Proposed Exemptions; Dimensional Fund Advisors Inc. (DFA)

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10034, et al.]

Proposed Exemptions; Dimensional Fund Advisors Inc. (DFA)

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

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

406(b) of the Act, requests for hearing 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

[[Page 49156]]

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, N.W., Washington, D.C.

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, N.W., Washington, D.C. 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.

Dimensional Fund Advisors Inc. (DFA) Located in Santa Monica,

California

Application No. D-10034]

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 C.F.R. 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)

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 proposed in-kind transfers of the

assets of employee benefit plans (the Client Plans) for which DFA or an

affiliate act as a fiduciary 1 and which are held in DFA sponsored

group trusts (the Group Trusts) to the DFA Investment Trust Company

(the Master Fund), in exchange for the shares of the Master Fund, an

open-end investment company registered under the Investment Company Act

of 1940 (the 1940 Act), for which DFA acts as investment advisor;

provided that the following conditions are satisfied:

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\1\ The applicant states that no retirement plan established by

DFA is invested in any of the Group Trusts, and no relief is being

requested herein on behalf of any of DFA's own plans. Accordingly,

the Department is not proposing relief for in-kind transfers

involving any plan established and maintained by DFA or its

affiliates or subsidiaries.

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(a) A fiduciary (the Second Fiduciary) who is acting on behalf of

each affected Client Plan and who is independent of and unrelated to

DFA, as defined in paragraph (g) of Section III below, will receive

advance written notice of the in-kind transfer of the Client Plan's

assets held in a subtrust of a Group Trust to a corresponding series of

the Master Fund in exchange for the shares of the Master Fund, and the

investment of such assets in the corresponding series of the Master

Fund, and will receive full written disclosures concerning the Master

Fund described in paragraph (c) of Section II below;

(b) On the basis of such information described in paragraph (c) of

Section II below, the Second Fiduciary will authorize in writing the

in-kind transfer of the Client Plan's assets from a subtrust of a Group

Trust to the corresponding series of the Master Fund in exchange for

the shares of the Master Fund, and the investment of such assets in the

corresponding series of the Master Fund. Such authorization is to be

consistent with the responsibilities, obligations, and duties imposed

on fiduciaries by Part 4 of Title I of the Act;

(c) No sales commissions, redemption fees or other fees are paid by

the Client Plans in connection with the in-kind transfer of the Group

Trust's assets, in exchange for the shares of the Master Fund;

(d) The transfers will be one-time transactions for each subtrust

of a Group Trust for which a comparable series of the Master Fund

exists;

(e) Each Group Trust receives shares of the Master Fund which have

a total net asset value that is equal to the value of the Client Plans'

all or pro rata share of the Group Trust's assets on the date of the

transfer;

(f) The current market value of the Group Trust's assets to be

transferred in-kind in exchange for the shares of the Master Fund, is

determined in a single valuation performed in the same manner at the

close of the same business day with respect to any such transfer, using

independent sources in accordance with the procedures set forth in Rule

17a-7 (Rule 17a-7) under the 1940 Act, as amended from time to time or

any successor rule, regulation, or similar pronouncement and the

procedures established by DFA pursuant to Rule 17a-7 for the valuation

of such assets. Such procedures must require that all securities for

which a current market price cannot be obtained by reference to the

last sales price for transactions reported on a recognized securities

exchange or NASDAQ, be valued based on the average of the highest

current independent bid and lowest current independent offer, as of the

close of business on the last business day preceding the day of the

Group Trust transfer, determined on the basis of reasonable inquiry

from at least three sources that are broker-dealers or pricing services

independent of DFA;

(g) No later than 30 days after completion of each in-kind transfer

of Group Trust's assets to the Master Fund, DFA will send by regular

mail to each Second Fiduciary, who is acting on behalf of each affected

Client Plan and who is independent of and unrelated to DFA, as defined

in paragraph (g) of Section III below, written confirmation containing

the following information:

1. the identity of each security that was valued for purposes of

the transaction in accordance with Rule 17a-7(b)(4) under the 1940 Act;

2. the price of each such security involved in the transaction; and

3. the identity of each pricing service or market maker consulted

in determining the value of such securities;

(h) No later than 90 days after completion of each in-kind transfer

of

[[Page 49157]]

the Group Trust's assets to the Master Fund, DFA will send by regular

mail to the Second Fiduciary, who is acting on behalf of each affected

Client Plan and who is independent of and unrelated to DFA, as defined

in paragraph (g) of Section III below, written confirmation that

contains the following information:

1. the number of Group Trust's units held by the Client Plan

immediately before the transfer (and the related per unit value and the

total dollar amount of such Group Trust's units transferred); and

2. the number of shares in the Master Fund that are held by the

Client Plan following the transfer (and the related per share net asset

value and the total dollar amount of such shares received);

(i) The transferred securities will be valued using the same

methodology in the Group Trusts and in the Master Fund;

(j) DFA will not execute an in-kind transfer of the Client Plan's

assets unless the Second Fiduciary of each affected Client Plan

affirmatively consents to the in-kind transfer in writing; and

(k) There will be no penalty to a Client Plan for not participating

in the in-kind transfer.

Section II--General Conditions

(a) DFA maintains for a period of six years the records necessary

to enable the persons described below in paragraph (b) to determine

whether the conditions of this exemption have been met, except that (1)

a prohibited transaction will not be considered to have occurred if,

due to circumstances beyond the control of DFA, the records are lost or

destroyed prior to the end of the six-year period, and (2) no party in

interest other than DFA shall be subject to the civil penalty that may

be assessed under section 502(i) of the Act or to the taxes imposed by

section 4975 (a) and (b) of the Code if the records are not maintained

or are not available for examination as required by paragraph (b)

below.

(b) (1) Except as provided in paragraph (b)(2) and notwithstanding

any provisions of section 504(a)(2) and (b) of the Act, the records

referred to in paragraph (a) are unconditionally available at their

customary location for examination during normal business hours by--

(i) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

(ii) Any fiduciary of the Client Plans who has authority to acquire

or dispose of shares of the Funds owned by the Client Plans, or any

duly authorized employee or representative of such fiduciary, and

(iii) Any participant or beneficiary of the Client Plans or duly

authorized employee or representative of such participant or

beneficiary;

(2) None of the persons described in paragraph (b)(1)(ii) and (iii)

of Section II shall be authorized to examine trade secrets of DFA, or

commercial or financial information which is privileged or

confidential; and

(c) A Second Fiduciary who is acting on behalf of a Client Plan and

who is independent and unrelated to DFA, as defined in paragraph (g) of

Section III below, will receive in advance of the investment by a

Client Plan in the Master Fund full written disclosure of information

concerning the Master Fund which shall include, but not be limited to

the following:

(1) A current copy of SEC Form N-1A (regarding the registration of

an open end investment company under the 1940 Act) 2 with respect

to the Master Fund, plus certain additional information as specified in

the Advisory Opinion 94-35A 3;

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2 Form N-1A requires the registrant to answer a series of

questions regarding financial information, management of the fund,

risk factors and expenses.

3 In the Advisory Opinion 94-35A (AO 94-35A) issued by

the Department to DFA, DFA requested an advisory opinion with regard

to certain disclosures required by the Securities Act of 1933 (the

1933 Act), and which are provided by DFA to independent plan

fiduciaries in connection with the plans' investment in a certain

open-end investment company to which DFA serves as an investment

advisor (the Core Fund), and which is registered under the 1940 Act,

but not under the 1933 Act. Specifically, DFA requested an advisory

opinion that a receipt by the independent plan fiduciary of the Core

Fund's Form N-1A and the additional information as specified in AO

94-35A complies with the prospectus disclosure requirement of

paragraph (d) of section II of PTCE 77-4. In AO 94-35A, the

Department stated that the disclosure of the Core Fund's Form N-1A

information and the additional information as specified in AO 94-35A

to an independent plan fiduciary, in lieu of a prospectus, will

satisfy the prospectus disclosure requirement of paragraph (d) of

section II of PTCE 77-4, provided that the additional information as

specified in AO 94-35A contains all the information, otherwise

included in a prospectus, that is relevant to the independent

fiduciary's decision as to whether to approve the purchase and sale

of shares in the Core Fund.

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(2) A table listing management fees for the most recent completed

fiscal period, all other expenses broken down by category and total

portfolio operating expenses;

(3) A chart showing the effect of such fees on an investment in the

Master Fund over one, three, five and ten years; and

(4) A list of per share income and capital changes for shares

outstanding throughout the year, including investment income, expenses,

net investment income, dividends from net investment income, net

realized and unrealized gains (losses) on securities; distributions

from net realized gains (losses) on securities; net increase (decrease)

in net asset value, net asset value at the beginning of the period, net

asset value at the end of the period, expenses to average net assets,

portfolio turnover rate, and number of shares outstanding at the end of

the period.

Section III--Definitions

For purposes of this proposed exemption:

(a) The term ``DFA'' means Dimensional Fund Advisors Inc., and any

affiliate thereof as defined below in paragraph (b) of this section.

(b) An ``affiliate'' of a person includes:

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

intermediaries, controlling, controlled by, or under common control

with the person;

(2) Any officer, director, employee, relative, or partner in any

such person; and

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

officer, director, partner, or employee.

(c) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(d) The term ``Fund'' or ``Funds'' shall include the DFA Investment

Trust Company, such additional series as may be added to the DFA

Investment Trust Company, or any other diversified open-end investment

company or companies registered under the 1940 Act for which DFA serves

as an investment advisor and may also serve as a custodian, shareholder

servicing agent, or transfer agent.

(e) The term ``net asset value'' means the amount for purposes of

pricing all purchases and sales calculated by dividing the value of all

securities, determined by a method as set forth in the Fund's SEC Form

N-1A and statement of additional information, and other assets

belonging to each of the portfolios in the Fund or the Fund, less the

liabilities charged to each such portfolio or the Fund, by the number

of outstanding shares.

(f) The term ``relative'' means a ``relative'' as that term is

defined in section 3(15) of the Act (or a ``member of the family'' as

that term is defined in section 4975(e)(6) of the Code), or a brother,

a sister, or a spouse of a brother or a sister.

(g) The term ``Second Fiduciary'' means a fiduciary of a Client

Plan who is independent of and unrelated to DFA. For purposes of this

exemption, the Second Fiduciary will not be deemed to be independent of

and unrelated to DFA if:

[[Page 49158]]

(1) Such Second Fiduciary directly or indirectly controls, is

controlled by, or is under common control with DFA;

(2) Such Second Fiduciary, or any officer, director, partner,

employee, or relative of the fiduciary is an officer, director, partner

or employee of DFA (or is a relative of such persons);

(3) Such Second Fiduciary directly or indirectly receives any

compensation or other consideration for his or her own personal account

in connection with any transaction described in this exemption.

If an officer, director, partner or employee of DFA (or relative of

such persons), is a director of such Second Fiduciary, and if he or she

abstains from participation in (i) the choice of the Client Plan's

investment manager advisor, (ii) the approval of any such purchase or

sale between the Client Plan and the Funds, and (iii) the approval of

any change in fees charged to or paid by the Client Plan in connection

with any of the transactions described in Section I above, then

paragraph (g)(2) of this Section III shall not apply.

Summary of Facts and Representations

1. DFA is a registered investment advisor under the Investment

Advisors Act of 1940. DFA was organized in May 1981, and is engaged in

the business of providing investment management services to

institutional investors (including pension and profit sharing plans,

endowment funds and governmental agencies). As of February 1, 1995, DFA

had approximately $10.5 billion in assets under management, of which

approximately $4.969 billion were held in the Group Trusts. DFA

currently sponsors three tax-exempt Group Trusts qualified under

Revenue Ruling 81-100. The Group Trusts hold assets of the Client Plans

for which DFA serves as a fiduciary and an investment manager as

defined in section 3(38) of the Act. Approximately $3.7 billion, or 74

percent of the Group Trusts assets are ERISA Client Plan assets.

2. DFA has full investment authority for the Group Trusts, which

are divided into various subtrusts, each with a distinct investment

objective and strategy. DFA represents that it does not receive any

fees from the Group Trusts. The initial decision and authorization to

participate in a subtrust of a Group Trust is made by the Second

Fiduciary of each Client Plan. A Client Plan which invests in the Group

Trust then negotiates an investment management agreement with DFA,

which specifies the types and amounts of services performed for such

Client Plan, under which the Client Plan pays DFA an investment

management fee.4

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4 The Department expresses no opinion as to whether the

provision of services by DFA or its affiliates to the Client Plans

satisfies the requirements for statutory exemption, as set forth in

section 408(b)(2) of the Act and 29 CFR 2550.408(b)(2) of the

Department's regulation. To the extent that such provision of

services to the Client Plans by DFA or its affiliates does not

satisfy the requirements of section 408(b)(2) of the Act, the

Department, herein, is offering no relief.

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3. As of January 31, 1995, the Group Trusts held investments of

thirty-eight (38) Client Plans. Of these Client Plans, 2 have invested

more than $500 million; 7 have invested between $100 million and $500

million; 10 have invested between $50 million and $100 million; 7 have

invested between $25 million and $50 million; and 12 have invested

between $1.113 million and $25 million. It is represented that the

investor Client Plans range in size from $57 million to $45 billion.

4. DFA also serves as the investment advisor to the DFA Investment

Trust Company (the DFA Investment Trust Company), a diversified, open-

end management investment company organized as a Delaware business

trust on October 27, 1992, and registered under the 1940 Act. The DFA

Investment Trust Company is currently comprised of seven series, each

of which operates as a diversified investment company and represents a

separate class of the DFA Investment Trust Company shares of beneficial

interest. Each of the series has specific investment objectives,

policies and investment limitations. DFA represents that in the future

it may add additional series to the DFA Investment Trust Company, or

create similar open-end management investment companies (collectively;

the Master Fund).

Currently, these series are: the U.S. 6-10 Small Company Series,

the U.S. Large Company Series, the DFA One-Year Fixed Income Series,

U.S. Small Cap Value Series, the U.S. Large Cap Value Series, the DFA

International Value Series and the Emerging Market Series. DFA serves

as investment advisor to each of the series, and it manages the

investment and reinvestment of the series' assets.

5. The shares of the Master Fund are sold only to the DFA sponsored

investment companies, to DFA sponsored group trusts, to separately

managed accounts forming a part of qualified plans, and to other large

institutional investors. The Master Fund is valued in accordance with

regulations issued by the Securities and Exchange Commission (SEC) for

valuing mutual capital under the 1940 Act. The applicant represents

that, as required under the 1940 Act, the fees for the Master Fund are

set at the series level, and must be charged with respect to all assets

invested in such series. The Master Fund, however, does not impose a

fee under the SEC Rule 12b-1.

6. It is represented that the Master Fund is the master of the

master-and-feeder arrangement. The master is an open-end management

investment company registered under the 1940 Act in which the feeders

purchase shares. The feeders include other open-end investment

companies, collective investment vehicles (such as the Group Trusts),

and/or other large institutional investors. A master-and-feeder

arrangement exists where multiple investment vehicles and institutional

investors with identical investment objectives pool their assets by

investing in a single investment company having the same investment

objective. This arrangement enables the feeder funds which invest in

the Master Fund to spread the fixed costs of portfolio management and

fund administration over a greater number of investment dollars and to

achieve economies of scale. DFA represents that it is in the interest

of the Client Plans to utilize the master-and-feeder arrangement.

The investment management fees at the master level reflect only the

costs of investing the assets in the Master Fund. Other fees are paid

at the feeder level. At the feeder level a client enters into an

investment management agreement (IMA) with DFA. Pursuant to the terms

of IMA, the types and amounts of services performed for each client are

individually negotiated with such client. Once the assets are invested

in the Master Fund, the net fee at the feeder level will be determined

by subtracting from each client's gross fee under the IMA that client's

pro rata share of the investment advisory fee paid by the Master

Fund.5 DFA states that this fee arrangement would be covered by

the Prohibited Transaction Class Exemption 77-4 (42 FR 18732, April 8,

1977) (PTCE 77-4).6

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\5\ In this regard, DFA submitted the following example. XYZ

company pension plan signs an IMA under which it agrees to pay DFA

60 basis points for all services provided under the IMA. DFA invests

the XYZ pension plan assets in the Master Fund, which has an

investment advisory fee of 40 basis points. In accordance with PTCE

77-4, DFA will offset the 40 basis point investment advisory fee at

the Master Fund level from the 60 basis point fee at the group trust

or feeder level. The XYZ pension plan will pay DFA 20 basis points

under the IMA with respect to the assets invested in the Master

Fund.

\6\ PTCE 77-4, in pertinent part, permits the purchase and sale

by an employee benefit plan of shares of a registered, open-end

investment company when a fiduciary with respect to the plan is also

the investment adviser for the investment company, provided that,

among other things, the plan does not pay an investment management,

investment advisory or similar fee with respect to the plan assets

invested in such shares for the entire period of such investment.

Section II(c) of PTCE 77-4 states that this condition does not

preclude the payment of investment advisory fees by the investment

company under the terms of an investment advisory agreement adopted

in accordance with section 15 of the Investment Company Act of 1940.

Section II(c) states further that this condition does not preclude

payment of an investment advisory fee by the plan based on total

plan assets from which a credit has been subtracted representing the

plan's pro rata share of investment advisory fees paid by the

investment company.

The Department notes that fees for services other than

investment advisory services (i.e., secondary services such as

administrative services) may be received by an investment advisor or

its affiliate, provided that the conditions of PTCE 77-4 are met.

(See the Advisory Opinions 93-12A and 93-13A issued by the

Department).

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[[Page 49159]]

7. Accordingly, DFA is requesting an exemption to permit the in-

kind transfer of the Client Plans' assets held in the subtrusts of the

Group Trusts to the corresponding series of the Master Fund in exchange

for the shares of the Master Fund. DFA represents that these transfers

would otherwise comply with the PTCE 77-4 as interpreted by the

advisory opinions issued by the Department, except for the fact that

the transfers will be in-kind.7 In accordance with PTCE 77-4, the

investment management, investment advisory or similar fees generated at

the Master Fund level will directly offset the plan level fees with

respect to the Client Plans' assets invested in the Master Fund.

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\7\ In this regard, the Department is of the view that the

relief provided by PTCE 77-4 is unavailable for the purchase and

sale of shares in mutual funds other than for cash. (See Advisory

Opinion 94-35A issued by the Department).

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8. A Second Fiduciary who is independent of DFA will be provided

with advance written notice of the transfer and full written disclosure

concerning the Master Fund, including a current copy of SEC Form N-1A

(regarding the registration of an open end investment company under the

1940 Act) with respect to the Master Fund, plus the additional

information as specified in AO 94-35A which shall include but not be

limited to the following: (1) A table listing management fees for the

most recent completed fiscal period, all other expenses broken down by

category and total portfolio operating expenses; (2) a chart showing

the effect of such fees on an investment in the Fund over one, three,

five and ten years; and (3) a list of per share income and capital

changes for a share outstanding throughout the year, including

investment income, expenses, net investment income, dividends from net

investment income, net realized and unrealized gains (losses) on

securities; distributions from net realized gains (losses) on

securities; increase (decrease) in net asset value, net asset value at

the beginning of the period, net asset value at the end of the period,

expenses to average net assets, portfolio turnover rate, and number of

shares outstanding at the end of the period. On the basis of such

information, the Second Fiduciary will authorize in writing the in-kind

transfer of the Client Plan's assets in the Group Trust to the Master

Fund in exchange for the shares of the Master Fund.

9. DFA will not execute an in-kind transfer of the Client Plan's

assets unless the Second Fiduciary affirmatively consents to the

transfer. Also, no sales commissions or other fees will be paid by the

Client Plans in connection with the purchase of the Master Fund's

shares through an in-kind transfer of the Group Trust's assets. The

transfers will be one-time transactions between subtrusts of the Group

Trusts and series of the Master Fund that have the same investment

objectives. Furthermore, the transferred securities will be valued at

the time of the transfer using the same methodology in the subtrust of

the Group Trust as in the Master Fund's corresponding series.

10. DFA represents that valuation of assets transferred in-kind to

the Master Fund will be established by reference to independent

sources. All assets transferred in-kind will be valued in accordance

with Rule 17a-7 8 under the 1940 Act, as amended from time to time

or any successor rule, regulation or similar pronouncement, and the

procedures established by DFA pursuant to Rule 17a-7 for the valuation

of such assets. Such procedures require that all securities for which a

current market price cannot be obtained by reference to the last sale

price on a recognized securities exchange or NASDAQ, will be valued on

an average of the highest current independent bid and lowest current

independent offer, as of the close of business on the business day

preceding the transfer, determined on the basis of reasonable inquiry

from at least three sources that are broker dealers or pricing services

independent of DFA.

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\8\ Rule 17a-7 permits transactions between investment funds

that use the same investment advisor, subject to certain conditions.

Rule 17a-7(b) requires, among other things, that such transactions

be effected at the ``independent current market price'' for each

security, involve only securities for which market quotations are

readily available, involve no brokerage commissions or other

renumeration, and comply with valuation procedures adopted by the

board of directors of the investment company to ensure that all

requirements of the Rule are satisfied.

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Further, DFA represents that not later than 30 days after

completion of the in-kind transfers it will send by regular mail to

each affected Client Plan, written confirmation of the identity of each

security that was valued for purposes of the transaction in accordance

with Rule 17a-7(b)(4), the price of each such security involved in the

transaction; and the identity of each pricing service or market maker

consulted in determining the value of such securities. The securities

subject to valuation under Rule 17(a)-7(b)(4) include all securities

other than ``reported securities'', as the term is defined in Rule

11Aa3-1 under the Securities Exchange Act of 1934, or those quoted on

the NASDAQ system or for which the principal market is an exchange.

Each Group Trust will receive shares of the Master Fund that have a

total net asset value equal to the value of the Client Plans' all or

pro rata share of the Group Trust's assets on the date of the transfer,

based on the current market value of the Group Trust's assets as

determined in a single valuation also performed in the same manner at

the close of the same business day.

In addition, no later than 90 days after completion of each in-kind

transfer, DFA will send by regular mail to the Second Fiduciary written

confirmation of the number of Group Trust's units held by the Client

Plan immediately before the transfer (and the related per unit value

and the total dollar amount of such Group Trust's units transferred),

and the number of shares in the Master Fund that are held by the Client

Plan following the transfer (and the related per share net asset value

and the total dollar amount of such shares received).

11. With respect to ongoing disclosure, DFA will, as necessary, and

in accordance with requirements of the 1940 Act, provide Client Plans

with updated copies of SEC Form N1-A with respect to the Master Fund.

DFA will also update, as necessary, additional information identified

in AO 94-35A, which is provided by DFA to its Client Plans.

12. DFA represents that the proposed transfers are in the interest

and protective of the Client Plans. No sales commissions or other fees

will be paid by the Client Plans in connection with the purchase of the

Master Fund's shares through an in-kind transfer of the Group Trust's

assets. Furthermore, to the extent that it is not possible for DFA to

determine a price for a particular security pursuant to Rule 17(a)-7,

such security will remain in the Group Trust. In structuring the

transactions as described herein, DFA will eliminate

[[Page 49160]]

commission costs, market maker's spread and any potential for adverse

market impact. The savings from in-kind purchases would directly

benefit the Group Trusts and the Client Plans that participate in them.

DFA also maintains that there will be no penalty to a Client Plan for

not participating in the in-kind transfer. If a Client Plan chooses not

to participate in the transfer, DFA has the option of not transferring

any assets from a particular subtrust of the Group Trust as long as

that Client Plan remains in that subtrust. DFA may also segregate the

Client Plan's proportionate share of Group Trust's assets into a

separate subtrust, and then transfer the remaining assets to the Master

Fund.

13. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because:

(a) No sales commissions, redemption fees or other fees are paid by

the Client Plans in connection with the in-kind transfer of Group

Trust's assets in exchange for the shares of the Master Fund;

(b) A Second Fiduciary who is acting on behalf of each affected

Client Plan and who is independent of and unrelated to DFA, as defined

in paragraph (g) of Section III, receives advance written notice of the

in-kind transfer of the Group Trust's assets and the disclosures

described in paragraph (c) of Section II;

(c) No later than 30 days after completion of each in-kind transfer

of Group Trust's assets to the Master Fund, the Second Fiduciaries for

affected Client Plans will receive written confirmation of the identity

of each security that was valued for purposes of the transaction in

accordance with Rule 17a-7(b)(4), the price of each such security, and

the identity of the pricing service or market maker consulted;

(d) No later than 90 days after completion of each in-kind transfer

of the Group Trust's assets to the Master Fund, DFA will mail to the

Second Fiduciary a written confirmation of the number of Group Trust's

units held by each affected Client Plan immediately before the transfer

(and the related per unit value and the aggregate dollar value of such

Group Trust's units transferred), and the number of shares in the

Master Fund that are held by each affected Client Plan following the

transfer (and the related per share net asset value and the aggregate

dollar value of such shares received);

(e) Each Group Trust will receive shares of the Master Fund that

are equal to the value of the Client Plans' all or pro rata share of

the Group Trust's assets on the date of the transfer, as determined in

a single valuation performed in the same manner at the close of the

same business day with respect to any such transfer, in accordance with

the procedures set forth in Rule 17a-7 under the 1940 Act, as amended

from time to time or any successor rule, regulation, or similar

pronouncement;

(f) On the basis of such information described in paragraph (c) of

Section II, the Second Fiduciary will authorize in writing the in-kind

transfer of the Client Plan's assets held in the subtrust of the Group

Trust to the corresponding series of the Master Fund in exchange for

the shares of the Master Fund, and the investment of such assets in the

corresponding series of the Master Fund. Such authorization is to be

consistent with the responsibilities, obligations, and duties imposed

on fiduciaries by Part 4 of Title I of the Act;

(g) DFA will not execute an in-kind transfer of the Client Plan's

assets unless the Second Fiduciary of each affected Client Plan

affirmatively consents to the in-kind transfer in writing;

(h) The transfers will be one-time transactions for each subtrust

of a Group Trust for which a comparable series of a Master Fund exists;

and

(i) there will be no penalty to a Client Plan for not participating

in the in-kind transfer.

Notice to Interested Persons

DFA represents that it will distribute by first class mail a copy

of the notice of pendency of this proposed exemption (the Notice)

within fifteen (15) days of the date of such Notice in the Federal

Register to the fiduciaries of any of the Client Plans which are

invested in any of the Group Trusts on the date of publication of such

Notice in the Federal Register. The distribution to interested persons

shall include a copy of the Notice as published in the Federal Register

and a supplemental statement, as required pursuant to 29 CFR

2570.43(b)(2) which informs all interested persons of their right to

comment on and/or request a hearing with respect to the proposed

exemption. DFA also will provide a copy of the proposed exemption and/

or a copy of the final exemption, if granted, to any Second Fiduciary

of a Client Plan upon request. Comments and requests for a public

hearing are due within forty-five (45) days following the publication

of the proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,

telephone (202) 219-8883. (This is not a toll-free number.)

First National Bank of Anchorage Common Trust Fund (the Fund) Located

in Anchorage, Alaska

[Application No. D-10117]

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 C.F.R. 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)

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 prospective sales of certain defaulted

real estate mortgages (the Mortgages) by the First National Bank of

Anchorage Common Trust Fund (the Fund) to the First National Bank of

Anchorage (the Bank), a party in interest with respect to the Fund,

provided that the following conditions are satisfied:

(1) The sales will be one-time cash transactions;

(2) the Fund will incur no costs in connection with the sales;

(3) the Fund will sell each Mortgage for the greater of fair market

value, or its outstanding principal balance plus accrued, but unpaid

interest, and penalty charges at the time of the sale;

(4) the independent fiduciaries (the Independent Fiduciaries)

appointed to act on behalf of the Fund in these transactions will

review and determine that a Mortgage is in default, has been properly

declared to be in default by the Bank in accordance with the

Comptroller of Currency regulations, and that the prospective sale of a

Mortgage is in the best interest of the Fund;

(5) neither of the Independent Fiduciaries will derive more than 5%

of his gross annual income from the Bank for each fiscal year that he

serves in an independent fiduciary capacity with respect to the

transactions described herein;

(6) the Mortgages will be purchased, rather than segregated, by the

Bank;

(7) the borrowers on the Mortgages will be unrelated third parties;

(8) the conditions of the Prohibited Transaction Exemption 90-60

(PTE 90-60) have been met. PTE 90-60, which expired September 12, 1995,

provided retroactive and prospective relief for sales of the Mortgages

by the Fund to the Bank;

[[Page 49161]]

(9) the Bank maintains for a period of six years, the records

necessary to enable persons described in (10) below to determine

whether the conditions of this proposed exemption have been met, except

that a prohibited transaction will not be considered to have occurred

if, due to the circumstances beyond the control of the Bank or its

affiliates, the records are lost or destroyed prior to the end of the

six-year period; and

(10) (i) Except as provided in paragraph (ii) of this subsection

(10) and notwithstanding any provisions of subsections (a)(2) and (b)

of section 504 of the Act, the records referred to in subsection (9)

above are unconditionally available at their customary location for

examination during normal business hours by--

(A) Any duly authorized employee or representative of the

Department or the Internal Revenue Service,

(B) Any fiduciary of a plan participating in the Fund, who has

authority to acquire or dispose of the interests of the plan, or any

duly authorized employee or representative of such fiduciary,

(C) Any contributing employer to any plan participating in the

Fund, or any duly authorized employee or representative of such

employer, and

(D) Any participant or beneficiary of any plan participating in the

Fund, or any duly authorized employee or representative of such

participant or beneficiary.

(ii) None of the persons described in subparagraphs (B) through (D)

of this subsection (10) shall be authorized to examine trade secrets of

the Bank, any of its affiliates, or commercial or financial information

which is privileged or confidential.

Summary of the Facts and Representations

1. The First National Bank of Anchorage (the Bank) is a bank

organized in the state of Alaska, and it provides banking and trust

services. The Bank is subject to periodic examinations by the

Comptroller of the Currency. The Bank's principal business offices are

located at 646 West Fourth Avenue in Anchorage, Alaska, and the Bank

maintains 27 banking locations within this geographic area.

2. The Fund is a common trust fund established by the Bank on

November 2, 1965. The Fund is established pursuant to the Comptroller

of Currency Regulations section 9.18(a)(1) (OCC Regulations), and

contains assets of participating estates, trusts, and employee benefit

plans (the Participating Trusts). Current investors in the Fund include

three defined contribution profit sharing plans. The Trust Committee of

the Bank (the Trust Committee) has investment discretion with respect

to the Fund. The Bank is the sponsor and fiduciary of the Fund.

The Fund is maintained in accordance with the rules and regulations

of the Comptroller of Currency. As required by the regulations, the

Fund performs annual internal audits. Also, the Fund is valued

quarterly and audited annually by an independent accounting firm. For

the 1996 Fund year, KPMG Peat Marwick will perform the quarterly

valuations and the annual audit of the Fund. The Fund is also subject

to periodic audits by the Comptroller of Currency.

3. The Bank was granted an individual exemption by the Department

in 1990 (PTE 90-60), for the past and prospective sales of certain

defaulted real estate mortgages (the Mortgages) by the Fund in which

the Participating Trusts invest, to the Bank, a party in interest with

respect to the Fund. PTE 90-60 provided retroactive relief as of August

5, 1980, and remained effective for a five year period from September

12, 1990, which was the date the final grant appeared in the Federal

Register. PTE 90-60 expired September 12, 1995. The applicant

represents that the prospective portion of PTE 90-60 was never used by

the Bank. With respect to the prospective transactions entered into

after September 30, 1988, PTE 90-60 contained conditions that were

substantially similar to those proposed herein.

4. The Fund was established by the Bank to collectively invest and

reinvest monies received by the Bank in its capacity as fiduciary and

trustee of estates, trusts and retirement plans. As authorized by the

OCC Regulations, the Fund also invests in first mortgage loans which

were originated by the Fund and secured by real property. The borrowers

on the Mortgages are independent third parties unrelated to the Bank

and the Plans investing in the Fund. Occasionally, some Mortgages go

into default. However, over the preceding five years, no Mortgages have

gone into default. The Fund currently contains one Mortgage which is

not in default. The applicant represents that any Mortgages in default

would represent a small percentage of the net asset value of the Fund,

which as of June 30, 1995 was $7,443,065. In this regard, approximately

20% of the participation interests in the Fund are owned by the

Participating Trusts.

5. The applicant represents that under OCC Regulations, the Bank

has two alternative methods to protect the Fund when a Mortgage owned

by the Fund goes into default. The Bank may either segregate the

defaulted Mortgages from the remainder of the Fund or it may purchase

such Mortgages thereby permitting the Fund to reinvest the proceeds.

The OCC Regulations section 9.18(b)(7)(ii) specifies that a segregated

investment shall be administered separately, realizing its own separate

gains and losses, pro-rata, with regard to all participants in the

Fund. Accordingly, the applicant represents that because each

segregated account bears its own costs and realizes its own income, and

except for borrowings, cannot receive any further investment in the

account, it is possible that liquidating an account for a defaulted

investment would mean significant losses to such account, and the final

proceeds of the liquidating account would be significantly less than

the value of the assets prior to segregation.

However, in the case of the Bank purchasing a mortgage, the OCC

Regulations section 9.18(b)(8)(ii) state that:

``Any bank administering a collective investment fund may purchase

for its own account from such fund any defaulted fixed income

investment held by such fund, if in the judgement of the board of

directors the cost of segregation of such investment would be greater

than the difference between its market value and its principal amount

plus interest and penalty charges due. If the bank elects to so

purchase such investment, it must do so at its market value or the sum

of the costs (i.e., outstanding principal plus accrued unpaid interest,

and penalty charges, whichever is greater.'' The time period available

for a decision with respect to either segregation or purchase of a

mortgage is 60 days when the required payment was not received.

6. The Bank will purchase defaulted Mortgages from the Fund for the

outstanding principal balance, plus accrued but unpaid interest and

penalty charges. As stated in the Summary of the Facts and

Representations of the notice preceding PTE 90-60 (the Summary), the

Board of Directors of the Bank (the Board of Directors) determined that

this practice is a superior alternative to segregation because the

costs of retaining and segregating the mortgages are substantial. If

the Fund were to retain and segregate the Mortgages under the OCC

Regulations, it would, as owner of the Mortgages, incur the costs of

foreclosure in order to realize on the collateral of a mortgage loan.

Pursuant to the retroactive relief provided under PTE 90-60, the Bank

has in the past

[[Page 49162]]

purchased defaulted Mortgages from the Fund for outstanding principal

balance, plus accrued interest and penalty charges at the time of the

purchase.

7. With respect to any prospective purchases of the Mortgages, the

Bank obtained determinations of value from an independent appraiser and

from a business advisor, who also have rendered their opinions under

PTE 90-60. The first determination of value is rendered by Kenneth C.

Hume, who is an independent business advisor in the state of Alaska,

and a former president of the Alaska State Bank. Mr. Hume was also

employed as an assistant vice president with the Bank of California,

and a regional vice president with the First National Bank of Oregon

(First Interstate), and therefore has experience with transactions

involving a bank and its trust department. Mr. Hume concluded on March

5, 1996, that the ``upper limit'' of a fair market value of a mortgage

in default would be the outstanding principal balance plus accrued

interest, insurance, taxes, and penalties. Mr. Hume also stated that it

is in the interest of the Fund to sell the defaulted mortgages and

reinvest these proceeds.

8. A second determination of value, dated April 23, 1996, was

prepared by David T. McCabe, an independent, qualified real estate

appraiser, who has experience as an arbitrator and a general partner

with the Alaska Mortgage Group. Mr. McCabe stated that the ``upper

limit'' of the fair market value of a mortgage in default is the

outstanding principal balance plus accrued but unpaid interest and

penalties. Mr. McCabe also stated that it is in the interest of the

Fund to sell the defaulted mortgages and reinvest these proceeds.

9. The purchases of defaulted Mortgages will be one-time cash

transactions for the greater of fair market value, or the outstanding

principal balance plus accrued, but unpaid interest, and penalty

charges at the time of the sale. A decision as to the ``default''

status of a mortgage will be made by the Trust Committee in accordance

with the Comptroller's Handbook for National Trust Examiners,

Precedents and Opinions for Collective Investment Funds, section

9.5740. This section specifies that: ``Any mortgage which is in default

for a period of 60 days or more should be removed from the fund before

admissions or withdrawals are made. * * * If the loan is not made

current before two valuation dates occur (i.e., 60 days), it should be

removed from the account. Within this limitation, the trust investment

committee could properly be given discretionary authority as to the

segregation or sale of such defaulted mortgages.'' After the Trust

Committee informs the Board of Directors regarding default of a

Mortgage, the Board of Directors makes the decision to purchase the

defaulted Mortgage. As was permitted by PTE 90-60, in the past the Bank

has always purchased, rather then segregated, the Mortgages.

10. The applicant represents that the Bank's prospective purchases

of the Mortgages will continue to be desirable for the Fund.

Segregation of a defaulted Mortgage is not a viable alternative because

the high costs of segregation are ultimately detrimental to the Fund.

These costs would be imposed upon the segregated mortgage assets alone,

thereby reducing the amounts ultimately disbursed to the Participating

Trusts in the Fund when the segregated accounts are liquidated, after

foreclosure. In addition to the foreclosure costs, the Fund would

sustain the loss of additional accounting and administrative expenses

incurred in the segregation of the Mortgages into ``liquidating

accounts'' in the Fund. The likely consequence of segregation is that

the final proceeds of the liquidating account available for

distribution to the Participating Trusts in the Fund will be

significantly less than the value of the assets prior to segregation.

In this regard, the applicant represents that the Mortgages will always

be purchased, rather than segregated, by the Bank.

11. The applicant also appointed Mr. Hume and Mr. McCabe as the

Independent Fiduciaries to monitor prospective purchases of the

Mortgages by the Bank.9 In this regard, Mr. McCabe and Mr. Hume

represent that they accept the fiduciary duties and liability set forth

in section 404 of the Act regarding fiduciary duties. With respect to

the prospective transactions described herein, Mr. McCabe and Mr. Hume

will review and determine that a Mortgage is in default, has been

properly declared in default by the Bank in accordance with the OCC

Regulations, and that the sale of a Mortgage is in the best interest of

the Fund. Neither Independent Fiduciary will derive more than 5% of his

gross annual income from the Bank for each fiscal year that he serves

in an independent fiduciary capacity with respect to the transactions

described herein. The applicant represents that it is probable, given

the nature and the scope of the Bank's business and the size of the

city of Anchorage, that Mr. McCabe and Mr. Hume had a borrower/lender

relationship with the Bank in the past five years. However, this

relationship was de minimus and would not affect their independent

judgement as the Independent Fiduciaries.

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9 The applicant states that the purpose of having two

Independent Fiduciaries is to provide at least one source of

independent review, in the event that one of the Independent

Fiduciaries is not available at the time when a mortgage must be

declared in default by the Bank.

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12. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because:

(1) The sales will be one-time cash transactions;

(2) the Fund will incur no costs in connection with the sales;

(3) the Fund will sell each Mortgage for the greater of fair market

value, or its outstanding principal balance plus accrued, but unpaid

interest, and penalty charges at the time of the sale;

(4) two Independent Fiduciaries appointed to act on behalf of the

Fund in these transactions will review and determine that a Mortgage is

in default, has been properly declared to be in default by the Bank in

accordance with the Comptroller of Currency regulations, and that the

prospective sale of a Mortgage is in the best interest of the Fund;

(5) neither of the Independent Fiduciaries will derive more than 5%

of his gross annual income from the Bank for each fiscal year that he

serves in an independent fiduciary capacity with respect to the

transactions described herein;

(6) the Mortgages will be purchased, rather than segregated, by the

Bank;

(7) the conditions of the Prohibited Transaction Exemption 90-60

(PTE 90-60) have been met. PTE 90-60, which expired September 12, 1995,

provided retroactive and prospective relief for sales of the Mortgages

by the Fund to the Bank; and

(8) the borrowers on the Mortgages will be unrelated third parties.

Notice to Interested Persons

The applicant maintains that parties who may be interested in the

pendency of this requested exemption include plan administrators of the

plans participating in the Fund. It is represented that within ten (10)

days of the date of publication of the notice of proposed exemption

(the Notice) in the Federal Register, notification to interested

parties will be provided by first class mail or by delivery. Such

notification will include a copy of the Notice, as published in the

Federal Register, and a copy of the supplemental statement, as

required, pursuant to 29 CFR 2570.43(b)(2). The notification will

inform such interested parties of their right to comment or

[[Page 49163]]

request a hearing within a time period specified in the notification.

For Further Information Contact: Ekaterina A. Uzlyan, U.S.

Department of Labor, telephone (202) 219-8883. (This is not a toll-free

number.)

HSBC Securities, Inc. (HSBC) Located in New York, New York

[Application No. D-10316]

Proposed Exemption

I. Transactions

A. 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.10

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10 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. 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.11 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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\11\ 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. 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.12

\12\ 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. 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

[[Page 49164]]

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,

nor 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

HSBC 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) HSBC;

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

intermediaries, controlling, controlled by or under common control with

HSBC; or

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

which HSBC 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

[[Page 49165]]

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 would

be the case 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 would be the case if the

trust consisted of motor vehicle installment loan contracts.

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.

Summary of Facts and Representations

1. HSBC is a New York-based international banking and financial

services organization. HSBC is a 100% indirect subsidiary of HSBC

Holdings plc (Holdings), a multi-bank holding company registered under

the Bank Holding Company Act of 1956, as amended, and the rules and

regulations thereunder. Holdings is the largest bank in the world

ranked by shareholders' equity. HSBC was incorporated on December 12,

1969, as Carroll, McEntee & Co. (with the current name adopted on April

11, 1994). HSBC provides a wide range of commercial and retail banking

and trust services. HSBC 13 also provides various other financial

services, including commercial banking, merchant banking, and capital

holding markets services.

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\13\ For purposes of this exemption, ``HSBC'' shall include HSBC

and its affiliates, except where the context otherwise requires.

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Together with its affiliates, HSBC is a financial services

organization servicing the financial needs of individuals, businesses,

governments and financial institutions. As to the capital markets, HSBC

engages in securities transactions as both principal and agent and

provides underwriting, research and other financial services. HSBC is

actively involved in the issuance and trading of corporate debt and

other fixed-income securities (including mortgage and asset-backed

securities), U.S. government securities and equity securities.

HSBC represents that it has the legal authority to underwrite

asset-backed securities. By order dated February 20, 1996, the Board of

Governors of the Federal Reserve granted HSBC the power to underwrite

and deal in residential mortgage-related and consumer-receivable

related securities and all types of debt securities, including

securities issued by a trust, partnership, limited liability company or

other vehicle secured by or

[[Page 49166]]

representing interests in debt obligations (such as asset-backed

securities). In each case, HSBC's power to so underwrite and deal is

subject to a framework of structural and operating limitations set

forth in the applicable order, including a condition that it does not

derive more than a certain percentage of its gross revenues from such

activities.

Trust Assets

2. HSBC 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; 14 (2) motor vehicle

receivable investment trusts; (3) consumer or commercial receivables

investment trusts; and (4) guaranteed governmental mortgage pool

certificate investment trusts.15

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\14\ 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. HSBC requests relief for single-family residential mortgages in

this exemption because it would prefer one exemption for all trusts

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

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

\15\ 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

mort gages 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.16

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16 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. HSBC, alone or together with other broker-dealers, acts

as underwriter or placement agent with respect to the sale of the

certificates. All of the public offerings of certificates presently

contemplated are to be underwritten by HSBC on a firm commitment basis.

In addition, HSBC anticipates that it may privately place certificates

on both a firm commitment and an agency basis. HSBC may also act as the

lead underwriter for a syndicate of securities underwriters.

Certificateholders will be entitled to receive monthly, quarterly

or semi-annual 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

certificateholders) 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

certificateholders 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. HSBC

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.17

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17 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)(l)(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. 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 has 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

[[Page 49167]]

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.18

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18 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 (within 120 days, except in the case of obligations

having an original term of 30 years, in which case the period will not

exceed two years). 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 home owner or automobile

purchaser, or leases property to a 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

or other 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 HSBC, the trust sponsor or the servicer. HSBC 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 or sponsor. 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, the receivables may be

``subserviced'' by their respective originators and a single entity may

``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.

Receivables of the type suitable for inclusion in a trust

invariably are serviced with the assistance of a computer. After the

sale, the servicer keeps the sold receivables on the computer system in

order to continue monitoring the accounts. Although the records

relating to sold receivables are kept in the same master file as

receivables retained by the originator, the sold receivables are

flagged as having been sold. To protect the investor's interest, the

servicer ordinarily covenants that this ``sold flag'' will be included

in all records relating to the sold receivables, including the master

file, archives, tape extracts and printouts.

The sold flags are invisible to the obligor and do not affect the

manner in which the servicer performs the billing, posting and

collection procedures related to the sold receivables. However, the

servicer uses the sold flag to identify the receivables for the purpose

of reporting all activity on those receivables after their sale to

investors.

Depending on the type of receivable and the details of the

servicer's computer system, in some cases the servicer's internal

reports can be adapted for investor reporting with little or no

modification. In other cases, the servicer may have to perform special

calculations to fulfill the investor reporting responsibilities. These

calculations can be performed on the servicer's main computer, or on a

small computer with data supplied by the main system. In all cases, the

numbers produced for the investors are reconciled to the servicer's

books and reviewed by public accountants.

The underwriter will be a registered broker-dealer that acts as

underwriter or placement agent with respect to the sale of the

certificates. Public offerings of certificates are generally made on a

firm commitment basis. Private placement of certificates may be made on

a firm commitment or agency basis. It is anticipated that the lead and

co-managing underwriters will make a market in certificates offered to

the public.

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

included in a trust and the sponsor of the trust (although they may

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

however, HSBC may originate or service receivables included in a trust,

may sponsor a trust and/or may underwrite certificates.

Certificate Price, Pass-Through Rate and Fees

11. In some cases, the sponsor will obtain the receivables from

various originators pursuant to existing contracts with such

originators under which the sponsor continually buys receivables. In

other cases, the sponsor will purchase the receivables at fair market

value from the originator or a third party pursuant to a purchase and

sale agreement related to the specific offering of certificates. In

other cases, the sponsor will originate the receivables itself.

[[Page 49168]]

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.

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.19 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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19 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 or an affiliate thereof, 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 typically

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) expenses, 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 maintained with 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. The underwriter will receive a fee in connection with the

securities underwriting or private placement of certificates. In a firm

commitment underwriting, this fee would consist of the difference

between what the underwriter receives for the certificates that it

distributes and what it pays the sponsor for those certificates. In a

private placement, the fee normally takes the form of an agency

commission paid by the sponsor. In a best efforts underwriting in which

the underwriter would sell certificates in a public offering on an

agency basis, the underwriter would receive an agency commission rather

than a fee based on the difference between the price at which the

certificates are sold to the public and what it pays the sponsor. In

some private placements, the underwriter may buy certificates as

principal, in which case its compensation would be the difference

between what it receives for the certificates that it sells and what it

pays the sponsor for these certificates.

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

receivables 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 overcollateralization) 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) from the credit support provider (which

may be the master servicer or an affiliate thereof) or, (c) in the case

of a trust that

[[Page 49169]]

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.

Moreover, 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 certificate holders' 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 master 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 thereafter is 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.

[[Page 49170]]

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.

Forward Delivery Commitments

24. To date, no forward delivery commitments have been entered into

by HSBC in connection with the offering of any certificates, but HSBC

may contemplate entering into such commitments. The utility of forward

delivery commitments has been recognized with respect to offering

similar certificates backed by pools of residential mortgages, and HSBC

may find it desirable in the future to enter into such commitments for

the purchase of certificates.

Secondary Market Transactions

25. It is HSBC's normal policy to attempt to make a market for

securities for which it is lead or co-managing underwriter. HSBC

anticipates that it will make a market in certificates.

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 HSBC 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) HSBC anticipates that it will 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

[[Page 49171]]

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.\20\

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\20\ In 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

HSBC 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.\21\ 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.\22\ 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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\21\ In this regard, we note that the exemptive relief proposed

herein is limited to certificates with respect to which First Union

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.

\22\ The applicant represents that where a trust sponsor is an

affiliate of HSBC, 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 HSBC is not a fiduciary

with respect to plan assets to be invested in certificates.

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Additionally, HSBC 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. HSBC

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, HSBC 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.)

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 accurately describe all

material terms of the transaction which is the subject of the

exemption. In the case of continuing exemption transactions, if any of

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 13th day of September, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 96-23926 Filed 9-17-96; 8:45 am]

BILLING CODE 4510-29-P