on familiarizing people with the compilation of conflicts policies and procedures discussed in the prior recommendation. Each employee who interacts with clients will participate in these programs. This recommendation reflects our objectives of strengthening client relationships and reputational excellence and enhancing transparency of communication and disclosure.

Structured Products

The Business Standards Committee recommends establishing a global, consistent process for determining which transactions will be subject to enhanced review, approval and documentation. Specifically, the Committee recommends a three step identification process for designated structured, strategic and complex transactions as follows:

15. Designated Structured Transactions. The Structured Products Committee (SPC) will continue to review and approve all transactions that meet the requirements of a “designated structured transaction” under the charter of the SPC. Designated structured transactions are transactions, series of transactions or products where: (i) one of the client’s principal objectives appears to be to achieve a particular legal, regulatory, tax, or accounting treatment, including transferring assets off balance sheet; (ii) the proposed legal, regulatory, tax, or accounting treatment is materially uncertain; (iii) the product or transaction (or series of transactions) have substantially offsetting legs or lack economic substance,10 or (iv) the product or transaction (or series of transactions) could be characterized as a financing, but is structured in another manner. This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

16. Strategic Transactions. All strategic transactions will be subject to heightened review and approval. For this purpose, “strategic transactions” are transactions that are sufficiently large and important to a client or sufficiently large in the context of the market that they warrant heightened scrutiny. These transactions are often characterized by several of the following factors: (i) losses or gains from the transaction could reasonably be expected to materially impact the client’s financial position or have an adverse reputational impact on the firm; (ii) the transaction is likely to have a material impact on the market; (iii) the transaction requires the approval of the client’s Chief Financial Officer, Chief Executive Officer or Board of Directors; (iv) the transaction hedges a material acquisition, disposition or other business combination transaction by the client, and the hedge is material; (v) the transaction requires separate disclosure in the client’s financial statements or will otherwise be disclosed through a public filing; or (vi) the transaction represents a large financing commitment by the client. Strategic transactions may not involve complexity or unique structural features, but nevertheless merit heightened review because of these factors. This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

17. Complex Transactions. Complex transactions will also be subject to heightened review and approval. While not an exhaustive list, the following factors indicate complexity: (i) leverage; (ii) illiquidity; (iii) the potential for losses in excess of initial investment; (iv) lack of price transparency; and (v) non-linear payouts. The Committee has identified these factors to guide salespeople11 in deciding which transactions are complex and merit heightened review and approval. Not every transaction exhibiting these factors is complex—in fact these factors may be present in relatively simple transactions. Identifying complex transactions requires judgment. When in doubt, salespeople will seek guidance from their supervisor or the chairs of the Firmwide Suitability Committee (or their designees).

The Committee recommends the creation of new due diligence procedures. As part of the heightened review of complex and strategic transactions, salespeople will be required to complete a due diligence questionnaire that discusses the factors detailed above. The Firmwide New Activity Committee will also analyze these factors when reviewing a proposed new product or activity. This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

18. To strengthen client relationships and reputational excellence, the Business Standards Committee recommends redefining the firm’s approach to segmenting clients for suitability purposes into one of the following three segments:

professional investors (eg, banks, broker-dealers, investment advisers and hedge funds);

other institutional accounts (eg, municipalities, sovereigns, sub-sovereigns, pension funds, corporations, charities, foundations and endowments); and

high net worth accounts (eg, natural persons, family offices).

19. To strengthen client relationships and reputational excellence, the Business Standards Committee recommends the following additional enhancements to the firm’s overall pre-transaction sales practices:

A client profile will be maintained for each client in the form of a matrix (a Transaction Class Matrix or TCM) which reflects the types of transactions (eg, cash, options, contingent liabilities) and underliers (eg, equities, commodities, rates, credit) in which the client is pre-approved to transact from a suitability perspective. The TCM must be reviewed and approved by the relevant sales manager and Compliance officer before becoming effective and before being amended.

A heightened suitability review and approval will be required for any transaction or transaction class that falls outside a client’s TCM. The level of review and approval required will generally be based on: (i) the maximum probable exposure (MPE) for the transaction; (ii) the segment classification of the client determined as outlined in Recommendation 18 above; and (iii) the factors for determining complexity as outlined in Recommendation 17 above (collectively, Due Diligence Review Criteria). These Due Diligence Review Criteria will be included in the Due Diligence Questionnaire that sales professionals will complete when they seek approval for transactions with clients who have not been preapproved for those transactions.

All designated structured and strategic transactions will require heightened review even when a client is eligible to execute a transaction based on its TCM.

20. To strengthen client relationships and reputational excellence, the Business Standards Committee recommends the following post-transaction sales practices for structured products:

The firm will establish processes to monitor relevant metrics (eg, mark-to-market) for clients. Sales managers will be responsible for reviewing the results of this monitoring and taking appropriate actions on relevant transactions. There will be a mechanism for escalating issues to sales leadership and the Credit, Legal and Compliance Departments. Sales professionals will also be required to monitor the actual mark-to-market for transactions selected for heightened review and compare that mark-to-market against any previously analyzed stress test results that were provided to the client. In addition, divisional management will consider practices for monitoring the fulfillment by sales professionals of these post-transaction responsibilities for clients.

21. The Business Standards Committee recommends that each business unit that originates securities products12 be subject to consistent policies and standards, approval processes, disclosure requirements and oversight as contemplated by Recommendation 8. These controls will include the following: (i) each business unit will be required to have written policies and procedures incorporating minimum disclosure standards; (ii) the appropriate firmwide transaction oversight committee will review and approve the policies and procedures governing origination activities of each business unit; and (iii) each business unit will be required to designate a business supervisor who is responsible for its origination activities and compliance with applicable policies and procedures. This recommendation reflects our objectives of strengthening client relationships and reputational excellence.

22. To strengthen client relationships, reputational excellence and enhance transparency of communication and disclosure, the Business Standards Committee recommends as follows:

(i)The offering documents for securities products should include appropriate disclosure of risk factors, including risks arising from the instrument structure, underlying assets, market risks and counterparty credit risks. Where appropriate, investors will be provided with scenario analyses and stress test results. The firm will formalize disclosure standards to cover instances when the firm is underwriting a securities product that is collateralized by securities issued by Goldman Sachs (including when the securities product is issued by a special purpose vehicle). In those cases, the firm will disclose any material risks, including liquidity and credit concentration risks, associated with the collateral securities.

(ii)Business units must disclose to the relevant personnel responsible for approving a securities product any specific benefits to Goldman Sachs, in addition to underwriting fees.

(iii)The firm will continue to undertake appropriate due diligence reviews of issuers of securities products (including third-party issuers) and third-party managers. The business unit’s policies and procedures will address when, and under which circumstances, the firm should review existing due diligence of third-party issuers or managers. For any issuance involving a third-party issuer or manager, the business unit responsible for the transaction will confirm that it has followed the firm’s due diligence procedures.

23. To strengthen training and professional development, the Business Standards Committee recommends the development of cross-divisional training and professional development programs to implement the structured products recommendations. These programs will apply to all sales and trading personnel worldwide.

Transparency and Disclosure

24. The Business Standards Committee recommends reorganizing the firm’s three existing business segments into four business segments. The reorganized segment disclosure will provide more clarity as to the nature of the firm’s business activities, particularly the activities currently aggregated in the “Trading and Principal Investments” segment. This change will better demonstrate the importance of client franchise activities and client facilitation to our revenues. The four proposed business segments are:

Investment Banking: This segment will include the firm’s revenues from its activities as an advisor together with its debt and equity underwriting activities and revenues associated with derivative transactions directly related to an advisory or underwriting assignment.

Institutional Client Services: This new segment will include the firm’s revenues from client execution activities related to making markets in various products, which form an important part of the firm’s client franchise businesses. These activities are currently included in the Trading and Principal Investments segment. Institutional Client Services will also include the firm’s Securities Services business, which, under the existing segment construct, is aggregated into the “Asset Management and Securities Services” segment.

Investing & Lending: This new segment will include the firm’s revenues from investing and lending activities across various asset classes, primarily including debt and equity securities, loans, private equity and real estate.13 These activities include both direct investing and investing through funds. Under the existing segment construct, these activities are currently included in the Trading and Principal Investments segment.

Investment Management: This new segment will include the firm’s fee revenues earned in connection with its asset and wealth management businesses, including Goldman Sachs Asset Management (GSAM), Private Wealth Management and the firm’s merchant banking funds. In addition to management and incentive fee revenues, this segment will also include transaction revenues related to the firm’s Private Wealth Management business, including commissions and spreads.

25. The Business Standards Committee recommends that the firm disclose a simplified balance sheet showing assets by business unit/activity, including:

Excess Liquidity: the amount of available cash and highly liquid securities the firm maintains over and above its day-to-day liquidity needs;

Secured Client Financing: the assets related to secured funding provided to clients in the firm’s prime brokerage, matched book and futures businesses, as well as client margin lending positions;

Institutional Client Services: the inventory related to the firm’s client facilitation business, secured financing agreements and trading-related receivables;

Investing & Lending: the assets related to the firm’s investing and lending activities, primarily including debt and equity securities, loans, private equity and real estate investments. These investments may be held directly or through funds; and

Other Assets: primarily includes the firm’s goodwill, intangibles and physical property.

26. The Business Standards Committee recommends that the firm (i) enhance disclosure with respect to liquidity stress tests by including details on both scenario assumptions and modeling parameters, as well as to provide substantial qualitative detail on the contractual and contingent cash and collateral outflows considered by the firm’s Modeled Liquidity Outflow14 and (ii) provide incremental qualitative detail on how the firm sizes its excess liquidity.

27. The Business Standards Committee recommends that the firm implement the following:

Describe, in greater detail and in plain language, the firm’s risk management structure, culture and processes. This description will include detail on (i) the firm’s risk management governance structure, including the interaction between business units and independent control functions; (ii) how the firm uses committees to assist in managing risk, including a description of the relevant committees’ specific mandates and membership; and (iii) the firm’s risk management processes, including its use of mark-to-market, risk limits, price verification and active position management, and robust systems to ensure the timely delivery of comprehensive and reliable data.

Substantially enhance the discussion of Operational Risk, reflecting its increasing importance to the firm.

Provide additional qualitative disclosure regarding the Internal Capital Adequacy Assessment Process15 (ICAAP) to explain more clearly this aspect of how the firm manages capital.

Expand the description of credit risk to (i) include additional credit risks, such as loans and other non-derivative exposures, in our quantitative disclosure; (ii) provide increased granularity on credit exposures by industry and region; and (iii) qualitatively describe the firm’s recent credit experiences.

28. To improve the clarity of our overall disclosure, the Business Standards Committee recommends that the firm (i) rewrite its business description in the Form 10-K and its Annual Report to shareholders in plain language to better explain our business activities, our performance and how it relates to serving clients and (ii) reorganize its financial disclosure to consolidate related topics to remove, where possible, repetitive information described in both the Management Discussion and Analysis (MD&A) and financial statements, and to improve the overall clarity of the disclosure.

Committee Governance

29. The Business Standards Committee recommends that the following changes be made:

Establish a “Firmwide Client and Business Standards Committee.” The Client and Business Standards Committee will function as a high-level committee that assesses and makes determinations regarding business practices, reputational risk management and client relationships. This committee will initially be chaired by the firm’s President and Chief Operating Officer and will report to the Management Committee. Its responsibilities will include:

designing and implementing a comprehensive firmwide program to enhance our client franchise;

overseeing cross-divisional client coordination and annual client strategy reviews by division;

regularly reviewing the operational and reputational risks of the producing divisions and certain control functions;

resolving cross-divisional business practices and business selection matters;

resolving appeals of business practices, suitability and reputational matters from other firm committees;

periodically soliciting and assessing client views of the firm and addressing client concerns and incidents;

overseeing divisional and regional Client and Business Standards Committees—formerly divisional and regional Business Practices Committees—and the newly formed Firmwide Suitability Committee and Firmwide New Activity Committee;

commissioning cross-divisional committee reviews to identify best practices and/or to address emerging themes;

overseeing the implementation of Business Standards Committee recommendations, where appropriate; and

overseeing the Conflicts Resolution and Business Selection Group.

Establish a “Committee Operating Group” of the Client and Business Standards Committee. A Committee Operating Group will be established to assist the Client and Business Standards Committee in carrying out its functions. The Committee Operating Group will be headed by a senior leader reporting into the Chair of the Client and Business Standards Committee.

This recommendation reflects our objectives of strengthening client relationships, reputational excellence and committee governance.

The Business Standards Committee recommends:

30. Strengthen Procedures of Divisional and Regional Client and Business Standards Committees. The operating procedures of the divisional and regional CBSCs will strengthen accountability for reputational risk management and client relationships as follows:

appropriate senior leadership from divisions and regions will chair each divisional and regional CBSC. The Chairs of these regional and divisional committees will coordinate with the Chair of the CBSC in selecting members;

membership also will include senior control function leaders and, where appropriate, senior advisors such as retired PMDs. These members will help identify and elevate cross-divisional matters;

the divisional and regional CBSCs will be responsible for providing regular substantive reports to the Firmwide CBSC; and

unresolved matters and appeals will be escalated to the Firmwide CBSC.

This recommendation reflects our objectives of strengthening reputational excellence and committee governance.

The Business Standards Committee recommends that the following enhancements be made to the suitability and new activity review processes:

31. Establish a “Firmwide Suitability Committee.” A Firmwide Suitability Committee will be established, reporting to the Client and Business Standards Committee. This new committee will replace the existing Regional Suitability Committees. In addition, to address time zone practicalities, an Asia Suitability Committee will be formed, which will report to the Firmwide Suitability Committee. The Firmwide Suitability Committee will have the following responsibilities:

review transactions originating in EMEA and the Americas that require review as set forth in Section IV of this report relating to Structured Products;

set standards and policies for product, transaction and client suitability and provide a forum for more consistency across divisions, regions and products on suitability assessments;

review suitability matters escalated from other firm committees; and

oversee the activities of the Asia Suitability Committee, Structured Products Committee and Structured Investment Products Committee.

To facilitate consistent firmwide standards and practices for suitability assessments, the charters of the Firmwide Suitability Committee and the Asia Suitability Committee will require: (i) certain membership overlap; (ii) regular reports by the Asia Suitability Committee to the Firmwide Suitability Committee; and (iii) escalation of significant Asia-specific suitability matters by the Asia Suitability Committee to the Firmwide Suitability Committee.

Establish a “Firmwide New Activity Committee.” A Firmwide New Activity Committee will be established, replacing the existing Firmwide New Products Committee. The Firmwide New Activity Committee will report to the Client and Business Standards Committee and will have the following responsibilities:

for significant matters, answer the critical question of “should we” engage in the new activity (considering reputational, client, suitability and other concerns) as well as a detailed “can we” review, recognizing that divisional and regional business leadership must analyze both questions prior to sponsoring a matter;

oversee the activities of the Regional New Products Committees, Acquisition Review Committee and Physical Commodity Review Committee; and

establish a process to identify and review previously approved new activities that are significant and that have changed in complexity and/or structure or present different reputational and suitability concerns over time to consider whether these activities remain appropriate.

Considering the similarity of issues that may arise in the review of suitability matters related to transactions and new activities, the Business Standards Committee expects that the Firmwide Suitability Committee and Firmwide New Activity Committee will coordinate regularly to harmonize best practices and ensure a consistent approach. The two committees will have certain overlapping members.

This recommendation reflects our objectives of strengthening reputational excellence and committee governance.

32. Establish the “Event Review Group.” The Business Standards Committee recommends that an Event Review Group be on call to senior management and select firmwide committees to perform time-sensitive, high-profile targeted reviews of incidents or other business or industry matters of concern. The Event Review Group will comprise a rotating group of seasoned firm leaders. They will have the ability to assemble resources and work closely with the Legal and Compliance Departments and other relevant control groups. The Event Review Group will document and disseminate its findings to the appropriate constituents, and develop remediation, training and education initiatives. This recommendation reflects our objectives of strengthening reputational excellence, committee governance and training and professional development.

The Business Standards Committee recommends the following improvements to committee procedures:

33. Reputational Risk Ownership. Committee charters will reinforce the committees’ ownership and accountability for, among other things, reputational risk management.

Firmwide Risk Committee Reporting. The Finance Committee and its subcommittees will report to the Firmwide Risk Committee, and the Firmwide Risk Committee will report to the Management Committee.

Capital and Commitments Committees. The Capital Committee will report to the Firmwide Risk Committee, and the Commitments Committees will report to the Client and Business Standards Committee. On reputational risk issues, both committees will engage with the Client and Business Standards Committee. On capital commitments issues, both committees will work with the Firmwide Risk Committee.

Both the Capital and Commitments Committees play significant roles in reviewing underwritings and firm capital commitments. Accordingly, each of these committee’s charters will be amended to require certain membership overlap to ensure a consistent approach to reputational risk management and best practices.

Formal Committee Process Framework. The Committee Operating Group of the Client and Business Standards Committee will be responsible for establishing and maintaining a formal policy framework for committee best practices, processes and procedures governing all aspects of committee operations, including charters, regular meeting agendas, minutes and statements of action. The Committee Operating Group will require formal, periodic self assessments by committees of their activities and effectiveness, including member participation. These results will be presented to their supervising committee. The Client and Business Standards Committee and the Management Committee will be able to review these self assessments.

This recommendation reflects our objectives of strengthening reputational excellence and committee governance.

Training and Professional Development

The Business Standards Committee makes the following recommendations on our culture and leadership:

34. The firm will initiate professional development and training, beginning with its senior leaders, to immediately focus those leaders on reinforcing the firm’s culture and on strengthening client relationships and reputational excellence. In addition, the firm will use milestones in people’s careers as opportunities for targeted training on the Goldman Sachs culture. This recommendation reflects our objectives of strengthening client relationships, reputational excellence and training and professional development.

35. Our Chairman and CEO will lead the new Chairman’s Forum on Clients and Business Standards, a global program engaging all of the firm’s 2,200 PMDs and EMDs. This initiative will represent a large investment of time of our senior management team over the course of 2011 and will reinforce the most important attributes of our culture through in-depth discussions and case studies. The significant involvement of the CEO and other senior management communicates the importance of the program and its messages. This recommendation reflects our objectives of strengthening client relationships, reputational excellence and training and professional development.

36. To strengthen reputational excellence, the Business Standards Committee recommends that the firm emphasize the following criteria in the annual performance review process: (i) adherence to reputational risk management and (ii) reputational judgment and compliance. These enhancements were implemented for the 2010 performance review process.

37. To strengthen training and professional development, the Business Standards Committee recommends that the firm and each affected division design and implement training and professional development programs which address the Committee’s specific recommendations.

38. The Business Standards Committee recommends that the firm strengthen its focus on the importance of leadership, culture and values in the PMD and EMD promotion process by communicating to all involved their responsibility to thoroughly evaluate candidates on these attributes. This was accomplished in the 2010 PMD and EMD promotion process.

Communications during performance reviews, promotion and compensation conversations must be clear and specific so that our employees understand the correlation between recognition and behaviour, particularly behaviour related to leadership, culture and values.

This recommendation reflects our objective of strengthening reputational excellence.

39. To strengthen reputational excellence and training and professional development, the Business Standards Committee recommends that the firm update and strengthen the Code of Business Conduct and Ethics. Through that process, we will signal its importance and articulate the need for every employee to operate in accordance with the code. The firm should reinforce the importance of the Code of Business Conduct and Ethics by requiring employees to certify their compliance with the Code, highlighting it in orientation and training sessions and posting it more prominently on the firm’s external and internal website.

APPENDIX C

GOLDMAN SACHS’ COMPENSATION PRINCIPLES

We recognize that every financial institution is different, shaped by its activities, size, history and culture. It would be unrealistic to construct a specific model of compensation that is effective and appropriate for all financial institutions.

But, that does not diminish the need for firms to set forth a set of practical principles and defined standards focused on compensation. An enhanced framework for compensation establishes a direct relationship between the longer-term evaluation of performance and an appropriately matched incentive structure. We believe strongly that, for Goldman Sachs, such an outcome aligns the long-term interests of our shareholders with those of our people, while advancing our ethos of partnership.

Effective compensation practices should:

(1)Encourage a real sense of teamwork and communication, binding individual short-term interests to the institution’s long-term interests;

(2)Evaluate performance on a multi-year basis;

(3)Discourage excessive or concentrated risk taking;

(4)Allow an institution to attract and retain proven talent; and

(5)Align aggregate compensation for the firm with performance over the cycle.

Encourage a Firmwide Orientation and Culture

Compensation should reflect the performance of the firm as a whole.

Employees should think and act like long-term shareholders. Being significantly invested in our stock over time, as part of an individual’s compensation, advances our partnership culture of stewardship for the firm.

An individual’s performance evaluation should include annual narrative feedback from superiors, subordinates and peers, including peers from outside of an individual’s business unit and division.

Assessment areas should include productivity, teamwork, citizenship, communication and compliance.

To avoid misaligning compensation and performance, guaranteed employment contracts should be used only in exceptional circumstances (for example, for new hires) and multiyear guarantees should be avoided entirely.

Evaluate Performance Over Time

Compensation should include an annual salary (or commissions) plus, as appropriate, discretionary compensation awarded at the end of the year.

The percentage of compensation awarded in cash should decrease as an employee’s total compensation increases in order for long-term performance to remain the overriding aspiration to realizing full compensation.

Cash compensation in a single year should not be so much as to overwhelm the value ascribed to longer term stock incentives that can only be realized through longer term responsible behaviour.

Equity awards should be subject to vesting and other restrictions over an extended period of time.

These would allow for forfeiture or “clawback” effect in the event that conduct or judgment results in a restatement of the firm’s financial statements or other significant harm to the firm’s business.

A clawback should also exist for cause, including any individual misconduct that results in legal or reputational harm.

Equity delivery schedules should continue to apply after an individual has left the firm.

Discourage Excessive or Concentrated Risk Taking

No one in a risk taking role should get compensated with reference to only his or her own P&L.

Contracts or evaluations should not be based on the percentage of revenues generated by a specific individual.

As part of an individual’s annual performance review, the different risk profile of businesses must be taken into account. Factors like liquidity risk, cost of capital, reputation risk, the time horizon of risks and other relevant factors should be considered.

An outsized gain, just like an outsized loss, should be evaluated in the context of the cumulative record of that individual’s risk judgments.

The degree to which revenues are high quality and recurring should be considered.

Significant discretionary compensation for a particular year should not be awarded for expected future-year revenue.

All individuals, but particularly those working in legal, compliance, operations, technology and other non-revenue and critical parts of the firm, should be evaluated on their ability to protect and enhance the firm’s reputation or contribute to its efficiency and overall well-being.

Risk managers should have equal stature with counterparts in business units and compensation should establish and/or maintain that stature.

Revenue producers should not determine compensation for risk managers.

Attract and Retain Talent

Attracting and retaining talent is fundamental to our long-term success as a firm. Compensation, when structured appropriately, is one means to reinforcing the firm’s culture and mores.

Compensation should reward an individual’s ability to identify and create value, enhance the firm’s culture of compliance and its reputation and build and nurture a dedicated client base.

The recognition of individual performance must be constrained within the overall limits of the firm and not be out of line with the competitive market for the relevant talent and performance.

There should be no special or unique severance agreements.

Directly Align Firmwide Compensation with Firmwide Performance

Firmwide compensation should directly relate to firmwide performance over the cycle.

Junior people may experience less volatility in compensation. Senior and more highly paid people may experience more variability in their compensation based on year-to-year changes in the firm’s results.

Overall compensation should not automatically be the same ratio of revenues year in and year out or an overly flexible formula that produces outsized compensation to real long-term performance.

Any compensation decisions should be overlaid with a management culture that continually invests in and is guided by strong risk management, judgment and controls.

In addition to performance, a wide range of risk factors, in conjunction with underlying industry and market dynamics of individual businesses, should be weighed carefully by executive and divisional management when allocating aggregate discretionary compensation amounts to divisions and business units.

To more effectively compare and contrast individual performance as well as the results across different businesses, compensation should be reviewed by a specific compensation committee within each division of the firm as well as the firmwide compensation committee.

8 March 2013

1 In this submission we refer to The Goldman Sachs Group, Inc. and its subsidiaries together as the “firm”.

2 The Client and Business Standards Committee assesses and makes determinations regarding business standards and practices, reputational risk management and client service.

3 The Risk Committee is responsible for the on-going monitoring and management of all financial risks associated with the activities of the firm.

4 The Capital Committee provides approval and oversight of debt-related transactions, including principal commitments of the firm’s capital.

5 The Commitments Committee reviews the firm’s underwriting and distribution activities with respect to certain products and transactions, including underwriting equity securities.

6 These are contained in two public comment letters submitted to the U.S. regulators on 13 February 2012.

7 We will continue to permit written communications with views that are consistent with recently-published GIR research or that attaches, summarizes or references that research.

8 Offerings and syndications of investment grade debt and offerings and trading of asset-backed and mortgage-backed securities are generally excluded because of their frequency and because they generally are not material to the issuer or originator of the underlying assets, in each case unless otherwise determined by the Capital Committee or a subcommittee thereof. Municipal and not-for-profit issuers will be treated as issuers of high yield corporate debt.

9 Rules to be adopted as part of financial regulatory reform may limit or restrict certain of the activities described above between Goldman Sachs and MBD funds, other firm-managed funds and / or portfolio companies controlled by those funds.

10 “Offsetting legs” refers to cash flows under different parts of a transaction (or group of related transactions) which from an economic perspective cancel each other out. Transactions with offsetting legs may lack economic substance. Transactions without economic substance have not been and will not be approved by the SPC.

11 References to salespeople include, where the context requires, marketers, structurers and other members of the Goldman Sachs business team that work on structured products.

12 “Securities products” refers to new issue securities sold by means of an offering document; it does not include bilateral derivative transactions.

13 In the years through 2010, this segment also included the results of the firm’s proprietary trading business, “Principal Strategies”. The assets related to these activities were substantially liquidated during 2010.

14 Modeled Liquidity Outflow (MLO) is the firm’s internal liquidity model that identifies and quantifies potential contractual and contingent cash and collateral outflows during both a market-wide and Goldman Sachs-specific stress situation.

15 The firm’s Internal Capital Adequacy Assessment Process (ICAAP) ensures that the firm is appropriately capitalized relative to the risks of its businesses. ICAAP incorporates an internal risk based capital (IRBC) assessment designed to identify and measure risks associated with the firm’s business activities, including market risk, credit risk and operational risk. Capital adequacy is evaluated based on the result of this IRBC assessment as well as using the results of stress tests which measure the firm’s performance under various market conditions.

Prepared 19th June 2013