Risk & Compliance

A Trademark Move

Financial-services firms are entering legal terrain that Internet pioneers staked out in the late 1990s.
Ilan MochariOctober 6, 2004

In the late 1990s, business-method patents came into vogue as Internet pioneers staked out intellectual property. Priceline.com patented its “reverse auction” sales method in 1998, for example, and Amazon.com patented its “one-click” ordering system a year later.

Now financial-services firms are getting into the act. In July, Goldman Sachs & Co. received a patent for a hedging strategy. “We’ve locked down for our shareholders our best thinking on a tough problem,” says John A. Squires, chief patent counsel for Goldman Sachs.

Conceived by managing director David J. Marshall, the hedging strategy addresses the risks faced by companies offering deferred-compensation plans. Typically, companies hedge these plans either through corporate-owned life insurance (COLI) or by buying the same mutual funds selected by participating employees. Neither approach is bulletproof: COLI plans have some tax effects, and some carriers permit only limited investment options; mutual funds generate taxable income if the plan sponsor adjusts its holdings to mirror changes employees make in their allocations.

In Goldman Sachs’s hedging strategy, a plan sponsor enters into a “total return swap” with a third-party swap provider. The plan sponsor pays a LIBOR-based rate, and the swap provider pays the rate of return of the deferred-compensation liability. The swap is periodically reset to reflect changes in the size or aggregate allocations of the deferred-comp liability. The firm has developed software for this periodic calculation, and patent 6,766,303 covers both the hedging strategy and the software.

Other financial-services firms are seeking protection for their intellectual property. As of August, Goldman Sachs had a total of 4 patents (including 3 for software and hardware), making it a mere piker compared with Citigroup (39) and Merrill Lynch (26).

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