Proposed Exemptions; Alex. Brown & Sons, Inc. (ABS) et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-9801, et al.]

Proposed Exemptions; Alex. Brown & Sons, Inc. (ABS) et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

Retirement income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, within 45 days from the

date of publication of this Federal Register Notice. Comments and

request for a hearing should state: (1) The name, address, and

telephone number of the person making the comment or request, and (2)

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

request for a hearing must also state the issues to be addressed and

include a general description of the evidence to be presented at the

hearing. A request for a hearing must also state the issues to be

addressed and include a general description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, NW., Washington, DC

20210. Attention: Application No. stated in each Notice of Proposed

Exemption. The applications for exemption and the comments received

will be available for public inspection in the Public Documents Room of

Pension and Welfare Benefits Administration, U.S. Department of Labor,

Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

Register. Such notice shall include a copy of the notice of proposed

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (43 FR 47713, October 17, 1978) transferred the authority of

the Secretary of the Treasury to issue exemptions of the type requested

to the Secretary of Labor. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

statement of the facts and representations.

Alex. Brown & Sons, Incorporated (ABS)

Located in Baltimore, Maryland

[Application No. D-9801]

Proposed Exemption

I. Transactions

A. Effective August 12, 1994, the restrictions of sections 406(a)

and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b)

of the Code by reason of section 4975(c)(1) (A) through (D) of the Code

shall not apply to the following transactions involving trusts and

certificates evidencing interests therein:

(1) The direct or indirect sale, exchange or transfer of

certificates in the initial issuance of certificates between the

sponsor or underwriter and an employee benefit plan when the sponsor,

servicer, trustee or insurer of a trust, the underwriter of the

certificates representing an interest in the trust, or an obligor is a

party in interest with respect to such plan;

(2) The direct or indirect acquisition or disposition of

certificates by a plan in the secondary market for such certificates;

and

(3) The continued holding of certificates acquired by a plan

pursuant to subsection I.A. (1) or (2).

Notwithstanding the foregoing, section I.A. does not provide an

exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and

407 for the acquisition or holding of a certificate on behalf of an

Excluded Plan by any person who has discretionary authority or renders

investment advice with respect to the assets of that Excluded Plan.\1\

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\1\Section I.A. provides no relief from sections 406(a)(1)(E),

406(a)(2) and 407 for any person rendering investment advice to an

Excluded Plan within the meaning of section 3(21)(A)(ii) and

regulation 29 CFR 2510.3-21(c).

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B. Effective August 12, 1994, the restrictions of sections

406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section

4975 (a) and (b) of the Code by reason of section 4975(c)(1)(E) of the

Code shall not apply to:

(1) The direct or indirect sale, exchange or transfer of

certificates in the initial issuance of certificates between the

sponsor or underwriter and a plan when the person who has discretionary

authority or renders investment advice with respect to the investment

of plan assets in the certificates is (a) an obligor with respect to 5

percent or less of the fair market value of obligations or receivables

contained in the trust, or (b) an affiliate of a person described in

(a); if:

(i) The plan is not an Excluded Plan;

(ii) Solely in the case of an acquisition of certificates in

connection with the initial issuance of the certificates, at least 50

percent of each class of certificates in which plans have invested is

acquired by persons independent of the members of the Restricted Group

and at least 50 percent of the aggregate interest in the trust is

acquired by persons independent of the Restricted Group;

(iii) A plan's investment in each class of certificates does not

exceed 25 percent of all of the certificates of that class outstanding

at the time of the acquisition; and

(iv) Immediately after the acquisition of the certificates, no

more than 25 percent of the assets of a plan with respect to which the

person has discretionary authority or renders investment advice are

invested in certificates representing an interest in a trust containing

assets sold or serviced by the same entity.\2\ For purposes of this

paragraph B.(1)(iv) only, an entity will not be considered to service

assets contained in a trust if it is merely a subservicer of that

trust;

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\2\For purposes of this exemption, each plan participating in a

commingled fund (such as a bank collective trust fund or insurance

company pooled separate account) shall be considered to own the same

proportionate undivided interest in each asset of the commingled

fund as its proportionate interest in the total assets of the

commingled fund as calculated on the most recent preceding valuation

date of the fund.

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(2) The direct or indirect acquisition or disposition of

certificates by a plan in the secondary market for such certificates,

provided that the conditions set forth in paragraphs B.(1) (i), (iii)

and (iv) are met; and

(3) The continued holding of certificates acquired by a plan

pursuant to subsection I.B. (1) or (2).

C. Effective August 12, 1994, the restrictions of sections 406(a),

406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a)

and (b) of the Code by reason of section 4975(c) of the Code, shall not

apply to transactions in connection with the servicing, management and

operation of a trust, provided:

(1) Such transactions are carried out in accordance with the terms

of a binding pooling and servicing arrangement; and

(2) The pooling and servicing agreement is provided to, or

described in all material respects in the prospectus or private

placement memorandum provided to, investing plans before they purchase

certificates issued by the trust.3

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\3\In the case of a private placement memorandum, such

memorandum must contain substantially the same information that

would be disclosed in a prospectus if the offering of the

certificates were made in a registered public offering under the

Securities Act of 1933. In the Department's view, the private

placement memorandum must contain sufficient information to permit

plan fiduciaries to make informed investment decisions.

Notwithstanding the foregoing, section I.C. does not provide an

exemption from the restrictions of section 406(b) of the Act or from

the taxes imposed by reason of section 4975(c) of the Code for the

receipt of a fee by a servicer of the trust from a person other than

the trustee or sponsor, unless such fee constitutes a ``qualified

administrative fee'' as defined in section III.S.

D. Effective August 12, 1994, the restrictions of sections 406(a)

and 407(a) of the Act, and the taxes imposed by sections 4975(a) and

(b) of the Code by reason of sections 4975(c)(1)(A) through (D) of the

Code, shall not apply to any transactions to which those restrictions

or taxes would otherwise apply merely because a person is deemed to be

a party in interest or disqualified person (including a fiduciary) with

respect to a plan by virtue of providing services to the plan (or by

virtue of having a relationship to such service provider described in

section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2) (F),

(G), (H) or (I) of the Code), solely because of the plan's ownership of

certificates.

II. General Conditions

A. The relief provided under Part I is available only if the

following conditions are met:

(1) The acquisition of certificates by a plan is on terms

(including the certificate price) that are at least as favorable to the

plan as they would be in an arm's-length transaction with an unrelated

party;

(2) The rights and interests evidenced by the certificates are not

subordinated to the rights and interests evidenced by other

certificates of the same trust;

(3) The certificates acquired by the plan have received a rating at

the time of such acquisition that is in one of the three highest

generic rating categories from either Standard & Poor's Corporation

(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.

(D & P) or Fitch Investors Service, Inc. (Fitch);

(4) The trustee is not an affiliate of any member of the Restricted

Group. However, the trustee shall not be considered to be an affiliate

of a servicer solely because the trustee has succeeded to the rights

and responsibilities of the servicer pursuant to the terms of a pooling

and servicing agreement providing for such succession upon the

occurrence of one or more events of default by the servicer;

(5) The sum of all payments made to and retained by the

underwriters in connection with the distribution or placement of

certificates represents not more than reasonable compensation for

underwriting or placing the certificates; the sum of all payments made

to and retained by the sponsor pursuant to the assignment of

obligations (or interests therein) to the trust represents not more

than the fair market value of such obligations (or interests); and the

sum of all payments made to and retained by the servicer represents not

more than reasonable compensation for the servicer's services under the

pooling and servicing agreement and reimbursement of the servicer's

reasonable expenses in connection therewith; and

(6) The plan investing in such certificates is an ``accredited

investor'' as defined in Rule 501(a)(1) of Regulation D of the

Securities and Exchange Commission under the Securities Act of 1933.

B. Neither any underwriter, sponsor, trustee, servicer, insurer, or

any obligor, unless it or any of its affiliates has discretionary

authority or renders investment advice with respect to the plan assets

used by a plan to acquire certificates, shall be denied the relief

provided under Part I, if the provision of subsection II.A.(6) above is

not satisfied with respect to acquisition or holding by a plan of such

certificates, provided that (1) such condition is disclosed in the

prospectus or private placement memorandum; and (2) in the case of a

private placement of certificates, the trustee obtains a representation

from each initial purchaser which is a plan that it is in compliance

with such condition, and obtains a covenant from each initial purchaser

to the effect that, so long as such initial purchaser (or any

transferee of such initial purchaser's certificates) is required to

obtain from its transferee a representation regarding compliance with

the Securities Act of 1933, any such transferees will be required to

make a written representation regarding compliance with the condition

set forth in subsection II.A.(6) above.

III. Definitions

For purposes of this exemption:

A. ``Certificate'' means:

(1) A certificate--

(a) that represents a beneficial ownership interest in the assets

of a trust; and

(b) that entitles the holder to pass-through payments of principal,

interest, and/or other payments made with respect to the assets of such

trust; or

(2) A certificate denominated as a debt instrument--

(a) that represents an interest in a Real Estate Mortgage

Investment Conduit (REMIC) within the meaning of section 860D(a) of the

Internal Revenue Code of 1986; and

(b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which ABS

or any of its affiliates is either (i) the sole underwriter or the

manager or co-manager of the underwriting syndicate, or (ii) a selling

or placement agent.

For purposes of this exemption, references to ``certificates

representing an interest in a trust'' include certificates denominated

as debt which are issued by a trust.

B. ``Trust'' means an investment pool, the corpus of which is held

in trust and consists solely of:

(1) Either

(a) secured consumer receivables that bear interest or are

purchased at a discount (including, but not limited to, home equity

loans and obligations secured by shares issued by a cooperative housing

association);

(b) secured credit instruments that bear interest or are purchased

at a discount in transactions by or between business entities

(including, but not limited to, qualified equipment notes secured by

leases, as defined in section III.T);

(c) obligations that bear interest or are purchased at a discount

and which are secured by single-family residential, multi-family

residential and commercial real property (including obligations secured

by leasehold interests on commercial real property);

(d) obligations that bear interest or are purchased at a discount

and which are secured by motor vehicles or equipment, or qualified

motor vehicle leases (as defined in section III.U);

(e) ``guaranteed governmental mortgage pool certificates,'' as

defined in 29 CFR 2510.3-101(i)(2);

(f) fractional undivided interests in any of the obligations

described in clauses (a)-(e) of this section B.(1);

(2) Property which had secured any of the obligations described in

subsection B.(1);

(3) Undistributed cash or temporary investments made therewith

maturing no later than the next date on which distributions are to be

made to certificateholders; and

(4) Rights of the trustee under the pooling and servicing

agreement, and rights under any insurance policies, third-party

guarantees, contracts of suretyship and other credit support

arrangements with respect to any obligations described in subsection

B.(1).

Notwithstanding the foregoing, the term ``trust'' does not include

any investment pool unless: (i) the investment pool consists only of

assets of the type which have been included in other investment pools,

(ii) certificates evidencing interests in such other investment pools

have been rated in one of the three highest generic rating categories

by S&P's, Moody's, D & P, or Fitch for at least one year prior to the

plan's acquisition of certificates pursuant to this exemption, and

(iii) certificates evidencing interests in such other investment pools

have been purchased by investors other than plans for at least one year

prior to the plan's acquisition of certificates pursuant to this

exemption.

C. ``Underwriter'' means:

(1) ABS;

(2) Any person directly or indirectly, through one or more

intermediaries, controlling, controlled by or under common control with

ABS; or

(3) Any member of an underwriting syndicate or selling group of

which ABS or a person described in (2) is a manager or co-manager with

respect to the certificates.

D. ``Sponsor'' means the entity that organizes a trust by

depositing obligations therein in exchange for certificates.

E. ``Master Servicer'' means the entity that is a party to the

pooling and servicing agreement relating to trust assets and is fully

responsible for servicing, directly or through subservicers, the assets

of the trust.

F. ``Subservicer'' means an entity which, under the supervision of

and on behalf of the master servicer, services loans contained in the

trust, but is not a party to the pooling and servicing agreement.

G. ``Servicer'' means any entity which services loans contained in

the trust, including the master servicer and any subservicer.

H. ``Trustee'' means the trustee of the trust, and in the case of

certificates which are denominated as debt instruments, also means the

trustee of the indenture trust.

I. ``Insurer'' means the insurer or guarantor of, or provider of

other credit support for, a trust. Notwithstanding the foregoing, a

person is not an insurer solely because it holds securities

representing an interest in a trust which are of a class subordinated

to certificates representing an interest in the same trust.

J. ``Obligor'' means any person, other than the insurer, that is

obligated to make payments with respect to any obligation or receivable

included in the trust. Where a trust contains qualified motor vehicle

leases or qualified equipment notes secured by leases, ``obligor''

shall also include any owner of property subject to any lease included

in the trust, or subject to any lease securing an obligation included

in the trust.

K. ``Excluded Plan'' means any plan with respect to which any

member of the Restricted Group is a ``plan sponsor'' within the meaning

of section 3(16)(B) of the Act.

L. ``Restricted Group'' with respect to a class of certificates

means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

(6) Any obligor with respect to obligations or receivables included

in the trust constituting more than 5 percent of the aggregate

unamortized principal balance of the assets in the trust, determined on

the date of the initial issuance of certificates by the trust; or

(7) Any affiliate of a person described in (1)-(6) above.

M. ``Affiliate'' of another person includes:

(1) Any person directly or indirectly, through one or more

intermediaries, controlling, controlled by, or under common control

with such other person;

(2) Any officer, director, partner, employee, relative (as defined

in section 3(15) of the Act), a brother, a sister, or a spouse of a

brother or sister of such other person; and

(3) Any corporation or partnership of which such other person is an

officer, director or partner.

N. ``Control'' means the power to exercise a controlling influence

over the management or policies of a person other than an individual.

O. A person will be ``independent'' of another person only if:

(1) Such person is not an affiliate of that other person; and

(2) The other person, or an affiliate thereof, is not a fiduciary

who has investment management authority or renders investment advice

with respect to any assets of such person.

P. ``Sale'' includes the entrance into a forward delivery

commitment (as defined in section Q below), provided:

(1) The terms of the forward delivery commitment (including any fee

paid to the investing plan) are no less favorable to the plan than they

would be in an arm's length transaction with an unrelated party;

(2) The prospectus or private placement memorandum is provided to

an investing plan prior to the time the plan enters into the forward

delivery commitment; and

(3) At the time of the delivery, all conditions of this exemption

applicable to sales are met.

Q. ``Forward delivery commitment'' means a contract for the

purchase or sale of one or more certificates to be delivered at an

agreed future settlement date. The term includes both mandatory

contracts (which contemplate obligatory delivery and acceptance of the

certificates) and optional contracts (which give one party the right

but not the obligation to deliver certificates to, or demand delivery

of certificates from, the other party).

R. ``Reasonable compensation'' has the same meaning as that term is

defined in 29 CFR 2550.408c-2.

S. ``Qualified Administrative Fee'' means a fee which meets the

following criteria:

(1) The fee is triggered by an act or failure to act by the obligor

other than the normal timely payment of amounts owing in respect of the

obligations;

(2) The servicer may not charge the fee absent the act or failure

to act referred to in (1);

(3) The ability to charge the fee, the circumstances in which the

fee may be charged, and an explanation of how the fee is calculated are

set forth in the pooling and servicing agreement; and

(4) The amount paid to investors in the trust will not be reduced

by the amount of any such fee waived by the servicer.

T. ``Qualified Equipment Note Secured By A Lease'' means an

equipment note:

(1) Which is secured by equipment which is leased;

(2) Which is secured by the obligation of the lessee to pay rent

under the equipment lease; and

(3) With respect to which the trust's security interest in the

equipment is at least as protective of the rights of the trust as the

trust would be have if the equipment note were secured only by the

equipment and not the lease.

U. ``Qualified Motor Vehicle Lease'' means a lease of a motor

vehicle where:

(1) The trust holds a security interest in the lease;

(2) The trust holds a security interest in the leased motor

vehicle; and

(3) The trust's security interest in the leased motor vehicle is at

least as protective of the trust's rights as the trust would receive

under a motor vehicle installment loan contract.

V. ``Pooling and Servicing Agreement'' means the agreement or

agreements among a sponsor, a servicer and the trustee establishing a

trust. In the case of certificates which are denominated as debt

instruments, ``Pooling and Servicing Agreement'' also includes the

indenture entered into by the trustee of the trust issuing such

certificates and the indenture trustee.

Effective Date: This exemption, if granted, will be effective for

transactions occurring on or after August 12, 1994.

Summary of Facts and Representations

1. ABS, an investment banking firm, provides financial advice to,

and raises capital for, a broad range of domestic and international

clients. ABS conducts business from its headquarters in Baltimore and

in various cities across the United States, as well as London and

Geneva. ABS is the oldest banking firm in the United States, having

been in business since 1800. Since its inception, ABS has been very

active in the government bond, corporate equity and municipal finance

and housing finance areas. As of December 31, 1993, ABS had total

assets of over $1.2 billion and total shareholder's equity of over $345

million. For the year ended December 31, 1993, ABS had gross revenues

of over $628 million and net earnings, after income taxes, of over $89

million.

Trust Assets

2. ABS seeks exemptive relief to permit plans to invest in pass-

through certificates representing undivided interests in the following

categories of trusts: (1) Single and multi-family residential or

commercial mortgage investment trusts;\4\ (2) motor vehicle receivable

investment trusts; (3) consumer or commercial receivables investment

trusts; and (4) guaranteed governmental mortgage pool certificate

investment trusts.\5\

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\4\The Department notes that PTE 83-1 [48 FR 895, January 7,

1983], a class exemption for mortgage pool investment trusts, would

generally apply to trusts containing single-family residential

mortgages, provided that the applicable conditions of PTE 83-1 are

met. ABS requests relief for single-family residential mortgages in

this exemption because it would prefer one exemption for all trusts

of similar structure. However, ABS has stated that it may still

avail itself of the exemptive relief provided by PTE 83-1.

\5\Guaranteed governmental mortgage pool certificates are

mortgage-backed securities with respect to which interest and

principal payable is guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation

(FHLMC), or the Federal National Mortgage Association (FNMA). The

Department's regulation relating to the definition of plan assets

(29 CFR 2510.3-101(i)) provides that where a plan acquires a

guaranteed governmental mortgage pool certificate, the plan's assets

include the certificate and all of its rights with respect to such

certificate under applicable law, but do not, solely by reason of

the plan's holding of such certificate, include any of the mortgages

underlying such certificate. The applicant is requesting exemptive

relief for trusts containing guaranteed governmental mortgage pool

certificates because the certificates in the trusts may be plan

assets.

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3. Commercial mortgage investment trusts may include mortgages on

ground leases of real property. Commercial mortgages are frequently

secured by ground leases on the underlying property, rather than by fee

simple interests. The separation of the fee simple interest and the

ground lease interest is generally done for tax reasons. Properly

structured, the pledge of the ground lease to secure a mortgage

provides a lender with the same level of security as would be provided

by a pledge of the related fee simple interest. The terms of the ground

leases pledged to secure leasehold mortgages will in all cases be at

least ten years longer than the term of such mortgages.\6\

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\6\Trust assets may also include obligations that are secured by

leasehold interests on residential real property. See PTE 90-32

involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,

1990 at 23150).

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Trust Structure

4. Each trust is established under a pooling and servicing

agreement between a sponsor, a servicer and a trustee. The sponsor or

servicer of a trust selects assets to be included in the trust. These

assets are receivables which may have been originated by a sponsor or

servicer of the trust, an affiliate of the sponsor or servicer, or by

an unrelated lender and subsequently acquired by the trust sponsor or

servicer.

On or prior to the closing date, the sponsor acquires legal title

to all assets selected for the trust, establishes the trust and

designates an independent entity as trustee. On the closing date, the

sponsor conveys to the trust legal title to the assets, and the trustee

issues certificates representing fractional undivided interests in the

trust assets. ABS, alone or together with other broker-dealers, acts as

underwriter or placement agent with respect to the sale of the

certificates. The majority of the public offerings of certificates made

to date have been underwritten on a firm commitment basis. However,

some may be undertaken on a best efforts basis. In addition, ABS has

privately placed certificates on both a firm commitment and an agency

basis. ABS may also act as the lead underwriter for a syndicate of

securities underwriters. ABS may also act as the servicer or seller to

the trust of the receivables or the trust sponsor.

Certificate holders are entitled to receive monthly, quarterly or

semi-annually installments of principal and/or interest, or lease

payments due on the receivables, adjusted, in the case of payments of

interest, to a specified rate--the pass-through rate--which may be

fixed or variable.

When installments or payments are made on a semi-annual basis,

funds are not permitted to be commingled with the servicer's assets for

longer than would be permitted for a monthly-pay security. A segregated

account is established in the name of the trustee (on behalf of

certificate holders) to hold funds received between distribution dates.

The account is under the sole control of the trustee, who invests the

account's assets in short-term securities which have received a rating

comparable to the rating assigned to the certificates. In some cases,

the servicer may be permitted to make a single deposit into the account

once a month. When the servicer makes such monthly deposits, payments

received from obligors by the servicer may be commingled with the

servicer's assets during the month prior to deposit. Usually, the

period of time between receipt of funds by the servicer and deposit of

these funds in a segregated account does not exceed one month.

Furthermore, in those cases where distributions are made semi-annually,

the servicer will furnish a report on the operation of the trust to the

trustee on a monthly basis. At or about the time this report is

delivered to the trustee, it will be made available to certificate

holders and delivered to or made available to each rating agency that

has rated the certificates.

5. Some of the certificates will be multi-class certificates. ABS

requests exemptive relief for two types of multi-class certificates:

``strip'' certificates and ``fast-pay/slow-pay'' certificates. Strip

certificates are a type of security in which the stream of interest

payments on receivables is split from the flow of principal payments

and separate classes of certificates are established, each representing

rights to disproportionate payments of principal and interest.7

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\7\It is the Department's understanding that where a plan

invests in REMIC ``residual'' interest certificates to which this

exemption applies, some of the income received by the plan as a

result of such investment may be considered unrelated business

taxable income to the plan, which is subject to income tax under the

Code. The Department emphasizes that the prudence requirement of

section 404(a)(1)(B) of the Act would require plan fiduciaries to

carefully consider this and other tax consequences prior to causing

plan assets to be invested in certificates pursuant to this

exemption.

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``Fast-pay/slow-pay'' certificates involve the issuance of classes

of certificates having different stated maturities or the same

maturities with different payment schedules. In certain transactions of

this type, interest and/or principal payments received on the

underlying receivables are distributed first to the class of

certificates having the earliest stated maturity of principal, and/or

earlier payment schedule, and only when that class of certificates have

been paid in full (or has received a specified amount) will

distributions be made with respect to the second class of certificates.

Distributions on certificates having later stated maturities will

proceed in like manner until all the certificateholders have been paid

in full. The only difference between this multi-class pass-through

arrangement and a single-class pass-through arrangement is the order in

which distributions are made to certificateholders. In each case,

certificateholders will have a beneficial ownership interest in the

underlying assets. In neither case will the rights of a plan purchasing

a certificate be subordinated to the rights of another

certificateholder in the event of default on any of the underlying

obligations. In particular, if the amount available for distribution to

certificateholders is less than the amount required to be so

distributed, all senior certificateholders then entitled to receive

distributions will share in the amount distributed on a pro rata

basis.8

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\8\If a trust issues subordinated certificates, holders of such

subordinated certificates may not share in the amount distributed on

a pro rata basis with the senior certificateholders. The Department

notes that the exemption does not provide relief for plan investment

in such subordinated certificates.

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6. For tax reasons, the trust must be maintained as an essentially

passive entity. Therefore, both the sponsor's discretion and the

servicer's discretion with respect to assets included in a trust are

severely limited. Pooling and servicing agreements provide for the

substitution of receivables by the sponsor only in the event of defects

in documentation discovered within a short time after the issuance of

trust certificates. Any receivable so substituted is required to have

characteristics substantially similar to the replaced receivable and

will be at least as creditworthy as the replaced receivable.

In some cases, the affected receivable would be repurchased, with

the purchase price applied as a payment on the affected receivable and

passed through to certificateholders.

Parties to Transactions

7. The originator of a receivable is the entity that initially

lends money to a borrower (obligor), such as a homeowner or automobile

purchaser, or leases property to the lessee. The originator may either

retain a receivable in its portfolio or sell it to a purchaser, such as

a trust sponsor.

Originators of receivables included in the trusts will be entities

that originate receivables in the ordinary course of their business,

including finance companies for whom such origination constitutes the

bulk of their operations, financial institutions for whom such

origination constitutes a substantial part of their operations, and any

kind of manufacturer, merchant, or service enterprise for whom such

origination is an incidental part of its operations. Each trust may

contain assets of one or more originators. The originator of the

receivables may also function as the trust sponsor or servicer.

8. The sponsor will be one of three entities: (i) A special-purpose

corporation unaffiliated with the servicer, (ii) a special-purpose or

other corporation affiliated with the servicer, or (iii) the servicer

itself. Where the sponsor is not also the servicer, the sponsor's role

will generally be limited to acquiring the receivables to be included

in the trust, establishing the trust, designating the trustee, and

assigning the receivables to the trust.

9. The trustee of a trust is the legal owner of the obligations in

the trust. The trustee is also a party to or beneficiary of all the

documents and instruments deposited in the trust, and as such is

responsible for enforcing all the rights created thereby in favor of

certificateholders.

The trustee will be an independent entity, and therefore will be

unrelated to ABS, the trust sponsor or the servicer. ABS represents

that the trustee will be a substantial financial institution or trust

company experienced in trust activities. The trustee receives a fee for

its services, which will be paid by the servicer, sponsor or the trust

as specified in the pooling and servicing agreement. The method of

compensating the trustee which is specified in the pooling and

servicing agreement will be disclosed in the prospectus or private

placement memorandum relating to the offering of the certificates.

10. The servicer of a trust administers the receivables on behalf

of the certificateholders. The servicer's functions typically involve,

among other things, notifying borrowers of amounts due on receivables,

maintaining records of payments received on receivables and instituting

foreclosure or similar proceedings in the event of default. In cases

where a pool of receivables has been purchased from a number of

different originators and deposited in a trust, it is common for the

receivables to be ``subserviced'' by their respective originators and

for a single entity to ``master service'' the pool of receivables on

behalf of the owners of the related series of certificates. Where this

arrangement is adopted, a receivable continues to be serviced from the

perspective of the borrower by the local subservicer, while the

investor's perspective is that the entire pool of receivables is

serviced by a single, central master servicer who collects payments

from the local subservicers and passes them through to

certificateholders.

In some cases, the originator and servicer of receivables to be

included in a trust and the sponsor of the trust (though they

themselves may be related) will be unrelated to ABS. In other cases,

however, affiliates of ABS may originate or service receivables

included in a trust, or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

11. Where the sponsor of a trust is not the originator of

receivables included in a trust, the sponsor generally purchases the

receivables in the secondary market, either directly from the

originator or from another secondary market participant. The price the

sponsor pays for a receivable is determined by competitive market

forces, taking into account payment terms, interest rate, quality, and

forecasts as to future interest rates.

As compensation for the receivables transferred to the trust, the

sponsor receives certificates representing the entire beneficial

interest in the trust, or the cash proceeds of the sale of such

certificates. If the sponsor receives certificates from the trust, the

sponsor sells all or a portion of these certificates for cash to

investors or securities underwriters. In some transactions, the sponsor

or an affiliate may retain a portion of the certificates for its own

account. In addition, in some transactions the originator may sell

receivables to a trust for cash. At the time of the sale, the trustee

would sell certificates to the public or to underwriters and use the

cash proceeds of the sale to pay the originator for receivables sold to

the trust. The transfer of the receivables to the trust by the sponsor,

the sale of certificates to investors, and the receipt of the cash

proceeds by the sponsor generally take place simultaneously.

12. The price of the certificates, both in the initial offering and

in the secondary market, is affected by market forces, including

investor demand, the pass-through interest rate on the certificates in

relation to the rate payable on investments of similar types and

quality, expectations as to the effect on yield resulting from

prepayment of underlying receivables, and expectations as to the

likelihood of timely payment.

The pass-through rate for certificates is equal to the interest

rate on receivables included in the trust minus a specified servicing

fee.9 This rate is generally determined by the same market forces

that determine the price of a certificate. The price of a certificate

and its pass-through, or coupon, rate together determine the yield to

investors. If an investor purchases a certificate at less than par,

that discount augments the stated pass-through rate; conversely, a

certificate purchased at a premium yields less than the stated coupon.

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\9\The pass-through rate on certificates representing interests

in trusts holding leases is determined by breaking down lease

payments into ``principal'' and ``interest'' components based on an

implicit interest rate.

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13. As compensation for performing its servicing duties, the

servicer (who may also be the sponsor, and receive fees for acting in

that capacity) will retain the difference between payments received on

the receivables in the trust and payments payable (at the pass-through

rate) to certificateholders, except that in some cases a portion of the

payments on receivables may be paid to a third party, such as a fee

paid to a provider of credit support. The servicer may receive

additional compensation by having the use of the amounts paid on the

receivables between the time they are received by the servicer and the

time they are due to the trust (which time is set forth in the pooling

and servicing agreement). The servicer will be required to pay the

administrative expenses of servicing the trust, including, in some

cases, the trustee's fee, out of its servicing compensation.

The servicer is also compensated to the extent it may provide

credit enhancement to the trust or otherwise arrange to obtain credit

support from another party. This ``credit support fee'' may be

aggregated with other servicing fees, and is either paid out of the

interest income received on the receivables in excess of the pass-

through rate or paid in a lump sum at the time the trust is

established.

14. The servicer may be entitled to retain certain administrative

fees paid by a third party, usually the obligor. These administrative

fees fall into three categories: (a) Prepayment fees; (b) Late payment

and payment extension fees; and (c) Fees and charges associated with

foreclosure or repossession, or other conversion of a secured position

into cash proceeds, upon default of an obligation.

Compensation payable to the servicer will be set forth or referred

to in the pooling and servicing agreement and described in reasonable

detail in the prospectus or private placement memorandum relating to

the certificates.

15. Payments on receivables may be made by obligors to the servicer

at various times during the period preceding any date on which pass-

through payments to the trust are due. In some cases, the pooling and

servicing agreement may permit the servicer to place these payments in

non-interest bearing accounts in itself or to commingle such payments

with its own funds prior to the distribution dates. In these cases, the

servicer would be entitled to the benefit derived from the use of the

funds between the date of payment on a receivable and the pass-through

date. Commingled payments may not be protected from the creditors of

the servicer in the event of the servicer's bankruptcy or receivership.

In those instances when payments on receivables are held in non-

interest bearing accounts or are commingled with the servicer's own

funds, the servicer is required to deposit these payments by a date

specified in the pooling and servicing agreement into an account from

which the trustee makes payments to certificateholders.

16. ABS and any other participating underwriter will receive a fee

in connection with the securities underwriting or private placement of

certificates. In a firm commitment underwriting, this fee would

normally consist of the difference between what ABS receives for the

certificates that it distributes and what it pays the sponsor for those

certificates. In a private placement, the fee may also take the form of

an agency commission paid by the sponsor. Such fees are negotiated at

arm's-length with the sponsor, originator or unrelated lender and are

affected by fees in comparable offerings.

Purchase of Receivables by the Servicer

17. The applicant represents that as the principal amount of the

receivables in a trust is reduced by payments, the cost of

administering the trust generally increases, making the servicing of

the trust prohibitively expensive at some point. Consequently, the

pooling and servicing agreement generally provides that the servicer

may purchase the receivables remaining in the trust when the aggregate

unpaid balance payable on the receivables is reduced to a specified

percentage (usually 5 to 10 percent) of the initial aggregate unpaid

balance.

The purchase price of a receivable is specified in the pooling and

servicing agreement and will be at least equal to: (1) The unpaid

principal balance on the receivable plus accrued interest, less any

unreimbursed advances of principal made by the servicer; or (2) The

greater of (a) the amount in (1) or (b) the fair market value of such

obligations in the case of a REMIC, or the fair market value of the

certificates in the case of a trust that is not a REMIC.

Certificate Ratings

18. The certificates will have received one of the three highest

ratings available from either S&P's, Moody's, D&P or Fitch. Insurance

or other credit support (such as surety bonds, letters of credit,

guarantees, or the creation of a class of certificates with

subordinated cash flow) will be obtained by the trust sponsor to the

extent necessary for the certificates to attain the desired rating. The

amount of this credit support is set by the rating agencies at a level

that is a multiple of the worst historical net credit loss experience

for the type of obligations included in the issuing trust.

Provision of Credit Support

19. In some cases, the master servicer, or an affiliate of the

master servicer, may provide credit support to the trust (i.e. act as

an insurer). In these cases, the master servicer, in its capacity as

servicer, will first advance funds to the full extent that it

determines that such advances will be recoverable (a) out of late

payments by the obligors, (b) out of liquidation proceeds, (c) from the

credit support provider (which may be itself) or, (d) in the case of a

trust that issues subordinated certificates, from amounts otherwise

distributable to holders of subordinated certificates, and the master

servicer will advance such funds in a timely manner. When the servicer

is the provider of the credit support and provides its own funds to

cover defaulted payments, it will do so either on the initiative of the

trustee, or on its own initiative on behalf of the trustee, but in

either event it will provide such funds to cover payments to the full

extent of its obligations under the credit support mechanism. In some

cases, however, the master servicer may not be obligated to advance

funds but instead would be called upon to provide funds to cover

defaulted payments to the full extent of its obligations as insurer.

However, a master servicer typically can recover advances either from

the provider of credit support or from future payments on the affected

assets.

If the master servicer fails to advance funds, fails to call upon

the credit support mechanism to provide funds to cover delinquent

payments, or otherwise fails in its duties, the trustee would be

required and would be able to enforce the certificateholders' rights,

as both a party to the pooling and servicing agreement and the owner of

the trust estate, including rights under the credit support mechanism.

Therefore, the trustee, who is independent of the servicer, will have

the ultimate right to enforce the credit support arrangement.

When a master servicer advances funds, the amount so advanced is

recoverable by the servicer out of future payments on receivables held

by the trust to the extent not covered by credit support. However,

where the master servicer provides credit support to the trust, there

are protections in place to guard against a delay in calling upon the

credit support to take advantage of the fact that the credit support

declines proportionally with the decrease in the principal amount of

the obligations in the trust as payments on receivables are passed

through to investors. These safeguards include:

(a) There is often a disincentive to postponing credit losses

because the sooner repossession or foreclosure activities are

commenced, the more value that can be realized on the security for the

obligation;

(b) The master servicer has servicing guidelines which include a

general policy as to the allowable delinquency period after which an

obligation ordinarily will be deemed uncollectible. The pooling and

servicing agreement will require the master servicer to follow its

normal servicing guidelines and will set forth the master servicer's

general policy as to the period of time after which delinquent

obligations ordinarily will be considered uncollectible;

(c) As frequently as payments are due on the receivables included

in the trust (monthly, quarterly or semi-annually, as set forth in the

pooling and servicing agreement), the master servicer is required to

report to the independent trustee the amount of all past-due payments

and the amount of all servicer advances, along with other current

information as to collections on the receivables and draws upon the

credit support. Further, the master servicer is required to deliver to

the trustee annually a certificate of an executive officer of the

master servicer stating that a review of the servicing activities has

been made under such officer's supervision, and either stating that the

master servicer has fulfilled all of its obligations under the pooling

and servicing agreement or, if the master servicer has defaulted under

any of its obligations, specifying any such default. The master

servicer's reports are reviewed at least annually by independent

accountants to ensure that the master servicer is following its normal

servicing standards and that the master servicer's reports conform to

the master servicer's internal accounting records. The results of the

independent accountants' review are delivered to the trustee; and

(d) The credit support has a ``floor'' dollar amount that protects

investors against the possibility that a large number of credit losses

might occur towards the end of the life of the trust, whether due to

servicer advances or any other cause. Once the floor amount has been

reached, the servicer lacks an incentive to postpone the recognition of

credit losses because the credit support amount becomes a fixed dollar

amount subject to reduction only for actual draws. From the time that

the floor amount is effective until the end of the life of the trust,

there are no proportionate reductions in the credit support amount

caused by reductions in the pool principal balance. Indeed, since the

floor is a fixed dollar amount, the amount of credit support ordinarily

increases as a percentage of the pool principal balance during the

period that the floor is in effect.

Disclosure

20. In connection with the original issuance of certificates, the

prospectus or private placement memorandum will be furnished to

investing plans. The prospectus or private placement memorandum will

contain information material to a fiduciary's decision to invest in the

certificates, including:

(a) Information concerning the payment terms of the certificates,

the rating of the certificates, and any material risk factors with

respect to the certificates;

(b) A description of the trust as a legal entity and a description

of how the trust was formed by the seller/servicer or other sponsor of

the transaction;

(c) Identification of the independent trustee for the trust;

(d) A description of the receivables contained in the trust,

including the types of receivables, the diversification of the

receivables, their principal terms, and their material legal aspects;

(e) A description of the sponsor and servicer;

(f) A description of the pooling and servicing agreement, including

a description of the seller's principal representations and warranties

as to the trust assets and the trustee's remedy for any breach thereof;

a description of the procedures for collection of payments on

receivables and for making distributions to investors, and a

description of the accounts into which such payments are deposited and

from which such distributions are made; identification of the servicing

compensation and any fees for credit enhancement that are deducted from

payments on receivables before distributions are made to investors; a

description of periodic statements provided to the trustee, and

provided to or made available to investors by the trustee; and a

description of the events that constitute events of default under the

pooling and servicing contract and a description of the trustee's and

the investors' remedies incident thereto;

(g) A description of the credit support;

(h) A general discussion of the principal federal income tax

consequences of the purchase, ownership and disposition of the pass-

through securities by a typical investor;

(i) A description of the underwriters' plan for distributing the

pass-through securities to investors; and

(j) Information about the scope and nature of the secondary market,

if any, for the certificates.

21. Reports indicating the amount of payments of principal and

interest are provided to certificateholders at least as frequently as

distributions are made to certificateholders. Certificateholders will

also be provided with periodic information statements setting forth

material information concerning the underlying assets, including, where

applicable, information as to the amount and number of delinquent and

defaulted loans or receivables.

22. In the case of a trust that offers and sells certificates in a

registered public offering, the trustee, the servicer or the sponsor

will file such periodic reports as may be required to be filed under

the Securities Exchange Act of 1934. Although some trusts that offer

certificates in a public offering will file quarterly reports on Form

10-Q and Annual Reports on Form 10-K, many trusts obtain, by

application to the Securities and Exchange Commission, a complete

exemption from the requirement to file quarterly reports on Form 10-Q

and a modification of the disclosure requirements for annual reports on

Form 10-K. If such an exemption is obtained, these trusts normally

would continue to have the obligation to file current reports on Form

8-K to report material developments concerning the trust and the

certificates. While the Securities and Exchange Commission's

interpretation of the periodic reporting requirements is subject to

change, periodic reports concerning a trust will be filed to the extent

required under the Securities Exchange Act of 1934.

23. At or about the time distributions are made to

certificateholders, a report will be delivered to the trustee as to the

status of the trust and its assets, including underlying obligations.

Such report will typically contain information regarding the trust's

assets, payments received or collected by the servicer, the amount of

prepayments, delinquencies, servicer advances, defaults and

foreclosures, the amount of any payments made pursuant to any credit

support, and the amount of compensation payable to the servicer. Such

report also will be delivered to or made available to the rating agency

or agencies that have rated the trust's certificates.

In addition, promptly after each distribution date,

certificateholders will receive a statement prepared by the servicer,

paying agent or trustee summarizing information regarding the trust and

its assets. Such statement will include information regarding the trust

and its assets, including underlying receivables. Such statement will

typically contain information regarding payments and prepayments,

delinquencies, the remaining amount of the guaranty or other credit

support and a breakdown of payments between principal and interest.

Secondary Market Transactions

24. It is ABS's normal policy to attempt to make a market for

securities for which it is lead or co-managing underwriter, and it is

ABS's intention to attempt to make a market for any certificates for

which ABS is lead or co-managing underwriter. In general, it is also

ABS's policy to facilitate sales by investors who purchase certificates

if ABS has acted as agent or principal in the original private

placement of the certificates and if such investors request ABS's

assistance.

Retroactive Relief

25. ABS represents that it has engaged in transactions related to

mortgage-backed and asset-backed securities based on the assumption

that retroactive relief would not be granted. However, it is possible

that some transactions may have occurred that would be prohibited. For

example, because many certificates are held in street or nominee name,

it is not always possible to identify whether the percentage interest

of plans in a trust is or is not ``significant'' for purposes of the

Department's regulation relating to the definition of plan assets (29

CFR 2510.3-101(f)). These problems are compounded as transactions occur

in the secondary market. In addition, with respect to the ``publicly-

offered security'' exception contained in that regulation (29 CFR

2510.3-101(b)), it is difficult to determine whether each purchaser of

a certificate is independent of all other purchasers.

Therefore, ABS requests relief retroactive for transactions which

have occurred on or after August 12, 1994, the date ABS originally

filed its exemption application with the Department.

Summary

26. In summary, the applicant represents that the transactions for

which exemptive relief is requested satisfy the statutory criteria of

section 408(a) of the Act due to the following:

(a) The trusts contain ``fixed pools'' of assets. There is little

discretion on the part of the trust sponsor to substitute receivables

contained in the trust once the trust has been formed;

(b) Certificates in which plans invest will have been rated in one

of the three highest rating categories by S&P's, Moody's, D&P or Fitch.

Credit support will be obtained to the extent necessary to attain the

desired rating;

(c) All transactions for which ABS seeks exemptive relief will be

governed by the pooling and servicing agreement, which is made

available to plan fiduciaries for their review prior to the plan's

investment in certificates;

(d) Exemptive relief from sections 406(b) and 407 for sales to

plans is substantially limited; and

(e) ABS has made, and anticipates that it will continue to make, a

secondary market in certificates.

Discussion of Proposed Exemption

I. Differences between Proposed Exemption and Class Exemption PTE 83-1

The exemptive relief proposed herein is similar to that provided in

PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain

Transactions Involving Mortgage Pool Investment Trusts, amended and

restated as PTE 83-1 [48 FR 895, January 7, 1983].

PTE 83-1 applies to mortgage pool investment trusts consisting of

interest-bearing obligations secured by first or second mortgages or

deeds of trust on single-family residential property. The exemption

provides relief from sections 406(a) and 407 for the sale, exchange or

transfer in the initial issuance of mortgage pool certificates between

the trust sponsor and a plan, when the sponsor, trustee or insurer of

the trust is a party-in-interest with respect to the plan, and the

continued holding of such certificates, provided that the conditions

set forth in the exemption are met. PTE 83-1 also provides exemptive

relief from section 406(b)(1) and (b)(2) of the Act for the above-

described transactions when the sponsor, trustee or insurer of the

trust is a fiduciary with respect to the plan assets invested in such

certificates, provided that additional conditions set forth in the

exemption are met. In particular, section 406(b) relief is conditioned

upon the approval of the transaction by an independent fiduciary.

Moreover, the total value of certificates purchased by a plan must not

exceed 25 percent of the amount of the issue, and at least 50 percent

of the aggregate amount of the issue must be acquired by persons

independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1

provides conditional exemptive relief from section 406(a) and (b) of

the Act for transactions in connection with the servicing and operation

of the mortgage trust.

Under PTE 83-1, exemptive relief for the above transactions is

conditioned upon the sponsor and the trustee of the mortgage trust

maintaining a system for insuring or otherwise protecting the pooled

mortgage loans and the property securing such loans, and for

indemnifying certificateholders against reductions in pass-through

payments due to defaults in loan payments or property damage. This

system must provide such protection and indemnification up to an amount

not less than the greater of one percent of the aggregate principal

balance of all trust mortgages or the principal balance of the largest

mortgage.

The exemptive relief proposed herein differs from that provided by

PTE 83-1 in the following major respects: (1) The proposed exemption

provides individual exemptive relief rather than class relief; (2) The

proposed exemption covers transactions involving trusts containing a

broader range of assets than single-family residential mortgages; (3)

Instead of requiring a system for insuring the pooled receivables, the

proposed exemption conditions relief upon the certificates having

received one of the three highest ratings available from S&P's,

Moody's, D&P or Fitch (insurance or other credit support would be

obtained only to the extent necessary for the certificates to attain

the desired rating); and (4) The proposed exemption provides more

limited section 406(b) and section 407 relief for sales transactions.

II. Ratings of Certificates

After consideration of the representations of the applicant and

information provided by S&P's, Moody's, D&P and Fitch, the Department

has decided to condition exemptive relief upon the certificates having

attained a rating in one of the three highest generic rating categories

from S&P's, Moody's, D&P or Fitch. The Department believes that the

rating condition will permit the applicant flexibility in structuring

trusts containing a variety of mortgages and other receivables while

ensuring that the interests of plans investing in certificates are

protected. The Department also believes that the ratings are indicative

of the relative safety of investments in trusts containing secured

receivables. The Department is conditioning the proposed exemptive

relief upon each particular type of asset-backed security having been

rated in one of the three highest rating categories for at least one

year and having been sold to investors other than plans for at least

one year.10

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\1\0In referring to different ``types'' of asset-backed

securities, the Department means certificates representing interests

in trusts containing different ``types'' of receivables, such as

single family residential mortgages, multi-family residential

mortgages, commercial mortgages, home equity loans, auto loan

receivables, installment obligations for consumer durables secured

by purchase money security interests, etc. The Department intends

this condition to require that certificates in which a plan invests

are of the type that have been rated (in one of the three highest

generic rating categories by S&P's, D&P, Fitch or Moody's) and

purchased by investors other than plans for at least one year prior

to the plan's investment pursuant to the proposed exemption. In this

regard, the Department does not intend to require that the

particular assets contained in a trust must have been ``seasoned''

(e.g., originated at least one year prior to the plan's investment

in the trust).

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III. Limited Section 406(b) and Section 407(a) Relief for Sales

ABS represents that in some cases a trust sponsor, trustee,

servicer, insurer, and obligor with respect to receivables contained in

a trust, or an underwriter of certificates may be a pre-existing party

in interest with respect to an investing plan.11 In these cases, a

direct or indirect sale of certificates by that party in interest to

the plan would be a prohibited sale or exchange of property under

section 406(a)(1)(A) of the Act.12 Likewise, issues are raised

under section 406(a)(1)(D) of the Act where a plan fiduciary causes a

plan to purchase certificates where trust funds will be used to benefit

a party in interest.

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\1\1In this regard, we note that the exemptive relief proposed

herein is limited to certificates with respect to which ABS or any

of its affiliates is either (a) the sole underwriter or manager or

co-manager of the underwriting syndicate, or (b) a selling or

placement agent.

\1\2The applicant represents that where a trust sponsor is an

affiliate of ABS, sales to plans by the sponsor may be exempt under

PTE 75-1, Part II (relating to purchases and sales of securities by

broker-dealers and their affiliates), if ABS is not a fiduciary with

respect to plan assets to be invested in certificates.

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Additionally, ABS represents that a trust sponsor, servicer,

trustee, insurer, and obligor with respect to receivables contained in

a trust, or an underwriter of certificates representing an interest in

a trust may be a fiduciary with respect to an investing plan. ABS

represents that the exercise of fiduciary authority by any of these

parties to cause the plan to invest in certificates representing an

interest in the trust would violate section 406(b)(1), and in some

cases section 406(b)(2), of the Act.

Moreover, ABS represents that to the extent there is a plan asset

``look through'' to the underlying assets of a trust, the investment in

certificates by a plan covering employees of an obligor under

receivables contained in a trust may be prohibited by sections 406(a)

and 407(a) of the Act.

After consideration of the issues involved, the Department has

determined to provide the limited sections 406(b) and 407(a) relief as

specified in the proposed exemption.

Notice to Interested Persons

The applicant represents that because those potentially interested

participants and beneficiaries cannot all be identified, the only

practical means of notifying such participants and beneficiaries of

this proposed exemption is by the publication of this notice in the

Federal Register. Comments and requests for a hearing must be received

by the Department not later than 30 days from the date of publication

of this notice of proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,

telephone (202) 219-8881. (This is not a toll-free number.)

The Masters, Mates and Pilots Pension Plan (the Pension Plan) and

Individual Retirement Account Plan (the IRAP; Together, the Plans)

Located in Linthicum Heights, Maryland

[Application Nos. D-9618 and D-9619]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption

is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)

and 407(a) of the Act and the sanctions resulting from the application

of section 4975 of the Code, by reason of section 4975(c)(1)(A) through

(E) of the Code, shall not apply to the continued holding by the Plans

of their shares of stock (the Stock) in American Heavy Lift Shipping

Company (AHL), provided that (a) the Plans' independent fiduciary has

determined that the Plans' holding of the Stock is appropriate for the

Plans and in the best interests of the Plans' participants and

beneficiaries; and (b) the Plans' independent fiduciary continues to

monitor the Plans' holding of the Stock and determines at all times

that such transaction remains in the best interests of the Plans.

Temporary Nature of Exemption

If the proposed exemption is granted, the exemption will be

effective until the later of: (1) December 31, 1995, or (2) December

31, 1996 provided another application for exemption is filed with the

Department prior to December 31, 1995.

Summary of Facts and Representations

1. The Pension Plan is a defined benefit plan that currently has

approximately 5,800 participants. As of December 31, 1992, the Pension

Plan had approximately $673 million in assets. The IRAP is a defined

contribution plan that currently has approximately 5,200 participants.

As of December 31, 1992, the IRAP had approximately $87 million in

assets. The Plans principally cover members of the International

Organization of Masters, Mates and Pilots.

2. Bear Stearns Fiduciary Services, Inc. (BSFS) is a registered

investment advisor which serves as the Named Fiduciary for the Special

Assets Portfolio of the Plans. The Special Assets Portfolio consists of

various venture capital and other non-liquid investments which were

made by a former investment manager of the Plans, Tower Asset

Management, Inc. (Tower), and which were the subject of protracted

litigation (the Litigation) between the Department, Tower, the Plans

and certain of their trustees, and certain plan participants.13

The Litigation ultimately was settled pursuant to Court Order entered

by the United States District Court for the Southern District of New

York (the Court).

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\1\3In re Masters, Mates and Pilots Pension Plan and IRAP

Litigation, Lead File No. 85 Civ. 9545 (VLB) (S.D.N.Y.)

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3. In the course of the Litigation, BSFS was appointed Named

Fiduciary for the Plans' Special Assets Portfolio by Court Order dated

September 18, 1990 (the Court Order). BSFS assumed its responsibilities

on November 8, 1990. The Court Order provided that the Named Fiduciary,

rather than the Plans' trustees, has the ``sole, exclusive, full and

complete authority and discretion concerning the control, management

and disposition of the Special Assets Portfolio''.

4. Since February, 1987, the Plans have each owned 45 shares of the

Stock, which Stock represents all of the outstanding shares of AHL. AHL

is a Delaware corporation, headquartered in Houston, Texas, that is

engaged in the shipping industry. Its principal assets consist of four

single-hulled tankers, built in the 1950's, that are used primarily for

the transportation of petroleum products in the Jones Act trade (i.e.,

American-flagged tankers in the domestic intra-coastal trade). The

Plans' Stock can be traced back to certain prior investments made by

Tower and is held in the Plans' Special Assets Portfolio, along with

the Plans' other remaining Tower-initiated investments.

5. Since AHL is an employer of employees covered under the Plans,

the Stock constitutes employer securities under section 407(d)(1) of

the Act. The applicants represent that the Stock constituted qualifying

employer securities within the meaning of section 407(d)(5) of the Act

at the time of its acquisition, but as of January 1, 1993, the Stock

ceased to be a qualifying employer security because the Stock is

wholly-owned by the Plans and thus cannot meet the requirements of

section 407(f) of the Act. However, the Plans' continued holding of the

Stock is currently exempt from the prohibited transaction restrictions

of the Act pursuant to Prohibited Transaction Class Exemption No. 79-15

as a result of a court order, dated November 2, 1992, entered in the

Litigation (the PTE 79-15 Order). Under the terms of the PTE 79-15

Order, this exemption is effective until the later of: a) December 31,

1993; or b) December 31, 1994, provided the Plans make application to

the Department for an exemption to permit the continued holding of the

Stock. By filing the request which is the subject of the exemption

proposed herein, the exemption provided under the PTE 79-15 Order has

been automatically extended to December 31, 1994.

6. While BSFS, in its capacity as Named Fiduciary, has ultimate

investment management responsibility for the Special Assets Portfolio,

it does not exercise investment management discretion over the

portfolio's assets on a day-to-day basis. Rather, as contemplated by

the Court Order, responsibility for the day-to-day management and

supervision of the portfolio's assets has been delegated at all times

to independent investment managers selected by BSFS. With respect to

the Plans' investment in the Stock, such responsibility was first

delegated to Sunwestern Advisors, L.P. (Sunwestern), which served as

the investment manager for this investment until July 14, 1992.

Effective that date, Sunwestern's responsibilities were assumed by a

new investment manager, Potomac Asset Management, Inc. (Potomac), which

continues to serve in that capacity.

7. Potomac, a registered investment adviser founded in 1978, is

owned by three principals, all of whom are analysts as well as

portfolio managers. In addition to the principals, Potomac has an

experienced fixed-income manager, equity manager, and corporate finance

consultant. In addition to its traditional investment management of

$165 million in bond and stock portfolios, Potomac maintains a

corporate finance business consisting of private placement consulting

and monitoring for pension funds, fair market value analysis for

various clients, restructuring and financing of private companies and

related activities. Potomac has had experience in managing investments

by multi-employer plans in privately-held companies, similar to the

situation involving the Plans' investment in the Stock.

8. Potomac represents that aggressive efforts were made by

Sunwestern to sell the Plans' Stock in 1991 and 1992. These efforts

were unsuccessful largely due to the age of AHL's ships and market

uncertainties created by the Oil Pollution Act of 1990 (OPA 1990). By

the time these sales efforts were discontinued in mid-1992, no bona

fide offers for any price above essentially scrap value had

materialized. Under OPA 1990, every single-hull tanker engaged in the

domestic petroleum trade must be converted to a double-hulled tanker or

it will be phased out of service beginning in 1995, depending upon its

year of construction. AHL's four tankers were constructed between 1957

and 1960. Therefore, AHL must either double-hull two of the tankers

before the end of 1995 and the other two by the end of 1996, or those

ships will be prohibited from engaging in the domestic petroleum trade.

If AHL chooses not to double-hull the ships, it will have to depend on

the less consistent grain, vegetable oil, etc. trade for business.

9. Potomac represents that, in its judgment, there has been no

change in market conditions that would permit a sale of the Plans'

interest in the near term, and, more importantly by year end when the

exemption pursuant to the PTE 79-15 Order expires. While AHL has

returned to profitability (see reps. 10 and 11, below), the twin

problems that plagued prior sales efforts (see rep. 8, above) still

remain and make the sale of AHL on a going concern basis, in Potomac's

opinion, a virtual impossibility. The only expressions of interest that

Potomac has received since becoming investment manager in 1992 have

consisted of casual inquiries concerning whether AHL would sell one of

its vessels at slightly below scrap value. In addition, the scrapping

of AHL's ships is not feasible at the present time due to existing

contractual commitments. Currently, several of AHL's ships are on

extended term charter and thus, with the possible exception of a single

ship, AHL could not now scrap its fleet without abrogating its

contractual obligations.

10. Potomac represents that while no sale of AHL is currently

feasible on favorable terms, AHL has returned to profitability

following the difficulties it experienced over the last half of 1991

and during 1992. Potomac states that these profitable operations will

result in a very significant return to the Plans on their investment

over the near term, particularly when compared to the only viable

alternative, a sale of AHL's ships at a price approximating their scrap

value. Since a scrap value sale of the ships remains available after

the relatively short period of profitable operations permitted under

OPA 1990, Potomac believes that the Plans' retention of their

investment is the preferable investment course of action over the near

term, even if OPA 1990's requirements ultimately end the useful life of

AHL's ships.

11. Potomac represents that AHL's Board, subject to Potomac's

review as investment manager, has instituted a number of measures

designed to return AHL to profitability. These measures included a

change in AHL's key management, the ability of new management to secure

term, as opposed to spot charters, and the installation of more refined

and sophisticated cash management and management information systems.

In addition, AHL had significant necessary maintenance performed,

including the successful completion of total drydock on three of AHL's

four ships. During the first quarter of 1994, AHL earned a net profit

of $787,284 from operations, and shareholders' equity rose to the

highest level in AHL's history. Potomac represents that it believes

that in 1994, AHL will earn between $1.2 million and $1.6 million from

operations. Potomac further represents that the scrap value of the

ships will not decline significantly from today's values, if at all,

over the near term. Thus, even if AHL found that OPA 1990's

requirements left it with no option other than scrapping its vessels

after 1996, the continued operation of the company, so long as it is

profitable, will leave the Plans with the added value generated by such

profitability, plus roughly the same scrap value that they could now

realize. In addition, this investment option allows AHL to continue to

study other options and await market developments that may

significantly enhance the value of its assets to a potential buyer and

thus significantly enhance the value of the Plans' investment.

12. One such potential market development involves the

reconstruction of existing single-hulled vessels to meet the

requirements of OPA 1990, which may present a cost-effective

alternative to the building of new ships. This alternative entails

attaching new, double-hulled cargo bodies to the engine and crew

sections of existing ships. Potomac represents that discussions it has

had with Avondale Industries, Inc. (Avondale), one of the nation's

leading shipbuilding companies, suggest that the cost of rebuilding an

existing vessel in this fashion would be approximately 50% of the cost

of a new vessel. This potential cost savings represents an important

value potential for AHL's existing ships that Potomac represents would

exceed the ship's scrap value and may be attractive to a possible buyer

should a demand for rebuilt ships, in fact, develop. Potomac has been

exploring this option in discussions with Avondale and representatives

of the United States Coast Guard. In addition, preliminary discussions

have been held with the Federal Maritime Administration concerning the

potential financing of such a project, by whomever is the owner, with

federal loan guarantees. Potomac emphasizes in exploring this option

that it does not intend the Plans either to make any additional

investment in AHL for this purpose, or to guarantee any financing for

AHL. In fact, BSFS, in its capacity of named fiduciary for the Plans

with oversight responsibility over Potomac (see rep. 13., below), has

made it clear to Potomac that any such investment by the Plans, either

directly or in the form of guarantees, is out of the question. Rather,

it is Potomac's goal to advance this conversion project so as to make

AHL and its ships attractive to a potential buyer/investor in the event

a market for reconfigured vessels develops as a cost-effective

alternative to new construction.

13. BSFS represents that its obligations under the Court Order to

monitor and report on the activities of the investment managers for the

Special Assets Portfolio sharply restrict Potomac's opportunity to

perpetuate unduly the Plans' continued ownership of AHL. Pursuant to

the investment management agreement with Potomac that BSFS negotiated

on behalf of the Plans, Potomac is obligated to supply detailed

quarterly reports on each of the Special Assets it manages and to

comply with written investment guidelines. Those guidelines state that

Potomac ``shall seek, among other prudent objectives, to: (A) Maximize

the Plans' net, long-term investment return [and] (B) Liquidate each

such investment when and insofar as prudent * * *'' Furthermore, the

guidelines require Potomac to prepare and update on a quarterly basis

an ``action plan'' for each asset, including AHL. The action plan

requires the investment manager to state the timetable for achieving a

sale (if sale is intended) or for achieving any other stated objective.

In short, BSFS represents that significant mechanisms are in place to

prevent Potomac from improperly seeking to continue indefinitely to

manage the Plans' Stock in AHL. BSFS represents that in its capacity as

Named Fiduciary, it has reviewed in depth Potomac's analysis of the

various options available and has accepted Potomac's conclusion that

the continued ownership of the Stock is in the best interests of the

Plans.

14. In summary, the applicant represents that the proposed

transaction satisfies the criteria contained in section 408(a) of the

Act because: (a) the proposed exemption would continue for a limited

period of time a transaction permitted by the PTE 79-15 Order; (b) the

Plans' independent investment manager, Potomac, has reviewed the Plans'

holding of the Stock and has determined that it is in the best interest

of both Plans to continue holding the Stock; (c) Potomac will continue

to monitor the transaction to determine whether it remains in the

Plans' best interests to retain the Stock; d) BSFS, which has the

overall responsibility as Named Fiduciary over the Plans' investment in

the Stock, has reviewed Potomac's findings and agrees with Potomac's

determination that the Plans' continued holding of the Stock is in the

best interests of both Plans; and e) the Plans will make no additional

investment in AHL, nor will they guarantee any financing to AHL, for

the purpose of double-hulling of the ships.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,

telephone (202) 219-8881. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

section 404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete, and that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 20th day of October, 1994.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration.

[FR Doc. 94-26405 Filed 10-24-94; 8:45 am]

BILLING CODE 4510-29-P