Proposed Exemptions; Morgan Stanley & Company Incorporated

DEPARTMENT OF LABOR

[Application No. D-10108, et al.]

Proposed Exemptions; Morgan Stanley & Company Incorporated

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restriction of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the pending exemptions, unless otherwise

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

date of publication of this Federal Register Notice. Comments and

requests for a hearing should state: (1) the name, address, and

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

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

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

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

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

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

addressed and include a general description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and requests 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.

Morgan Stanley & Co. Incorporated; Located in New York, New York

[Application No. D-10108]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

Section I--Transactions

A. Effective August 25, 1995, the restrictions of section 406(a)(1)

(A) through (D) of the Employee Retirement Income Security Act of 1974

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

Internal Revenue Code of 1986 (the Code), by reason of section 4975

(c)(1) (A) through (D) of the Code, shall not apply to any purchase or

sale of a security between an employee benefit plan and a broker-dealer

affiliated with Morgan Stanley & Co. and subject to British law (MSC/UK

Affiliate), if the following conditions, and the conditions of Section

II, are satisfied:

(1) The MSC/UK Affiliate customarily purchases and sells securities

for its own account in the ordinary course of its business as a broker-

dealer.

(2) Such transaction is on terms at least as favorable to the plan

as those which the plan could obtain in an arm's length transaction

with an unrelated party.

(3) Neither the MSC/UK Affiliate nor an affiliate thereof has

discretionary authority or control with respect to the investment of

the plan assets involved in the transaction, or renders investment

advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to

those assets, and the MSC/UK Affiliate is a party in interest or

disqualified person with respect to the plan assets involved in the

transaction solely by reason of section 3(14)(B) of the Act or section

4975(e)(2)(B) of the Code, or by reason of a relationship to a person

described in such sections. For purposes of this paragraph, the MSC/UK

Affiliate shall not be deemed to be a fiduciary with respect to a plan

solely by reason of providing securities custodial services for a plan.

B. Effective August 25, 1995, the restrictions of section 406(a)(1)

(A) through (D) 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 lending of securities that are assets of

an employee benefit plan to an MSC/UK Affiliate if the following

conditions, and the conditions of Section II, are satisfied:

(1) Neither the MSC/UK Affiliate (the Borrower) nor an affiliate of

the Borrower has discretionary authority or control with respect to the

investment of the plan assets involved in the transaction, or renders

investment advice (within the meaning of 29 CFR 2510.3-21(c)) with

respect to those assets;

(2) The plan receives from the Borrower, either by physical

delivery or by book entry in a securities depository located in the

United States, by the close of business on the day on which the

securities lent are delivered to the Borrower, collateral consisting of

U.S. currency, securities issued or

[[Page 58238]]

guaranteed by the United States Government or its agencies or

instrumentalities, or irrevocable United States bank letters of credit

issued by a person other than the Borrower or an affiliate thereof, or

any combination thereof, having, as of the close of business on the

preceding business day, a market value (or, in the case of letters of

credit, a stated amount) equal to not less than 100 percent of the then

market value of the securities lent. The collateral referred to in this

Section I(B)(2) must be held in the United States;

(3) Prior to the making of any such loan, the Borrower shall have

furnished the following items to the fiduciary for the plan who is

making decisions on behalf of the plan with respect to the lending of

securities (the Lending Fiduciary): (1) the most recent available

audited statement of the Borrower's financial condition, (2) the most

recent available unaudited statement of the Borrower's financial

condition (if more recent than such audited stated), and (3) a

representation that, at the time the loan is negotiated, there has been

no material adverse change in the Borrower's financial condition since

the date of the most recent financial statement furnished to the plan

that has not been disclosed to the Lending Fiduciary. Such

representation may be made by the Borrower's agreement that each such

loan shall constitute a representation by the Borrower that there has

been no such material adverse change;

(4) The loan is made pursuant to a written loan agreement, the

terms of which are at least as favorable to the plan as those which the

plan could obtain in an arm's-length transaction with an unrelated

party. Such agreement may be in the form of a master agreement covering

a series of securities-lending transactions;

(5) The plan (1) receives a reasonable fee that is related to the

value of the borrowed securities and the duration of the loan, or (2)

has the opportunity to derive compensation through the investment of

cash collateral. Where the plan has that opportunity, the plan may pay

a loan rebate or similar fee to the Borrower, if such fee is not

greater than the plan would pay an unrelated party in an arm's-length

transaction;

(6) The plan receives the equivalent of all distributions made to

holders of the borrowed securities during the term of the loan,

including, but not limited to, cash dividends, interest payments,

shares of stock as a result of stock splits and rights to purchase

additional securities;

(7) If the market value of the collateral on the close of trading

on a business day is less than 100 percent of the market value of the

borrowed securities at the close of trading on that day, the Borrower

shall deliver, by the close of business on the following business day,

an additional amount of collateral (as described in paragraph (2)) the

market value of which, together with the market value of all previously

delivered collateral, equals at least 100 percent of the market value

of all the borrowed securities as of such preceding day.

Notwithstanding the foregoing, part of the collateral may be returned

to the Borrower if the market value of the collateral exceeds 100

percent of the market value of the borrowed securities, as long as the

market value of the remaining collateral equals at least 100 percent of

the market value of the borrowed securities;

(8) The loan may be terminated by the plan at any time, whereupon

the Borrower shall deliver certificates for securities identical to the

borrowed securities (or the equivalent thereof in the event of

reorganization, recapitalization or merger of the issuer of the

borrowed securities) to the plan within (1) the customary delivery

period for such securities, (2) three business days, or (3) the time

negotiated for such delivery by the plan and the Borrower, whichever is

lesser; and

(9) In the event the loan is terminated and the Borrower fails to

return the borrowed securities or the equivalent thereof within the

time described in paragraph (8) above, then (i) the plan may, under the

terms of the loan agreement, purchase securities identical to the

borrowed securities (or their equivalent as described above) and may

apply the collateral to the payment of the purchase price, any other

obligations of the Borrower under the agreement, and any expenses

associated with the sale and/or purchase, and (ii) the Borrower is

obligated, under the terms of the loan agreement, to pay, and does pay

to the plan, the amount of any remaining obligations and expenses not

covered by the collateral plus interest at a reasonable rate.

Notwithstanding the foregoing, the Borrower may, in the event the

Borrower fails to return borrowed securities as described above,

replace non-cash collateral with an amount of cash not less than the

then current market value of the collateral, provided such replacement

is approved by the Lending Fiduciary.

(10) If the Borrower fails to comply with any condition of this

exemption, in the course of engaging in a securities-lending

transactions, the plan fiduciary who caused the plan to engage in such

transaction shall not be deemed to have caused the plan to engage in a

transaction prohibited by section 406(a)(1)(A) through (D) of the Act

solely by reason of the Borrower's failure to comply with the

conditions of the exemption.

C. Effective August 25, 1995, the restrictions of sections

406(a)(1) (A) through (D) and 406(b)(2) of the Act and the taxes

imposed by section 4975 (a) and (b) of the Code shall not apply to any

extension of credit to an employee benefit plan by an MSC/UK Affiliate

to permit the settlement of securities transactions or in connection

with the writing of options contracts provided that the following

conditions are met:

(a) The MSC/UK Affiliate is not a fiduciary with respect to any

assets of such plan, unless no interest or other consideration is

received by such fiduciary or any affiliate thereof in connection with

such extension of credit; and

(b) Such extension of credit would be lawful under the Securities

Exchange Act of 1934 and any rules or regulations thereunder if such

act, rules or regulations were applicable.

Section II--General Conditions

A. The MSC/UK Affiliate is registered as a broker-dealer with the

Securities and Futures Authority of the United Kingdom (the S.F.A.);

B. The MSC/UK Affiliate is in compliance with all requirements of

Rule 15a-6 (17 CFR 240.15a-6) under the Securities and Exchange Act of

1934, which provides for foreign broker-dealers a limited exemption

from U.S. registration requirements;

C. Prior to the transaction, the MSC/UK Affiliate enters into a

written agreement with the plan in which the MSC/UK Affiliate consents

to the jurisdiction of the courts of the United States with respect to

the transactions covered by this exemption;

D.(1) The MSC/UK Affiliate maintains or causes to be maintained

within the United States for a period of six years from the date of

such transaction such records as are necessary to enable the persons

described in this section to determine whether the conditions of this

exemption have been met; except that a party in interest with respect

to an employee benefit plan, other than the MSC/UK Affiliate, shall not

be subject to a civil penalty under section 502(i) of the Act or the

taxes imposed by section 4975(a) or (b) of the Code, if such records

are not maintained, or are not available for examination as required by

this section, and a prohibited transaction will not be deemed to have

occurred if, due to circumstances

[[Page 58239]]

beyond the control of the MSC/UK Affiliate, such records are lost or

destroyed prior to the end of such six year period;

(2) The records referred to in subsection (1) above are

unconditionally available for examination during normal business hours

by duly authorized employees of the Department of Labor, the Internal

Revenue Service, plan participants and beneficiaries, any employer of

plan participants and beneficiaries, and any employee organization any

of whose members are covered by such plan; except that none of the

persons described in this subsection shall be authorized to examine

trade secrets of Morgan Stanley & Co. or the MSC/UK or any commercial

or financial information which is privileged or confidential.

Section III--Definitions

``Affiliate'' of a person shall include: (i) Any person directly or

indirectly, through one or more intermediaries, controlling, controlled

by, or under common control with such other person; (ii) any officer,

director, or partner, employee or relative (as defined in section 3(15)

of the Act) of such other person; and (iii) any corporation or

partnership of which such other person is an officer, director or

partner. For purposes of this definition, the term ``control'' means

the power to exercise a controlling influence over the management or

policies of a person other than an individual.

``Security'' shall include equities, fixed income securities,

options on equity and on fixed income securities, government

obligations, and any other instrument that constitutes a security under

U.S. securities laws. The term ``security'' does not include swap

agreements or other notional principal contracts.

Summary of Facts and Representations

1. Morgan Stanley & Co. Incorporated (MSC) is an international

securities firm that performs securities underwriting, distribution and

trading, merger, acquisition, restructuring and other corporate

financial services for clients world wide. Clients include

multinational corporations, governments, emerging growth companies,

financial institutions and individual investors.

2. MSC has foreign affiliates world wide who are in the business of

trading securities, including a broker-dealer affiliate in London,

England (the MSC/UK Affiliate), currently Morgan Stanley & Co.

International Limited. MSC represents that in the ordinary course of

their business as broker-dealers, these foreign affiliates customarily

operate as traders in dealers markets wherein the broker-dealer

purchases and sells securities for its own account and engages in

purchases and sales of securities with its clients, and that such

trades are referred to as principal transactions. MSC states that in

issuing Prohibited Transaction Class Exemption 75-1 (PTCE 75-1, 40 FR

50845, October 31, 1975) the Department has recognized the functions of

registered broker-dealers in principal transactions on behalf of

clients which are employee benefit plans covered by the Act. Part II of

PTCE 75-1 provides exemptive relief from section 406(a) of the Act for

principal transactions between plans and broker-dealers which are

registered under the Securities Exchange Act of 1934, provided all

requirements stated in Part II are satisfied. MSC represents that like

the U.S. dealer markets, international equity and debt markets,

including the options markets, are no less dependent on a willingness

of dealers to trade as principals. In the absence of an exemption for

principal transactions, such as PTCE 75-1, those responsible for

trading activities on behalf of plan investors would be prevented from

engaging in transactions with those broker-dealers and banks that

provide the markets for the securities and are most capable of handling

such transactions.

3. MSC represents that over the past decade, plans have

increasingly invested in foreign equity and debt securities, including

foreign government securities. MSC states that plans seeking to enter

into such investments may wish to increase the number of trading

partners available to them by trading with foreign broker-dealers such

as the MSC/UK Affiliate. However, where MSC provides services to such

plans which are covered by the Act, principal transactions with the

MSC/UK Affiliate would be prohibited by the Act. The exemptive relief

afforded U.S. broker-dealers by PTCE 75-1 would not be available with

respect to the MSC/UK Affiliate because that class exemption is limited

to broker-dealers registered with the U.S. Securities and Exchange

Commission (S.E.C.) under the Securities Exchange Act of 1934 (the 1934

Act). MSC represents that its MSC/UK Affiliate is not so registered

but, instead, is governed by the rules, regulations and registration

requirements of the Securities and Futures Authority of the United

Kingdom (the S.F.A.). Furthermore, MSC represents that Rule 15(a)-6 of

the 1934 Act offers foreign broker-dealers limited exemption from the

S.E.C. registration requirements pursuant to provisions with which the

MSC/UK Affiliate is able to comply. However, MSC states that because of

the S.E.C. registration requirement of PTCE 75-1, the MSC/UK Affiliate

is prevented from engaging in principal transactions with plans with

respect to which MSC is a party in interest, even though such affiliate

is registered with the S.F.A., experienced in the markets, and able to

satisfy the Rule 15(a)-6 requirements for S.E.C. registration

exemption. Accordingly, MSC is requesting an individual exemption to

permit its MSC/UK Affiliate to engage in principal transactions with

plans under the terms and conditions set forth herein, which MSC

represents are equivalent to those set forth in PTCE 75-1, Part

II.1

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\1\ The Department notes that the proposed principal

transactions are subject to the fiduciary responsibility

requirements of part 4, subtitle B, title I of the Act. Section

404(a) of the Act requires, among other things, that a fiduciary of

a plan act prudently, solely in the interest of the plan's

participants and beneficiaries, and for the exclusive purpose of

providing benefits to participants and beneficiaries when making

investment decisions on behalf of a plan.

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4. The proposed exemption will be applicable only to transactions

affected by an MSC/UK Affiliate which is registered as a broker-dealer

with the S.F.A. and in compliance with Rule 15(a)-6. MSC represents

that the role of a broker-dealer in a principal transaction in the

United Kingdom is substantially identical to that of a broker-dealer in

a principal transaction in the United States. MSC further represents

that registration of a broker-dealer with the S.F.A. is equivalent to

registration of a broker-dealer with the S.E.C. under the 1934 Act. MSC

maintains that the S.F.A. has promulgated rules for broker-dealers

which are equivalent to S.E.C. rules, relating to registration

requirements, minimum capitalization, reporting requirements, periodic

examinations, fund segregation, client protection, and enforcement. MSC

represents that the rules and regulations set forth by the S.F.A. and

the S.E.C. share a common objective: the protection of the investor by

the regulation of securities markets. MSC explains that under S.F.A.

rules, persons who manage investments or give advice with respect to

investments must be registered as a ``registered representative''. If a

person is not a registered representative and, as part of his duties,

makes commitments in market dealings or transactions, that person must

be registered as a ``registered trader''. MSC represents that the

S.F.A. rules require each firm which employs registered representatives

or

[[Page 58240]]

registered traders to have positive tangible net worth and be able to

meet its obligations as they fall due, and that the S.F.A. rules set

forth comprehensive financial resource and reporting/disclosure rules

regarding capital adequacy. In addition to demonstration of capital

adequacy, MSC states that the S.F.A. rules impose reporting/disclosure

requirements on broker-dealers with respect to risk management,

internal controls, and all records relating to a counterparty, and that

all records must be produced at the request of the S.F.A. at any time.

MSC states that S.F.A.'s registration requirements for broker-dealers

are backed up by potential fines and penalties, and rules which

establish a comprehensive disciplinary system.

5. MSC represents that in addition to the protections which are

afforded by registration with S.F.A., compliance with the requirements

of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act will offer

additional protections in lieu of registration with the S.E.C. MSC

states that Rule 15a-6 provides an exemption from U.S. broker-dealer

registration for a foreign broker-dealer that induces or attempts to

induce the purchase or sale of any security (including over-the-counter

equity and debt options) by a ``U.S. institutional investor'' or a

``U.S. major institutional investor'', provided that the foreign broker

dealer, among other things, enters into these transactions through a

U.S. registered broker-dealer intermediary. The term ``U.S.

institutional investor'', as defined in Rule 15a-6(b)(7), includes an

employee benefit plan within the meaning of the Employee Retirement

Income Security Act of 1974 (the Act) if (a) the investment decision is

made by a plan fiduciary, as defined in section 3(21) of the Act, which

is either a bank, savings and loan association, insurance company or

registered investment advisor, or (b) the employee benefit plan has

total assets in excess of $5 million, or (c) the employee benefit plan

is a self-directed plan with investment decisions made solely by

persons that are ``accredited investors'' as defined in Rule 501(a)(1)

of Regulation D of the Securities Act of 1933, as amended. The term

``U.S. major institutional investor'' is defined as a person that is a

U.S. institutional investor that has total assets in excess of $100

million. MSC represents that the intermediation of the U.S. registered

broker-dealer imposes upon the foreign broker-dealer the requirement

that the securities transaction be effected in accordance with a number

of U.S. securities laws and regulations applicable to U.S. registered

broker-dealers.

MSC represents that under Rule 15a-6, a foreign broker-dealer that

induces or attempts to induce the purchase or sale of any security by a

U.S. institutional or major institutional investor in accordance with

Rule 15a-6 must, among other things:

(a) Consent to service of process for any civil action brought by,

or proceeding before, the S.E.C. or any self-regulatory organization;

(b) Provide the S.E.C. with any information or documents within its

possession, custody or control, any testimony of any such foreign

associated persons, and any assistance in taking the evidence of other

persons, wherever located, that the S.E.C. requests and that relates to

transactions effected pursuant to the Rule;

(c) Rely on the U.S. registered broker-dealer through which the

transactions with the U.S. institutional and major institutional

investors are effected to (among other things):

(1) Effect the transactions, other than negotiating their terms;

(2) Issue all required confirmations and statements;

(3) As between the foreign broker-dealer and the U.S. registered

broker-dealer, extend or arrange for the extension of credit in

connection with the transactions;

(4) Maintain required books and records relating to the

transactions, including those required by Rules 17a-3 (Records to be

Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by

Certain Exchange Members, Brokers and Dealers) of the 1934 Act;

(5) Receive, deliver, and safeguard funds and securities in

connection with the transactions on behalf of the U.S. institutional

investor or U.S. major institutional investor in compliance with Rule

15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of

Securities); and

(6) Participate in all oral communications (e.g., telephone calls)

between the foreign associated person and the U.S. institutional

investor (not the U.S. major institutional investor), and accompany the

foreign associated person on all visits with both U.S. institutional

and major institutional investors. By virtue of this participation, the

U.S. registered broker-dealer would become responsible for the content

of all these communications.

6. MSC represents that a normal part of the execution of securities

transactions by broker-dealers on behalf of customers, including

employee benefit plans, is the extension of credit to customers to

permit the settlement of transactions in the customary settlement

period, and that such extensions of credit are also customary

activities of broker-dealers in connection with the writing of option

contracts. MSC notes that exemptive relief for such transactions is

provided under Part V of PTCE 75-1. However, the exemptive relief under

Part V of PTCE 75-1, like that under Part II, is available only with

respect to broker-dealers which are registered with the S.E.C. under

the 1934 Act. Accordingly, MSC requests that the exemption include

relief for extensions of credit by the MSC/UK affiliate in the ordinary

course of the purchase or sale of securities, regardless of whether

they are effected on an agency or a principal basis. The proposed

exemption provides relief for extensions of credit by the MSC/UK

Affiliate to a plan to permit the settlement of securities transactions

or in connection with the writing of options contracts, provided that

the MSC/UK Affiliate is not a fiduciary with respect to any assets of

the plan, unless no interest or other consideration is received by the

MSC/UK Affiliate in connection with such extension of credit. The

proposed exemption also requires that the extension of credit would be

lawful under the 1934 Act and any rules or regulations thereunder if

such act, rules, or regulations were applicable.

7. In addition to exemptive relief for principal transactions and

extensions of credit in connection with the purchase or sale of

securities, MSC is also requesting exemptive relief for the lending of

securities, equivalent to that provided under the terms and conditions

of Prohibited Transaction Class Exemption 81-6 (PTCE 81-6, 46 FR 7527,

January 23, 1981, amended at 52 FR 18754, May 19, 1987), a class

exemption to permit certain loans of securities by employee benefit

plans. MSC represents that in PTCE 81-6 the Department has recognized

that securities lending represents a low-risk means of enhancing the

investment return of plans with respect to securities that would

otherwise be idle. MSC represents that the conditions of Section I(B)

of the proposed exemption will subject the MSC/UK Affiliate to all of

the conditions imposed on broker-dealers under PTCE 81-6, other than

registration under the 1934 Act. MSC notes that such conditions include

requirements relating to daily marking to market, setting collateral at

100 percent of the market value of the securities, the rules for

termination of the loan, and return of the borrowed securities. In

addition, MSC notes that

[[Page 58241]]

the collateral will be in U.S. dollars and will be held in the United

States.

8. In summary, the applicant represents that the proposed

transactions satisfy the criteria of section 408(a) of the Act for the

following reasons: (1) With respect to principal transactions affected

by the MSC/UK Affiliate, the exemption will enable plans to realize the

same benefits of efficiency and convenience which derive from principal

transactions executed pursuant to Part II of PTCE 75-1 by broker-

dealers registered in the United States; (2) With respect to extensions

of credit by the MSC/UK Affiliate in connection with purchases or sales

of securities, the exemption will enable the MSC/UK to extend credit in

the ordinary course of business to affect the transactions within the

customary settlement period or in connection with the writing of

options contracts; (3) With respect to securities lending transactions

affected by the MSC/UK Affiliate, the exemption will enable plans to

realize a low-risk return on securities that otherwise would remain

idle, as in securities lending transactions executed pursuant to PTCE

81-6 by broker-dealers registered in the United States; and (3) The

proposed exemption generally imposes terms and conditions upon the

transactions executed by the MSC/UK Affiliate which are the same as

those imposed on U.S. broker-dealers under PTCE 75-1 and PTCE 81-6.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

General Electric Pension Trust (the GE Trust), Located in Fairfield,

Connecticut

[Application Nos. D-10285 Thru D-10287]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

406(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,2 shall not apply, effective July 12,

1996, to the past sale by the GE Trust of its stock in AmeriData

Technologies, Inc. (the AmeriData Stock) to General Electric Capital

Corporation (GECC) and GECC's indirect, wholly-owned subsidiary, GAC

Acquisition I Corporation (GAC), both of which are parties in interest

with respect to the GE Trust and affiliates of the General Electric

Company (GE) the sponsor of the GE Trust, in connection with the merger

(the Merger) of GAC and AmeriData Technologies, Inc. (AmeriData),

provided that the following conditions were satisfied:

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\2\ For purposes of this proposed exemption references to

specific provisions of Title I of the Act, unless otherwise

specified, refer also to the corresponding provisions of the Code.

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(a) The sale of the AmeriData Stock by the GE Trust was a one-time

transaction for cash;

(b) The GE Trust received the fair market value for each share of

the AmeriData Stock on the date of the sale;

(c) The GE Trust received no less consideration than that received

by similarly situated AmeriData shareholders at the same time in the

same transaction;

(d) The GE Trust paid no commissions, fees or other expenses in

connection with the sale of the AmeriData Stock to GECC and GAC;

(e) The terms of the sale were no less favorable to the GE Trust

than those obtainable by other similarly situated shareholders of

AmeriData Stock;

(f) The GE Trust tendered its shares of AmeriData Stock only at the

close of the tender-offer period and only after a majority of the

outstanding shares of AmeriData had been tendered; and

(g) The transactions engaged in by the GE Trust with respect to the

AmeriData Stock (including the acquisition, holding and subsequent sale

to GECC and GAC) were not part of an arrangement designed to benefit

GE, any of its affiliates, or any other party in interest with respect

to the GE Trust.

EFFECTIVE DATE: This proposed exemption, if granted, will be effective

as of July 12, 1996, the closing date of the tender-offer period for

the AmeriData Stock in connection with the Merger.

Summary of Facts and Representations

1. The GE Trust is a single pension trust through which three (3)

defined benefit plans (the Plans) are funded. These Plans provide

pension and death benefits to eligible employees and their

beneficiaries. As of December 31, 1995, there were approximately

465,000 participants in the Plans. The Plans which participate in the

GE Trust are: (a) the General Electric Company Pension Plan (the GE

Plan), which is maintained by GE; (b) the Components Pension Plan for

Puerto Rico, which is maintained by Caribe General Electric Products,

Inc., an affiliate of GE; and (c) the ERC Retirement Plan, which is

maintained by Employers Reinsurance Corporation, an affiliate of GE. As

of December 31, 1995, the GE Trust had total net assets of

approximately $30.3 billion.

2. The assets of the GE Trust are held in trust by seven (7)

trustees (the Trustees) who are all employees of GE and who are

appointed by the Benefit Plans Investment Committee (BPIC). The Board

of Directors of GE appoints officers of GE to serve as members of BPIC.

BPIC determines the investment policies with respect to the assets of

the Plans in the GE Trust.

3. GE offers diversified manufacturing and technical services

worldwide. An indirect, wholly-owned subsidiary of GE, GECC, provides

financial services in the following categories: special insurance

services, consumer services, specialized financing, equipment

management, and mid-market financing. The affiliates of GE play a

primary role in the proposed transaction. In this regard, GECC

established GAC, as an indirect, wholly-owned special purpose

subsidiary, to acquire AmeriData. In this regard, it is represented

that GAC will be merged into AmeriData at which time AmeriData will

become an affiliate of GE. Because GECC is a participating employer

under the GE Plan, GECC and GAC are parties in interest with respect to

the GE Trust.

4. AmeriData, with offices in Stamford, Connecticut, is a

corporation registered under the laws of the State of Delaware.

AmeriData is an international provider of computer products and

services, as well as technology consulting services. Shares of

AmeriData Stock are widely-held and publicly-traded on the New York

Stock Exchange. It is represented that approximately 24,938,845 shares

of AmeriData Stock are considered outstanding for purposes of Delaware

General Corporation Law (DGCL), as of July 23, 1996.

5. The Applicants represent that, as of December 31, 1995, the

readily identifiable shareholders of AmeriData Stock were: (1) the GE

Trust; (2) two investment Partnerships; (3) SBC Technologies, Inc., a

wholly-owned subsidiary of AmeriData; and (4) the officers and

directors of AmeriData. It is represented that the remaining shares of

AmeriData Stock were held by the general public.

As of December 31, 1995, the officers and directors of AmeriData

owned 11.8 percent (11.8%) of the shares of AmeriData Stock. It is

represented that, as of May 20, 1996, management shareholders of

AmeriData owning approximately 6 percent (6%) of the

[[Page 58242]]

outstanding shares of AmeriData Stock had entered into binding

agreements to tender their shares. None of the officers and directors

of AmeriData are employed by GE or its affiliates.

With respect to the two investment partnerships, the combined

ownership represented a total of 10.9% of the shares of AmeriData

Stock. Neither investment partnership has any affiliation with GE.

6. As of December 31, 1995, the GE Trust owned approximately

2,101,404 shares of the AmeriData Stock. These shares represented

approximately 9.7 percent (9.7%) of the total outstanding shares of the

AmeriData Stock at that time. It is represented that the Trustees

acquired the 2,101,404 shares of the AmeriData Stock in a number of

transactions over the period from May 1993 through October 1994. The

cost to the GE Trust of its 2,101,404 shares of AmeriData stock, as

shown on the GE Trust's financial records, was $21,566,026. It is

represented that the GE Trust acquired some of the AmeriData Stock in

blind transactions on the open market. In addition, the remaining

AmeriData Stock was acquired in various transactions with AmeriData or

its predecessor, including but not limited to purchases, the exercise

of warrants, and the receipt of stock dividends.3 It is

represented that at the time of these transactions neither AmeriData

nor its predecessor was related to GE, nor was either a party in

interest with respect to the GE Trust. The Applicants represent that

the decisions made by the Trustees regarding the acquisition of the

AmeriData Stock were made independent of, and without knowledge that in

the future an affiliate of GE would attempt to acquire all of the

outstanding shares of AmeriData Stock.

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\3\ In this regard, the Department is not providing any opinion

in this proposed exemption as to whether the acquisition and holding

of the AmeriData Stock by the GE Trust violated any of the

provisions of Part IV of Title I of the Act. However, the Department

notes that section 404(a) of the Act requires, among other things,

that a plan fiduciary act prudently, solely in the interest of the

participants and beneficiaries of a plan, and for the exclusive

purpose of providing benefits to participants and beneficiaries when

making investment decisions for such plan.

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7. On May 20, 1996, GECC, GAC and AmeriData entered into an

agreement and plan of merger (the Merger Agreement). In this regard,

the Boards of Directors of these parties unanimously approved the

acquisition of AmeriData by GECC and GAC by means of the merger of GAC

with and into AmeriData. In connection with the Merger, GAC made a

tender offer on May 24, 1996, for all outstanding shares of AmeriData

Stock. The tender-offer period began on May 24, 1996, and was to expire

on June 21, 1996, subject to the satisfaction or waiver of certain

closing conditions. Because certain closing conditions could not be

satisfied or waived before June 21, the tender-offer period was

extended until July 12, 1996.

Pursuant to the tender, GAC offered to purchase the stock of

AmeriData for $16 a share or approximately $490 million in the

aggregate. The tender price represented a premium of approximately 47.1

percent (47.1%) over the closing price of $10\7/8\ per share for

AmeriData Stock on April 19, 1996, thirty-one (31) days prior to the

public announcement of the execution of the Merger Agreement. In this

regard, it is represented the trading price of shares of AmeriData

Stock on the open market during the tender-offer period, ranged from

$15\3/4\ to $15\7/8\ per share, except that the closing price per share

was $15\5/8\ on May 27, and $16 on June 17, and July 5, 8, and 10,

1996. The Board of Directors of AmeriData unanimously approved such

tender offer and recommended that its shareholders accept the tender.

8. While it would have been possible for the GE Trust, as a

shareholder of AmeriData Stock to ignore the recommendation of the

Board of Directors and sell its shares in the open market or in a

private transaction before the close of the tender-offer period, it is

represented that this approach would probably have resulted in loss of

some profits to the GE Trust. Since any purchaser of the AmeriData

Stock (either in the open market or in a private transaction) during

the tender-offer period could normally expect to resell such shares for

the tender-offer price, the transaction would be worthwhile for such

purchaser only if it paid to the GE Trust a price less than the tender-

offer price so as to realize a profit from the spread. By accepting the

tender offer, the GE Trust avoided losing part of the profit on its

investment and was able to sell its shares for the full tender-offer

price.

9. Regardless of whether or not the GE Trust tendered its shares,

once a majority of the outstanding shares of AmeriData Stock were

tendered by shareholders other than the GE Trust, in no event could the

GE Trust have continued to hold its shares of AmeriData Stock. In this

regard, under the terms of the Merger Agreement, GAC was not required

to proceed with the purchase of the tendered shares, if less than a

majority of AmeriData Stock was tendered as of the close of the tender-

offer period. However, if a majority, but less than 100 percent (100%)

of the shares of AmeriData Stock were tendered, then GAC was bound to

acquire the tendered shares. Further, under the terms of the Merger

Agreement once a majority of shares had been tendered, GAC in its

capacity as the acquiring corporation, was obligated to cause a forced

redemption of all the shares of AmeriData Stock which had not been

tendered initially. In this regard, under the terms of the Merger

Agreement, such follow-on merger would redeem, at the same $16 per

share consideration, all the remaining shares of AmeriData Stock held

by parties other than GAC. GAC was assured under Delaware law, that

once a majority of shares had been tendered, it would be able to

acquire all of the shares of AmeriData either through a short-form

merger or a shareholder vote followed by a merger. In the event that at

least 90 percent (90%) of the shares of AmeriData Stock were tendered

in the tender offer, such follow-on merger would be a ``short-form''

merger under Section 253 of the DGCL and would not require a vote of

shareholders. In the event that less than 90 percent (90%) of the

shares were tendered, a follow-on merger under Section 251 of DGCL

would be accomplished by a shareholder vote.

It is represented that the total number of shares of AmeriData

Stock tendered to GAC at the close of the tender-offer period was

22,421,080 out of a total of 24,938,845 shares. The number of shares

tendered represented 89.9 percent (89.9%) of the total number of

outstanding shares of AmeriData Stock. In order to proceed with a

``short-form'' merger under Section 253 of the DGCL which would not

require a vote of shareholders, GAC subsequently purchased a sufficient

number of shares of AmeriData Stock directly from AmeriData at the same

$16 per share price so that GAC became a 90 percent (90%) shareholder.

AmeriData was then merged with GAC using the ``short-form'' merger

provisions of DGCL with the result that AmeriData as a surviving

company is now a wholly owned subsidiary of GECC.

10. The Applicants represent that the Trustees made a fiduciary

decision not to tender the GE Trust's shares of AmeriData Stock until

the close of the tender-offer period, and then to do so only if at that

time at least 51 percent (51%) of the other shareholders had already

tendered their shares. The Trustees determined that such a conditional

tender should be made, and that the shares of AmeriData Stock held by

the GE Trust should be tendered only if the specified conditions were

met immediately prior to the close of the

[[Page 58243]]

tender-offer period, so that the arm's length nature of the transaction

by the Trustees would be confirmed by the actions of independent

parties, prior to the tender by the Trustees. Also, the Trustees

concluded that by waiting for a majority of shareholders other than the

GE Trust to tender, no issue would arise as to whether the Trustees had

facilitated the acquisition by GAC of AmeriData Stock, since once a

majority of other shareholders had tendered their shares, GAC was

obligated to redeem all of the outstanding shares of AmeriData Stock.

11. The Trustees carried out the conditional tender in a two part

process. First, several days prior to the close of the tender-offer

period, the Trustees filed a letter with the Chase Manhattan Bank, in

its capacity as Depository for the tender-offer, which stated that the

Trustees' tender of the shares of AmeriData Stock held by the GE Trust

was conditional and was to be effective if and only if immediately

prior to the expiration of the tender-offer period, at least 51 percent

(51%) of the shares of AmeriData Stock had been validly tendered and

not withdrawn. In addition, the Trustees dispatched a letter which

would effectuate the transmittal of its shares of AmeriData Stock,

providing that the conditions of its tender were met. As more than a

majority of shares of AmeriData Stock were tendered by independent

shareholders at the close of the tender-offer period, the GE Trust

tendered its shares to GAC on July 12, 1996. In this regard, it is

represented that, as of July 17, 1996, a check in an amount of

approximately $33,622,464 million representing a purchase price of $16

per share, payable to the GE Trust for its 2,101,404 shares of

AmeriData Stock tendered to GAC was received by State Street Bank,

acting as custodian for the GE Trust. Accordingly, the GE Trust and the

Plans (collectively, the Applicants) request retroactive relief from

the prohibited transactions provisions of the Act provided certain

conditions were met for the past sale to GAC under the terms of the

tender offer of AmeriData Stock which, prior to the effective date of

this exemption, was held by the GE Trust.

12. The Applicants maintain that the proposed sale is

administratively feasible in that the transaction would be a one-time

cash sale. In this regard, there will be no need for the Department to

monitor or supervise the transaction. It is represented that the cost

of filing the application for exemption will be borne by GE Trust and

that the cost of notifying interested persons will be borne by GE or

one of its affiliates.

13. It is represented that the transaction is protective of the GE

Trust and the Plans, because the terms of transaction to the Plan were

no less favorable than those received by other similarly situated

shareholders of AmeriData Stock. In this regard, the terms of the

tender were carefully negotiated on an arm's length basis as to all

AmeriData shareholders by parties independent of the Applicants.

It is represented that the transaction has sufficient safeguards

for the protection of the Plans. Among such safeguards included in this

exemption, is the fact that the GE Trust could only tender its shares

of AmeriData Stock at the close of the tender-offer period and then

only if at the close of such period a majority of the outstanding

shares of AmeriData Stock had already been tendered by parties other

than the GE Trust. In this regard it is represented that GE Trust could

not have caused the transaction to occur because of their decision to

tender. In addition, because the GE Trust did not tender its shares

until the end of the tender-offer period and then tendered only after a

majority of independent investors in AmeriData had tendered, it is

represented that the arm's length nature of the tender was confirmed.

It is further represented that the GE Trust was protected, because

a majority of the shares of AmeriData Stock were tendered by

independent shareholders before the GE Trust tendered its shares. Since

all tenders were revocable up to the close of the tender-offer period,

had a third party made a more favorable offer, then all the

shareholders, including the GE Trust, would have revoked their tender

to GAC in favor of such competing offer. Accordingly, it is represented

that there was no potential for abuse. In addition, it is represented

that during the tender-offer period, there was in fact no competing

tender offer made by a third party.

14. It is represented that the transaction is in the interest of

the GE Trust and the Plans, because accepting the tender resulted in

the highest and best sales price of AmeriData Stock for the GE Trust

and the Plans. In this regard, the GE Trust and the Plans avoided

disposing of their shares of AmeriData Stock on the open market at less

than the tender-offer price. It is represented that the GE Trust was

informally advised by outside investment counsel that, because the GE

Trust would be disposing of a large block of AmeriData Stock, if such

shares were sold on the open market the price would likely be reduced

to as low as $15\1/2\ per share. It is estimated that if the GE Trust

had disposed of the AmeriData Stock on the open market at $15\1/2\ per

share, rather than tendering such shares at $16 per share, the Plans

would have received $1,050,702 less.

Further, the GE Trust and the Plans benefit from being able to

tender the AmeriData Stock, rather than sell the shares on the open

market. In this regard, in a sale on the open market the Plans would

have paid commissions, which were not incurred by the Plans by

accepting the tender offer.

15. In summary, the Applicants represent that the transaction

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

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

(a) The sale of the AmeriData Stock by the GE Trust was a one- time

transaction for cash;

(b) The GE Trust, and the Plans received the fair market value for

each share of the AmeriData Stock on the date of the sale;

(c) The GE Trust received no less consideration than other

similarly situated shareholders of the AmeriData Stock received at the

same time in the same transaction;

(d) The GE Trust paid no commissions, fees, or other expenses in

connection with the sale of the AmeriData Stock to GECC and GAC;

(e) The terms of the sale were no less favorable to the GE Trust,

and the Plans, then those obtainable in an arm's length transaction

engaged in by other similarly situated shareholders of AmeriData Stock;

and

(f) The GE Trust tendered its shares of AmeriData Stock only at the

close of the tender-offer period and only after a majority of the

outstanding shares of AmeriData had been tendered.

Notice to Interested Persons

The Applicants represent that because of the large number of

potentially interested persons, it is not possible to provide a

separate copy of the Notice of Proposed Exemption (the Notice) to each

participant in the Plans. However, GE will post a photocopy of the

Notice, as published in the Federal Register, plus a copy of the

supplemental statement (the Supplemental Statement), in the form set

forth in the Department's regulations under 29 CFR 2570.43(b)(2), on

bulletin boards normally used for employee notices in each of its

offices and operating facilities and in the offices and operating

facilities of its affiliates within fifteen (15) days of the

publication of such Notice in the Federal Register. Apart from this

method of notifying all interested persons, the Applicants represent

that the only practical form of providing notice to former employees,

[[Page 58244]]

retirees, and other employees, is to publish a notice in the 1995

Summary Annual Report which will be distributed to such person on or

before December 15, 1996, via first class mail. Such notice in the

Summary Annual Report will notify former employees, retirees, and other

employees that they may obtain a copy of the proposed exemption and

information on how to comment from Joseph C. Keifer, Controller of the

GE Trust at (203) 921-2167. The comment period will end thirty (30)

days after the mailing of the Summary Annual Report.

FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department,

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

First Chicago NBD Corporation (FCNBD), Located in Chicago, Illinois

[Application No. D-10361]

Proposed Exemption

I. Transactions

A. Effective October 8, 1996, 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.4

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\4\ Section I.A. provides no relief from sections 406(a)(1)(E),

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

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

regulation 29 CFR 2510.3-21(c).

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B. Effective October 8, 1996, 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.5 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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\5\ 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 certifi cates,

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

and (iv) are met; and

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

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

C. Effective October 8, 1996, 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.6

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\6\ 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.

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

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

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

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

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

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

D. Effective October 8, 1996, 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

[[Page 58245]]

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 Structured

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

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

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

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

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

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

and servicing agreement providing for such succession upon the

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

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

underwriters in connection with the distribution or placement of

certificates represents not more than reasonable compensation for

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

to and retained by the sponsor pursuant to the assignment of

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

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

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

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

pooling and servicing agreement and reimbursement of the servicer's

reasonable expenses in connection therewith; and

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

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

Securities and Exchange Commission under the Securities Act of 1933.

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

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

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

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

selling or placement agent.

For purposes of this exemption, references to ``certificates

representing an interest in a trust'' include certificates denominated

as debt which are issued by a trust.

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

trust and consists solely of:

(1) Either

(a) Secured consumer receivables that bear interest or are

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

loans and obligations secured by shares issued by a cooperative housing

association);

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

at a discount in transactions by or between business entities

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

leases, as defined in section III.T);

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

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

residential and commercial real property (including obligations secured

by leasehold interests on commercial real property);

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

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

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

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

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

(f) Fractional undivided interests in any of the obligations

described in clauses (a)-(e) of this section B.(1); 7

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\7\ It is the Department's view that the definition of ``trust''

contained in III.B. includes a two-tier structure under which

certificates issued by the first trust, which contains a pool of

receivables described above, are transferred to a second trust which

issues securities that are sold to plans. However, the Department is

of the further view that, since the exemption provides relief for

the direct or indirect acquisition or disposition of certificates

that are not subordinated, no relief would be available if the

certificates held by the second trust were subordinated to the

rights and interests evidenced by other certificates issued by the

first trust.

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(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 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) FCNBD;

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

intermediaries, controlling, controlled by or under common control with

FCNBD; or

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

which FCNBD 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.

[[Page 58246]]

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 receivables contained in the

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

G. Servicer means any entity which services receivables contained

in the trust, including the master servicer and any subservicer.

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

certificates which are denominated as debt instruments, also means the

trustee of the indenture trust.

I. Insurer means the insurer or guarantor of, or provider of other

credit support for, a trust. Notwithstanding the foregoing, a person is

not an insurer solely because it holds securities representing an

interest in a trust which are of a class subordinated to certificates

representing an interest in the same trust.

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

obligated to make payments with respect to any obligation or receivable

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

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

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

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

in the trust.

K. Excluded Plan means any plan with respect to which any member of

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

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

L. Restricted Group with respect to a class of certificates means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

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

in the trust constituting more than 5 percent of the aggregate

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

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

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

M. Affiliate of another person includes:

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

intermediaries, controlling, controlled by, or under common control

with such other person;

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

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

brother or sister of such other person; and

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

officer, director or partner.

N. Control means the power to exercise a controlling influence over

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

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

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

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

who has investment management authority or renders investment advice

with respect to any assets of such person.

P. Sale includes the entrance into a forward delivery commitment

(as defined in section Q below), provided:

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

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

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

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

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

delivery commitment; and

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

applicable to sales are met.

Q. Forward delivery commitment means a contract for the purchase or

sale of one or more certificates to be delivered at an agreed future

settlement date. The term includes both mandatory contracts (which

contemplate obligatory delivery and acceptance of the certificates) and

optional contracts (which give one party the right but not the

obligation to deliver certificates to, or demand delivery of

certificates from, the other party).

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

defined in 29 CFR 2550.408c-2.

S. Qualified Administrative Fee means a fee which meets the

following criteria:

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

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

obligations;

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

to act referred to in (1);

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

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

set forth in the pooling and servicing agreement; and

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

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

T. Qualified Equipment Note Secured By A Lease means an equipment

note:

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

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

under the equipment lease; and

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

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

W. FCNBD means First Chicago NBD Corporation and its affiliates.

The Department notes that this proposed exemption is included

within the meaning of the term ``Underwriter Exemption'' as it is

defined in section V(h) of Prohibited Transaction Exemption 95-60 (60

FR 35925, July 12, 1995), the Class Exemption for Certain Transactions

Involving Insurance Company General Accounts at 35932.

Summary of Facts and Representations

1. FCNBD, a Delaware corporation, is a Chicago, Illinois based bank

holding company formed by the merger of First Chicago Corporation with

and into NBD Bancorp, Inc., which has assets of over $113 billion and

through its subsidiaries operates more than 763 branches in various

cities in Florida, Illinois, Indiana, Michigan and Wisconsin, as well

as various overseas locations. FCNBD also owns and operates

subsidiaries that engage in trust, brokerage, investment management,

equipment leasing, venture capital, mortgage banking, consumer finance

and insurance.

First Chicago Capital Markets, Inc. (FCCM), a Delaware corporation,

is a wholly-owned indirect subsidiary of FCNBD. FCCM was organized in

1988 and pursuant to an August 1988 order (the 1988 Order) of the

Federal Reserve Board (FRB) is authorized to engage, to a limited

extent, in underwriting and dealing in certain mortgage-backed

securities, municipal revenue bonds, commercial paper and consumer

receivables-related securities transactions. In March, 1994, FCCM

received further authorization from the FRB to: (i) underwrite and deal

in all types of debt securities, including rated and unrated long-term

debt, medium term notes and convertible debt securities; (ii) privately

place and act as riskless principal in all types of securities,

including equity securities; and (iii) engage in certain related

investment and advisory activities. These orders are currently subject

to the condition that FCNBD does not derive more than 10% of its total

gross revenues from such activities. FCCM does not at this time have

authority to underwrite equity securities. FCCM is a broker-dealer

registered with the Securities and Exchange Commission and in all 50

states, and is a member of the National Association of Securities

Dealers, Inc. In addition, FCNBD affiliates have the power to sell

interests in their own assets in the form of asset-backed securities.

FCNBD's investment banking department has served as senior manager

with full structuring responsibilities for over $16.4 billion in public

asset-backed securities transactions since 1988 and agented $1.1

billion of private placement transactions in 1994 alone. It has one of

the largest departments specializing in asset-backed securities of any

bank or Wall Street firm, with approximately 50 professionals. The

asset-backed securities staff has extensive experience in structuring

both taxable and tax-exempt obligations having a wide range of

structural characteristics as well as security arrangements. FCNBD

originated and placed $22.8 billion in asset-backed commercial paper

transactions through October 1995.

Trust Assets

2. FCNBD 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; 8 (2) motor vehicle

receivable investment trusts; (3) consumer or commercial receivables

investment trusts; and (4) guaranteed governmental mortgage pool

certificate investment trusts.9

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\8\ The Department notes that PTE 83-1 [48 FR 895, January 7,

1983], a class exemption for mortgage

[[Page 58247]]

pool investment trusts, would generally apply to trusts containing

single-family residential mortgages, provided that the applicable

conditions of PTE 83-1 are met. FCNBD requests relief for single-

family residential mortgages in this exemption because it would

prefer one exemption for all trusts of similar structure. However,

FCNBD has stated that it may still avail itself of the exemptive

relief provided by PTE 83-1.

\9\ Guaranteed governmental mortgage pool certificates are

mortgage-backed securities with respect to which interest and

principal payable is guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation

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

Department's regulation relating to the definition of plan assets

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

guaranteed governmental mortgage pool certificate, the plan's assets

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

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

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

underlying such certificate. The applicant is requesting exemptive

relief for trusts containing guaranteed governmental mortgage pool

certificates because the certificates in the trusts may be plan

assets.

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3. Commercial mortgage investment trusts may include mortgages on

ground leases of real property. Commercial mortgages are frequently

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

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

ground lease interest is generally done for tax reasons. Properly

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

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

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

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

least ten years longer than the term of such mortgages.10

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\10\ 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.11

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\11\ It is the view of the Department that section III.B.(4)

includes within the definition of the term ``trust'' rights under

any yield supplement or similar arrangement which obligates the

sponsor or master servicer, or another party specified in the

relevant pooling and servicing agreement, to supplement the interest

rates otherwise payable on the obligations described in section

III.B.(1), in accordance with the terms of a yield supplement

arrangement described in the pooling and servicing agreement,

provided that such arrangements do not involve swap agreement or

other notional principal contracts.

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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. FCNBD, 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 FCNBD on a firm commitment

basis. In addition, FCNBD anticipates that it may privately place

certificates on both a firm commitment and an agency basis. FCNBD 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

[[Page 58248]]

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. FCNBD

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.12

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\12\ 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 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.13

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\13\ 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 homeowner 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 FCNBD, the trust sponsor or the servicer. FCNBD 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,

[[Page 58249]]

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 FCNBD. In other cases,

however, affiliates of FCNBD may originate or service receivables

included in a trust or may sponsor a trust.

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.

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.14 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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\14\ 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

[[Page 58250]]

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 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 certificateholders' rights,

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

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

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

the ultimate right to enforce the credit support arrangement.

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

recoverable by the 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;

[[Page 58251]]

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

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

including the types of receivables, the diversification of the

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

(e) A description of the sponsor and servicer;

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

a description of the seller's principal representations and warranties

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

a description of the procedures for collection of payments on

receivables and for making distributions to investors, and a

description of the accounts into which such payments are deposited and

from which such distributions are made; identification of the servicing

compensation and any fees for credit enhancement that are deducted from

payments on receivables before distributions are made to investors; a

description of periodic statements provided to the trustee, and

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

description of the events that constitute events of default under the

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

the investors' remedies incident thereto;

(g) A description of the credit support;

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

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

through securities by a typical investor;

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

pass-through securities to investors; and

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

if any, for the certificates.

21. Reports indicating the amount of payments of principal and

interest are provided to certificateholders at least as frequently as

distributions are made to certificateholders. Certificateholders will

also be provided with periodic information statements setting forth

material information concerning the underlying assets, including, where

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

defaulted loans or receivables.

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

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

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

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

certificates in a public offering will file quarterly reports on Form

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

application to the Securities and Exchange Commission, a complete

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

and a modification of the disclosure requirements for annual reports on

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

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

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

certificates. While the Securities and Exchange Commission's

interpretation of the periodic reporting requirements is subject to

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

required under the Securities Exchange Act of 1934.

23. At or about the time distributions are made to

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

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

Such report will typically contain information regarding the trust's

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

prepayments, delinquencies, servicer advances, defaults and

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

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

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

or agencies that have rated the trust's certificates.

In addition, promptly after each distribution date,

certificateholders will receive a statement prepared by the servicer 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 FCNBD in connection with the offering of any certificates, but FCNBD

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

FCNBD may find it desirable in the future to enter into such

commitments for the purchase of certificates.

Secondary Market Transactions

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

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

anticipates that it will make a market in certificates.

Retroactive Relief

26. FCNBD represents that it has not engaged in transactions

related to mortgage-backed and asset-backed securities based on the

assumption that retroactive relief would be granted prior to the date

of their application. However, FCNBD requests the exemptive relief

granted to be retroactive to October 8, 1996, the date of their

application, and would like to rely on such retroactive relief for

transactions entered into prior to the date exemptive relief may be

granted.

Summary

27. 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 FCNBD 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) FCNBD 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

[[Page 58252]]

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 certificate holders against reductions in pass-through

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

system must provide such protection and indemnification up to an amount

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

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

mortgage.

The exemptive relief proposed herein differs from that provided by

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

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

proposed exemption covers transactions involving trusts containing a

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

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

proposed exemption conditions relief upon the certificates having

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

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

obtained only to the extent necessary for the certificates to attain

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

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

II. Ratings of Certificates

After consideration of the representations of the applicant and

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

has decided to condition exemptive relief upon the certificates having

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

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

rating condition will permit the applicant flexibility in structuring

trusts containing a variety of mortgages and other receivables while

ensuring that the interests of plans investing in certificates are

protected. The Department also believes that the ratings are indicative

of the relative safety of investments in trusts containing secured

receivables. The Department is conditioning the proposed exemptive

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

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

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

one year.15

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\15\ 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

FCNBD 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.16 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.17 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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\16\ In this regard, we note that the exemptive relief proposed

herein is limited to certificates with respect to which FCNBD 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.

\17\ The applicant represents that where a trust sponsor is an

affiliate of FCNBD, 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 FCNBD is not

a fiduciary with respect to plan assets to be invested in

certificates.

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Additionally, FCNBD 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. FCNBD

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, FCNBD 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,

[[Page 58253]]

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(b) of the act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

Act and/or section 4975(c)(2) of the Code, the Department must find

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemptions, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemptions, if granted, will be subject to the

express condition that the material facts and representations contained

in each application are true and complete, and that each application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 7th day of November, 1996.

Ivan Strasfeld

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 96-29035 Filed 11-12-96; 8:45 am]

BILLING CODE 4510-29-P