Proposed Exemptions; Aultman Retirement Savings Plan (the Plan)

Federal RegisterFeb 13, 1996

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-09904, et al.]

Proposed Exemptions; Aultman Retirement Savings Plan (the Plan)

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 restrictions of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

406(b) of the Act, requests for hearing within 45 days from the date of

publication of this Federal Register Notice. Comments and request for a

hearing should state: (1) The name, address, and telephone number of

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

person's interest in the exemption and the manner in which the person

would be adversely affected by the exemption. A request for a hearing

must also state the issues to be addressed and include a general

description of the evidence to be presented at the hearing. A request

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

general description of the evidence to be presented at the hearing.

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

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

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

Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.

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

Exemption. The applications for exemption and the comments received

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

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

Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

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

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

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.

Aultman Retirement Savings Plan (the Plan), Located in Canton, Ohio

[Application No. D-09904]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

the Act and the sanctions resulting from the application of section

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

Code, shall not apply to the proposed guarantee (the Guarantee) by

Aultman Health Services Association (the Employer), the sponsor of the

Plan, of amounts due the Plan with respect to four guaranteed

investment contracts issued by Confederation Life (Confederation Life),

including the Employer's potential cash advances to the Plan (the

Advances) pursuant to the Guarantee and the potential repayment of the

Advances (the Repayments); provided that the following conditions are

satisfied:

(A) All terms of the transactions are no less favorable to the Plan

than those which the Plan could obtain in an arm's-length transaction

with an unrelated party;

(B) The Plan does not incur any expenses or pay any interest with

respect to the transactions;

made by the Employer, and (2) GIC Proceeds, defined as all amounts

actually received

[[Page 5573]]

by the Plan with respect to the GICs from Confederation Life, any

conservator, trustee or person performing similar functions with

respect to Confederation Life or acting as surety or insurer with

respect to Confederation Life, and/or any state guaranty fund or other

entity paying the obligations of Confederation Life with respect to the

GICs;

(D) The Repayments will be made only after the Plan has recovered,

through the Advances plus GIC Proceeds, the amount guaranteed by the

Employer with respect to the GICs; and

(E) To the extent the Advances exceed GIC Proceeds, repayment of

the difference will be waived.

Summary of Facts and Representations

Introduction: The Plan's assets currently include four guaranteed

investment contracts (the GICs) issued by Confederation Life Insurance

Company (Confederation). Confederation has been placed in receivership

and, consequently, payments and withdrawals with respect to the GICs

are prohibited. The Plan sponsor, Aultman Health Services Association

(the Employer), proposes to guarantee that in the eventual resolution

of the receivership the Plan will recover fully its investments in the

GICs, including interest guaranteed under the GICs through their

maturity dates and interest after the maturity dates at a rate

described below. The exemption proposed herein would enable this

guarantee under the terms and conditions described below.

1. The Plan is a defined contribution money purchase pension plan

which provides for individual participant accounts (the Accounts), with

3,496 participants and approximately $42 million in assets as of June

30, 1994. The Plan is sponsored by the Employer, a nonprofit Ohio

corporation engaged in the ownership and operation of Aultman Hospital

in Canton, Ohio. The trustee of the Plan is the Society National Bank

(the Trustee) in Canton, Ohio.

2. Under the terms of the Plan, participants direct individually

the investment of their Accounts among several investment options

offered by the Trustee, including one option which provides a return

based on two items: (a) individual guaranteed investment contracts

purchased by the Plan from insurance companies (the GIC Fund); and (b)

Plan investments in the EB MaGic Fund (the EB Fund), a large collective

investment fund maintained by the Trustee. The Plan is the sole

investor in the individual contracts in the GIC Fund, which includes

the GICs issued by Confederation Life, a Canadian life insurance

company doing business in the United States through subsidiaries. The

GICs were purchased by the Trustee as a general Plan asset before the

Plan documents provided for individually-directed investment of the

Accounts.

The GICs are identified as follows: (A) Contract no. 61931

purchased on January 5, 1990, principal amount $500,000; (B) Contract

no. 61985 purchased on January 16, 1990, principal amount $1 million;

million; and (D) Contract no. 62773 purchased on August 3, 1993,

principal amount $1 million. Each GIC is a non-benefit-responsive

contract earning interest, payable annually (the Annual Payments), at a

rate specified by its terms (the Contract Rates) over 60 months, at the

end of which principal and accrued, unpaid interest are due on a

specified date (the Maturity Date) in a final maturity payment (the

Maturity Payment). The Employer represents that through 1994, all

Annual Payments due under the GICs had been paid.

3. On August 11, 1994 (the Receivership Date), Confederation Life

was placed in receivership (the Receivership) pursuant to

rehabilitation proceedings by the State of Michigan.1

Consequently, Confederation Life's assets and operations were frozen,

and payments on all its guaranteed investment contracts, including the

GICs held by the Plan, were suspended effective as of the Receivership

Date. Maturity Payments on two of the GICs were due January 5 and

January 16, 1995, but such payments were not made. The Employer

represents that it is not known whether, when, or under what terms the

Plan will receive any further Annual Payments and Maturity Payments due

under the GICs, and further represents that the Plan is exposed to risk

of loss on its investment in the GICs.

1 The Department notes that the decisions to acquire and

hold the GICs are governed by the fiduciary responsibility

requirements of Part 4, Subtitle B, Title I of the Act. In this

proposed exemption, the Department is not proposing relief for any

violations of Part 4 which may have arisen as a result of the

acquisition and holding of the GICs.

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In order to protect the Accounts from any loss on the Plan's

investment in the GICs, the Employer proposes to guarantee that the

Plan will recover all amounts due under the GICs, plus post- maturity

interest at a rate described below, and in its discretion to make

advances to the Plan pursuant to this guarantee. The Employer requests

an exemption for these transactions under the terms and conditions

described herein.

4. The Guarantee: The Employer's proposed guarantee, including the

potential advances and repayments of the advances, will be embodied in

a written agreement between the Trustee and the Employer (the

Agreement). Under the Agreement, the Employer undertakes a guarantee

(the Guarantee) that the Plan will recover with respect to each GIC an

amount referred to in the Agreement as the GIC's ``Current Value'',

defined as follows: (a) The principal amount invested in the GIC, plus

(b) interest thereon through the Maturity Date at the Contract Rate

during any period for which the GIC's terms provide for interest at the

Contract Rate, plus (c) interest after the Maturity Date (herein

referred to as Post-Maturity Interest) at a daily rate of interest

equal to one three-hundred-sixty-fifth (\1/365\) of the lesser of (i)

the ``Index'' interest rate that was quoted in the Wall Street Journal

on the GIC's issue date for the purchase of a new five-year guaranteed

investment contract from an insurance company rated AAA by Standard and

Poor's or by Duff & Phelps, or (ii) the GIC's Contract Rate; less (d)

GIC Proceeds, defined as all amounts received by the Plan with respect

to the GIC from Confederation Life, any conservator, trustee or person

performing similar functions with respect to Confederation Life acting

as surety or insurer with respect to Confederation Life, and/or any

state guaranty fund or other entity otherwise paying the obligations of

Confederation Life with respect to the GIC.

Accordingly, when each Maturity Payment becomes due under each GIC,

the Employer becomes obligated to pay the Plan (not necessarily on each

GIC's Maturity Date, but in no event later than December 31, 2001, as

explained below) the difference between the amount of such Maturity

Payment then due and the amount of GIC Proceeds, if any, actually

received by the Plan with respect to such payment due (the Payment

Obligation). After the Maturity Date of each GIC, the amount of any

Payment Obligation then assumed by the Employer under the Agreement

also includes interest, effective on the Maturity Date prospectively

through the date of the Employer's final payment of the Payment

Obligation, at the rates for Post-Maturity Interest set forth in the

Agreement as described above. The Agreement requires the Trustee to

notify the Employer of the amount of the Payment Obligation upon the

Plan's failure to receive in full any Maturity Payment. As described

below, the

[[Page 5574]]

Employer's payment of amounts due the Plan as Payment Obligation under

the Agreement will be made from time to time at the discretion of the

Employer, and the total Payment Obligation must be paid to the Plan

upon final resolution of the Receivership but no later than December

31, 2001.

5. Advances: The Agreement enables (but does not obligate) the

Employer at any time to reduce the balance of amounts the Employer owes

the Plan under the Guarantee by making ``restorative payments'' of cash

to the Plan. These ``restorative payments'' (the Advances) are treated

under the Agreement as interest-free advances of amounts guaranteed by

the Employer under the Agreement. The Employer represents that although

the Agreement allows Advances at any time, it expects to fulfill its

Guarantee obligations upon eventual resolution of the Receivership, as

discussed below, and that interim Advances are anticipated only in the

event the Plan encounters unforeseen liquidity problems.

6. Repayments and Final Resolution: Prior to final resolution of

the Receivership, any Advances made by the Employer will be repaid

immediately to the Employer (the Repayments) if and whenever the total

GIC Proceeds plus unrepaid Advances exceeds the GICs' Current Value. A

final Repayment will be made to the Employer upon final resolution of

the Receivership, if the sum of GIC Proceeds plus unrepaid Advances

exceeds the Current Value, in the amount of such excess. The Employer

will receive no interest on the amounts repaid under the Agreement.

Upon final resolution of the Receivership, but in no event later

than December 31, 2001, if the GICs' Current Value exceeds the sum of

total GIC Proceeds plus any Advances by the Employer, then the Employer

must make a final Advance in the amount of the difference.

Execution of the Agreement is contingent upon (a) final grant of

the exemption proposed herein and (b) execution of a ``closing

agreement'' between the Employer, the Trustee and the Internal Revenue

Service pursuant to Revenue Procedure 92-16.

7. In summary, the applicant represents that the proposed

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

following reasons: (1) The transactions will protect the Plan against

all risk of loss with respect to its investments in the GICs; (2) The

Plan will recover all principal invested in the GICs plus all interest

due under the GICs' terms; (3) The Plan will not pay any or incur any

expenses with respect to the Advances or the Guarantee; (4) Repayment

of the Advances will be limited to GIC Proceeds and excess Advances;

and (6) Repayment of the Advances will be waived with respect to the

amount by which the Advances exceed the amount the Plan receives from

GIC proceeds.

FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,

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

Jack, Lyon & Jones, P.A. Profit Sharing Plan (the Plan), Located in

Little Rock, AR

[Application No. D-10071]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

of the Act and the sanctions resulting from the application of section

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

Code, shall not apply to the (1) proposed purchase by the Plan of

certain improved real property (the Property) from Jack, Lyon & Jones,

P.A., (the Employer), a party in interest with respect to the Plan; (2)

the subsequent leasing (the Lease) of the Property by the Plan to the

Employer; and (3) the potential future repurchase of the Property by

the Employer from the Plan pursuant to the terms of an option agreement

(the Option Agreement).

This proposed exemption is conditioned on the following

requirements:

(a) The interests of the Plan with respect to the purchase of the

Property, the execution and maintenance of the Lease and the potential

repurchase of the Property by the Employer will be represented by First

Commercial Trust Company (FCTC) of Little Rock, Arkansas, which will

serve as the independent fiduciary.

(b) FCTC does not and will not derive more than one percent of its

gross business revenues from the Employer and/or its principals for

each fiscal year that it serves as the independent fiduciary for the

Plan with respect to the transactions described herein.

transactions are in the best interests of the Plan, and monitor and

enforce compliance with the terms and conditions of the transactions

and the exemption, at all times.

(d) The acquisition price for the Property will be paid by the Plan

in cash and will be based upon the fair market value of the Property as

determined by a qualified, independent appraiser.

(e) The fair market value of the Property will not exceed 25

percent of the assets of the Plan.

(f) The terms of the Lease will remain at least as favorable to the

Plan as those obtainable in an arm's length transaction with an

unrelated party.

(g) The fair market rental amount will be redetermined every three

years that the Lease is in effect by a qualified, independent appraiser

who has been selected by FCTC and, FCTC will then make appropriate

adjustments to such rent.

(h) The Employer will be obligated for all real estate taxes,

utility costs, fees and insurance premiums that are incidental to the

Lease.

(i) The Option Agreement will enable the Plan to sell the Property

to the Employer in the event that FCTC determines that it is not in the

best interest of the Plan to retain the Property.

(j) The Option Agreement will provide that the Employer repurchase

the Property from the Plan for cash in an amount which is not less than

the greater of (i) the Plan's acquisition cost for the Property or (ii)

the fair market value of the Property as determined by a qualified,

independent appraiser who has been selected by FCTC.

(k) The Plan will pay no real estate fees, commissions or other

expenses in connection with the acquisition of the Property, the

administration of the Lease or the repurchase of the Property by the

Employer under the Option Agreement.

Summary of Facts and Representations

1. The Plan is a defined contribution plan that was established by

the Employer on August 1, 1986. As of March 21, 1995, the Plan had 27

participants. As of March 31, 1995, the Plan had total assets of

approximately $837,746. FCTC serves as the Plan trustee as well as the

decisionmaker with respect to Plan investments. The Employer, a

professional corporation engaged in the practice of law, maintains its

principal place of business at 425 West Capitol Avenue, Little Rock,

Arkansas.

2. Among the assets of the Employer is a parcel of improved real

property which is located at 350 Ardsley Place, Nashville, Tennessee.

The Property consists of a 3 bedroom condominium

[[Page 5575]]

end unit. The Employer purchased the Property for $169,900 from Paul J.

Reynard, an unrelated party, on September 30, 1994. Since the date of

purchase, the Employer has used the Property as a working office and

living quarters for visiting attorneys who share time between the

Employer's Nashville and Little Rock offices. The Property is not

located in close proximity to other real property that is owned by the

Employer or its principals.

At present, the Property is encumbered by a mortgage note in the

original principal amount of $169,900. The note was executed between

the Employer and Worthen Bank of Arkansas (Worthen), an unrelated

party, on September 29, 1994. The note carries interest at 8 \1/2\

percent per annum and initially required 5 interest only payments

beginning October 31, 1994 and continuing at monthly intervals

thereafter. Although a final payment of the unpaid principal balance

plus accrued interest was to be due and payable on November 2, 1995, it

is represented that the note has been extended by the parties under the

prior terms and conditions.

3. The Property has been appraised by Mitzi L. Ayers, SRA and

Shirley Adkins, MAI, qualified, independent appraisers who are

affiliated with the appraisal firm of Adkins & Associates, located in

Nashville, Tennessee. Using comparable market values as a basis for

their analysis, the appraisers placed the fair market value of the

Property at $170,000 as of January 24, 1995. Again using the sales

comparison approach to valuation, the appraisers also placed the fair

market rental value of the Property at $1,600 per month as of January

24, 1995.

4. Because it has assets available for reinvestment, the Plan

proposes to purchase the Property from the Employer for cash at its

appraised value of $170,000.2 The Property will then represent

approximately 21 percent of the Plan's assets. Contemporaneously with

its purchase of the Property, the Plan will commence leasing the

Property to the Employer under the terms of a written lease. The Lease

also provides for the Employer's potential repurchase of the Property

from the Plan. The Plan will not be required to pay any real estate

fees or commissions in connection with its acquisition of the Property,

the administration of the Lease or with respect to the future

reacquisition of the Property by the Employer. Accordingly, the

employer requests an administrative exemption from the Department under

the terms and conditions described herein.

2 It is represented that simultaneously with the Plan's

purchase of the Property, the Employer will use the sale proceeds to

pay off its indebtedness to Worthen.

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5. The interests of the Plan with respect to the proposed

transactions will be represented by FCTC, as the independent fiduciary.

Specifically, Mr. Albert M. Crawford, a Certified Employee Benefits

Specialist for FCTC, will undertake the duties that are required of the

independent fiduciary. Other than serving as the Plan's existing

trustee, FCTC represents that it is not related in any way to the

Employer or its principals through any common ownership, debt

relationship, business dealings or family relationships, nor does it

derive (or will it derive) more than one percent of its gross business

revenues from the Employer and/or its principals for each fiscal year

that it serves as the independent fiduciary for the Plan with respect

to the transactions described herein. In addition, FCTC states that it

has extensive experience as a fiduciary under the Act and that it

acknowledges and accepts the duties, responsibilities and liabilities

in acting as a fiduciary with respect to the Plan.

6. The proposed Lease will have a term of 15 years. It may be

renewed by the Employer for three, successive five year periods

provided the Employer notifies the Plan of its intent to renew 60 days

prior to the expiration of the Lease term and it obtains FCTC's

approval with respect to each such extension. The Lease provides that

the Employer pay the Plan an initial monthly rental of $1,600 per

month. In addition, the Employer is required to pay for all utilities

that are associated with the Property, condominium fees, real estate

taxes, insurance premiums and maintenance and repairs to the premises.

During every three years that the Lease is in effect, the Property

will be reappraised, at the expense of the Employer, by a qualified,

independent appraiser who has been selected by FCTC. FCTC will then

adjust the rental for the Property. In the event that the adjusted

rental amount is less than the rental paid by the Employer during the

previous three year period, the Employer will pay the Plan the prior

rental amount.

7. The Lease also contains a provision which authorizes FCTC to

require the Employer to purchase the Property from the Plan under the

terms of an Option Agreement. Any purchase of the Property pursuant to

the Option Agreement will be for a cash amount that is not less than

the greater of (a) The Plan's original acquisition price for the

Property or (b) the fair market value of the Property as determined by

a qualified, independent appraiser who has been selected by FCTC. FCTC

may exercise the option only after it has determined that it is in the

best interests of the Plan and its participants and beneficiaries.

Notice of the exercise of the option must be presented to the Employer

in writing before its expiration. (Expiration of the Option will occur

upon the sale or transfer of the Property by the Plan.) Upon the

presentment of notice, the Employer will have 60 business days to

consummate the repurchase of the Property. The Option Agreement further

requires that the Plan will not be responsible for any real estate

fees, commissions or other expenses that are incurred in connection

with Employer's repurchase of the Property.

8. FCTC believes that the proposed transactions are in the best

interest of the Plan and its participants and beneficiaries for the

following reasons: (a) the proposed purchase of the Property by the

Plan and the leaseback to the Employer will guarantee participants an

annual investment rate of return of approximately 11.92 percent or

greater; (b) the terms of the Lease are comparable to the ones

currently being negotiated in the Nashville area for similar

properties; and (c) the Employer must, if requested, repurchase the

Property under the Option Agreement for a price which may be at, or in

excess of, the fair market value. In addition, FCTC considers the

Employer creditworthy and able to meet any obligations it may have in

the future to repurchase the Property.

In addition to these reasons, FCTC believes that the

diversification of the Plan's investment portfolio in the Property

would be beneficial to its participants and beneficiaries. FCTC notes

that the Plan's investments in real property for the year ending 1994

would amount to less than 25 percent of the Plan's assets. As

additional contributions and earnings are made to the Plan, the

Property will represent a smaller percentage of the total Plan assets.

Consequently, FCTC believes the decision to invest Plan assets in the

Property is a prudent one.

Finally, FCTC represents that it has examined the Plan document,

the investment portfolio for the Plan as well as the most recent Forms

5500 and allocations. In light of this examination, FCTC does not

believe the liquidity of the Plan will be adversely affected if the

proposed transactions are consummated. FCTC also asserts that the

proposed transactions will promote the diversification of the Plan's

assets

[[Page 5576]]

and enable the Plan to achieve its investment objectives.

Aside from the duties that are described above, FCTC has agreed to

monitor the proposed transactions throughout their duration on behalf

of the Plan and take appropriate actions that are deemed necessary and

proper to safeguard the interests of the Plan and its participants and

beneficiaries. FCTC will also monitor the terms and conditions of the

exemption, at all times.

9. In summary, it is represented that the proposed transactions

will satisfy the statutory criteria for an exemption under section

408(a) of the Act because:

(a) The interests of the Plan with respect to the purchase of the

Property, the execution and maintenance of the Lease and the potential

repurchase of the Property by the Employer will, at all times, be

represented by FCTC.

(b) FCTC, which has evaluated the terms of the transactions and

determined that the such transactions will be in the best interests of

the Plan, will monitor and enforce compliance with the terms and

conditions of the transactions and the exemption, at all times.

in cash and will be based upon the fair market value of the Property as

determined by a qualified, independent appraiser.

(d) The fair market value of the Property will not exceed 25

percent of the assets of the Plan.

(e) The terms of the Lease will remain at least as favorable to the

Plan as those obtainable in an arm's length transaction with an

unrelated party.

(f) The fair market rental amount will be redetermined every three

years that the Lease is in effect by a qualified, independent appraiser

who has been selected by FCTC and, FCTC will then make appropriate

adjustments to such rent.

(g) The Employer will be obligated for all real estate taxes,

utility costs, fees and insurance premiums that are incidental to the

Lease.

(h) The Option Agreement will enable the Plan to sell the Property

to the Employer in the event that FCTC determines that it is not in the

best interest of the Plan to retain the Property.

(i) The Option Agreement will provide that the Employer repurchase

the Property from the Plan for cash in an amount which is not less than

the greater of (i) the Plan's acquisition price for the Property or

(ii) the fair market value of the Property as determined by a

qualified, independent appraiser who has been selected by FCTC.

(j) The Plan will pay no real estate fees, commissions or other

expenses in connection with the acquisition of the Property, the

administration of the Lease or the repurchase of the Property by the

Employer under the Option Agreement.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,

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

Associated Claims Management 401(k) Plan (the Plan), Located in

Walnut Creek, CA

[Application No. D-10121]

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 section 406(a), 406(b)(1) and (b)(2) of

the Act and the sanctions resulting from the application of section

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

Code, shall not apply to the proposed sale of a group annuity contract

(the GAC) issued by Mutual Benefit Life Insurance Company (Mutual

Benefit) by the Plan to Foundation Health Corporation (FHC), a party in

interest with respect to the Plan, provided that the following

conditions are satisfied: (a) The sale is a one-time transaction for

cash; (b) the Plan suffers no loss nor incurs any expense in connection

with the sale; (c) the purchase price is no less than the fair market

value of the GAC as of the date of the sale; and (d) any payments under

the GAC to FHC, or its successors, after the date of the sale in excess

of FHC's purchase price are paid to the Plan.

Summary of Facts and Representations

1. The Plan is a 401(k) plan maintained by Associated Claims

Management, Inc. (ACMI), a wholly-owned subsidiary of FHC. FHC, a

Delaware corporation headquartered in Rancho Cordova, California, is a

holding company that administers managed health care services, as well

as offering life and disability insurance, through its subsidiaries.

ACMI administers insurance claims and is located in Walnut Creek,

California. As of September 15, 1995, the Plan had 109 participants who

remain invested in the GAC and total assets of approximately $474,995.

The trustees of the Plan are Laurie Stover, Director of Corporate

Compensation and Benefits at FHC, and Danny O. Smithson, Senior Vice

President of FHC.

2. Among the assets of the Plan is the GAC, No. GA-07773, which was

acquired from Mutual Benefit on May 2, 1990 and was intended to serve

as one of the investment options offered to Plan participants. The GAC

is a variant on the insurance product known in the trade as an ``annual

window group annuity contract.'' Under the GAC, two certificates were

issued to the Plan. The first certificate, effective January 1, 1990,

provided for an interest rate of 7.65% and a maturity date of December

31, 1994 (the 1990 Certificate). The second certificate, effective

January 1, 1991, provided for an interest rate of 8.10% and a maturity

date of December 31, 1995 (the 1991 Certificate).

The GAC was designed to operate in the following manner. For each

calendar year during the life of the GAC, Mutual Benefit would issue a

certificate to the Plan setting the guaranteed rate of interest payable

on funds deposited pursuant to the GAC certificate. For each

certificate, the Plan could elect a maturity date of two, three, or

four years from the first of the year. Mutual Benefit would establish a

separate subfund with respect to each certificate such that the GAC,

over a period of time, would be composed of a series of annual subfunds

earning various rates of interest. The GAC could be discontinued by the

Plan at any time. However, the funds deposited pursuant to the GAC

certificates would continue to earn interest until the certificates'

respective maturity dates.

3. On July 16, 1991, Mutual Benefit was placed into rehabilitation

proceedings by the New Jersey Commissioner of Insurance (the

Commissioner).3 As a result, the assets of the Plan invested in

the GAC were frozen, with the exception of certain hardship

withdrawals. In 1994, the terms of the GAC were redefined under a

rehabilitation plan approved by the Commissioner, and all liabilities

and obligations of Mutual Benefit with respect to the GAC were assumed

by the MBL Life Assurance Corporation (MBLLAC), a New Jersey stock life

insurance company located in Newark, New Jersey. The Plan opted to

remain invested in the GAC according to the

[[Page 5577]]

terms of the rehabilitation plan, which provides that withdrawals are

not permitted to participants without penalty until December 31, 1999,

except in the event of hardship or upon retirement after attaining age

59\1/2\.

3 The Department notes that the decision to acquire and

hold the GAC are governed by the fiduciary responsibility

requirements of Part 4, Subtitle B, Title I of the Act. In this

proposed exemption, the Department is not proposing relief for any

violations of Part 4 which may have arisen as a result of the

acquisition and holding of the GAC.

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Under the restructured GAC, the interest due on the 1990 and 1991

Certificates is calculated as follows. From the GAC's inception in

January 1, 1990 to December 31, 1991, interest is credited at the

guaranteed rates set forth in the 1990 and 1991 Certificates, 7.65% and

8.10%, respectively. From January 1, 1992 onward, interest is credited

at a rate pursuant to an insurance industry enhancement, or so-called

``wrapper,'' 4% for 1992, 3.5% for 1993, 3.5% for 1994, and 3.55% for

1995. The wrapper is funded by a consortium of insurance companies (the

Consortium), led by the Prudential Insurance Company of America and

Metropolitan Life Insurance Company, and provides a rate of interest

for insurance products that have been frozen due to the rehabilitory

conservatorship of Mutual Benefit. Beginning with calendar year 1995,

the interest rate set forth is based on the actual investment

performance of a separate account allocated by the Consortium to the

GAC. The applicant represents that it is still uncertain whether MBLLAC

will be able to redeem the GAC at 100% of its accumulated value by

December 31, 1999, as provided by the rehabilitation plan.

4. In order to protect the Plan participants and beneficiaries from

any further risk of investment loss associated with the GAC, the

applicant proposes to purchase the GAC from the Plan for an amount

equal to the account balance of the GAC as determined by MBLLAC as of

the date of the sale. As of September 1, 1995, the GAC had an account

balance of $143,091. This figure represents the principal amounts

deposited pursuant to the 1990 and 1991 Certificates, less withdrawals,

plus (i) the interest that accrued under the 1990 and 1991 Certificates

from January 1, 1990 to December 31, 1991, and (ii) the interest that

accrued under the wrapper from January 1, 1992 to September 1, 1995.

The purchase price will be adjusted to reflect any additional interest

earned from September 1, 1995 to the date of the sale. The sale will be

a one-time transaction for cash, and the Plan will incur no expenses in

connection with the sale.

The applicant represents that the proposed transaction is in the

interests of the Plan because it will enable the Plan to avoid any risk

associated with continued holding of the GAC and to redirect assets to

investments with a more attractive risk-return ratio. In addition, the

proposed transaction will enable participants to obtain distributions,

loans, and withdrawals attributable to GAC funds that have been frozen

since 1991.

4. In summary, the applicant represents that the proposed

transaction satisfies the criteria of section 408(a) of the Act

because: (a) The sale will be a one-time transaction for cash; (b) the

Plan will suffer no loss nor incur any expense in connection with the

sale; (c) the transaction will protect the Plan from any risk

associated with continued holding of the GAC, as well as enabling

participants to exercise all of their rights under the Plan to request

distributions, loans, and withdrawals from the Plan; (d) the purchase

price will be the account balance of the GAC as determined by MBLLAC as

of the date of the sale; and (e) any payments under the GAC to FHC, or

its successors, after the date of the sale in excess of FHC's purchase

price will be paid to the Plan.

Notice to Interested Persons

Notice of the proposed exemption shall be given to all interested

persons by first-class mail, by overnight express delivery, or by

posting the required information at ACMI's offices within 15 days of

the date of publication of the notice of pendency in the Federal

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and/or to request a

hearing with respect to the proposed exemption. Comments and requests

for a hearing are due within 45 days of the date of publication of this

notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Karin Weng of the Department,

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

First Union Corporation (First Union), Located in Charlotte, NC

[Application No. D-10165]

Proposed Exemption

I. Transactions

A. The restrictions of sections 406(a) and 407(a) of the Act and

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

section 4975(c)(1)(A) through (D) of the Code shall not apply to the

following transactions involving trusts and certificates evidencing

interests therein:

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

certificates in the initial issuance of certificates between the

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

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

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

party in interest with respect to such plan;

(2) The direct or indirect acquisition or disposition of

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

and

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

pursuant to subsection I.A.(1) or (2). Notwithstanding the foregoing,

section I.A. does not provide an exemption from the restrictions of

sections 406(a)(1)(E), 406(a)(2) and 407 for the acquisition or holding

of a certificate on behalf of an Excluded Plan by any person who has

discretionary authority or renders investment advice with respect to

the assets of that Excluded Plan.4

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. 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

[[Page 5578]]

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;

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 certificates,

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

and (iv) are met; and

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

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

C. The restrictions of sections 406(a), 406(b) and 407(a) of the

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

reason of section 4975(c) of the Code, shall not apply to transactions

in connection with the servicing, management and operation of a trust,

provided:

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

of a binding pooling and servicing arrangement; and

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

described in all material respects in the prospectus or private

placement memorandum provided to, investing plans before they purchase

certificates issued by the trust.6

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. The restrictions of sections 406(a) and 407(a) of the Act, and

the taxes imposed by sections 4975(a) and (b) of the Code by reason of

sections 4975(c)(1)(A) through (D) of the Code, shall not apply to any

transactions to which those restrictions or taxes would otherwise apply

merely because a person is deemed to be a party in interest or

disqualified person (including a fiduciary) with respect to a plan by

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

relationship to such service provider described in section 3(14)(F),

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

the Code), solely because of the plan's ownership of certificates.

II. General Conditions

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

following conditions are met:

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

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

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

party;

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

subordinated to the rights and interests evidenced by other

certificates of the same trust;

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

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

generic rating categories from either Standard & Poor's Corporation

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

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

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

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

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

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

and servicing agreement providing for such succession upon the

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

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

underwriters in connection with the distribution or placement of

certificates represents not more than reasonable compensation for

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

to and retained by the sponsor pursuant to the assignment of

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

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

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

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

pooling and servicing agreement and reimbursement of the servicer's

reasonable expenses in connection therewith; and

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

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

Securities and Exchange Commission under the Securities Act of 1933.

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

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 First Union 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--

[[Page 5579]]

(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);

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

residential and commercial real property (including obligations secured

by leasehold interests on commercial real property);

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

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

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

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

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

(f) Fractional undivided interests in any of the obligations

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

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

subsection B.(1);

(3) Undistributed cash or temporary investments made therewith

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

made to certificateholders; and

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

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

guarantees, contracts of suretyship and other credit support

arrangements with respect to any obligations described in subsection

B.(1).

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

investment pool unless: (i) The investment pool consists only of assets

of the type which have been included in other investment pools, (ii)

certificates evidencing interests in such other investment pools have

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

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

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

(iii) certificates evidencing interests in such other investment pools

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

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

exemption.

C. ``Underwriter'' means:

(1) First Union;

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

intermediaries, controlling, controlled by or under common control with

First Union; or

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

which First Union or a person described in (2) is a manager or co-

manager with respect to the certificates.

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

depositing obligations therein in exchange for certificates.

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

pooling and servicing agreement relating to trust assets and is fully

responsible for servicing, directly or through subservicers, the assets

of the trust.

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

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

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

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

the trust, including the master servicer and any subservicer.

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

certificates which are denominated as debt instruments, also means the

trustee of the indenture trust.

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

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

person is not an insurer solely because it holds securities

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

to certificates representing an interest in the same trust.

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

obligated to make payments with respect to any obligation or receivable

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

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

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

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

in the trust.

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

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

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

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

means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

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

in the trust constituting more than 5 percent of the aggregate

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

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

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

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

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

intermediaries, controlling, controlled by, or under common control

with such other person;

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

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

brother or sister of such other person; and

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

officer, director or partner.

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

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

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

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

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

who has investment management authority or renders investment advice

with respect to any assets of such person.

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

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

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

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

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

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

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

delivery commitment; and

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

applicable to sales are met.

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

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

agreed future settlement date. The term includes both mandatory

contracts (which contemplate obligatory delivery and acceptance of the

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

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

of certificates from, the other party).

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

defined in 29 CFR 2550.408c-2.

[[Page 5580]]

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

following criteria:

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

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

obligations;

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

to act referred to in (1);

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

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

set forth in the pooling and servicing agreement; and

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

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

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

equipment note:

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

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

under the equipment lease; and

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

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

be the case if the equipment note were secured only by the equipment

and not the lease.

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

vehicle where:

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

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

vehicle; and

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

least as protective of the trust's rights as would be the case if the

trust consisted of motor vehicle installment loan contracts.

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

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

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

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

indenture entered into by the trustee of the trust issuing such

certificates and the indenture trustee.

Summary of Facts and Representations

1. First Union is a North Carolina-based, multi-bank holding

company registered under the Bank Holding Company Act of 1956, as

amended, and the rules and regulations thereunder. First Union was

incorporated on December 22, 1967. First Union provides a wide range of

commercial and retail banking and trust services. First Union 7

also provides various other financial services, including mortgage

banking, home equity lending, leasing, investment banking, insurance

and securities brokerage services, through other subsidiaries. First

Union Capital Markets Corp. (CMC), formerly First Union Securities,

Inc., is a wholly-owned subsidiary of First Union and a broker-dealer

registered with the Securities and Exchange Commission.8

7 For purposes of this exemption, ``First Union'' shall include

First Union Corporation, First Union Capital Markets Corp., the

direct and indirect national bank association subsidiaries of First

Union Corporation, and their respective subsidiaries and affiliates,

except where the context otherwise requires.

\8\ There are two other SEC-registered broker-dealers in the

First Union family: First Union Brokerage Services, Inc., a North

Carolina corporation (FUBS), and Lieber & Co., a New York general

partnership (Lieber). Neither FUBS nor Lieber currently engages, nor

is it currently contemplated that either will engage, in the

underwriting or private placement of asset- or mortgage-backed

securities.

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Through its subsidiaries and affiliates (including CMC), First

Union is a financial services organization servicing the financial

needs of individuals, businesses, governments and financial

institutions. As to the capital markets, CMC and certain of its bank

affiliates, principally First Union National Bank of North Carolina,

engage in a variety of activities that facilitate the flow of capital

from investors to CMC's and such Bank's middle market customers. In

particular, CMC engages in securities transactions as both principal

and agent and provides underwriting, research and other financial

services. CMC is actively involved in the issuance and trading of high

yield corporate debt, investment grade fixed-income securities

(including mortgage and asset-backed securities), U.S. government

securities and municipal securities.

First Union represents that CMC has the legal authority to

underwrite asset-backed securities. By order dated July 31, 1989, the

Board of Governors of the Federal Reserve (the Board) granted CMC the

power to underwrite and deal in residential mortgage-related and

consumer-receivable related securities. By order dated May 30, 1995,

the Board granted CMC the power to underwrite and deal in all types of

debt securities, including securities issued by a trust, partnership or

limited liability company or other vehicle secured by or representing

interests in debt obligations (such as asset-backed securities not

covered by the July 31, 1989 order). In each case, CMC's power to so

underwrite and deal is subject to a framework of structural and

operating limitations set forth in the applicable order, including a

condition that it does not derive more than a certain percentage of its

gross revenues from such activities. In addition, each of First Union's

national bank association subsidiaries has the power to underwrite

asset-backed securities representing interests in assets originated or

acquired by such national bank association subsidiary.

Trust Assets

12. First Union 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; 9 (2) motor vehicle

receivable investment trusts; (3) consumer or commercial receivables

investment trusts; and (4) guaranteed governmental mortgage pool

certificate investment trusts.10

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

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

generally apply to trusts containing single-family residential

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

met. First Union requests relief for single-family residential

mortgages in this exemption because it would prefer one exemption

for all trusts of similar structure. However, First Union has stated

that it may still avail itself of the exemptive relief provided by

PTE 83-1.

10 Guaranteed governmental mortgage pool certificates are

mortgage-backed securities with respect to which interest and

principal payable is guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation

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

Department's regulation relating to the definition of plan assets

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

guaranteed governmental mortgage pool certificate, the plan's assets

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

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

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

underlying such certificate. The applicant is requesting exemptive

relief for trusts containing guaranteed governmental mortgage pool

certificates because the certificates in the trusts may be plan

assets.

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3. Commercial mortgage investment trusts may include mortgages on

ground leases of real property. Commercial mort gages are frequently

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

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

ground lease interest is generally done for tax reasons. Properly

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

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

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

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

least ten years longer than the term of such mortgages.11

11 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).

[[Page 5581]]

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Trust Structure

4. Each trust is established under a pooling and servicing

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

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

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

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

an unrelated lender and subsequently acquired by the trust sponsor or

servicer.

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

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

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

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

issues certificates representing fractional undivided interests in the

trust assets. First Union, 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 First Union on a firm commitment

basis. In addition, First Union anticipates that it may privately place

certificates on both a firm commitment and an agency basis. First Union

may also act as the lead underwriter for a syndicate of securities

underwriters.

Certificateholders will be entitled to receive monthly, quarterly

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

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

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

fixed or variable.

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

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

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

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

certificateholders) to hold funds received between distribution dates.

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

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

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

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

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

received from obligors by the servicer may be commingled with the

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

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

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

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

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

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

delivered to the trustee, it will be made available to

certificateholders and delivered to or made available to each rating

agency that has rated the certificates.

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

Union 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

\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

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 home-owner or automobile

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

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

a trust sponsor.

Originators of receivables included in the trusts will be entities

that originate receivables in the ordinary course of their business,

including finance companies for whom such origination constitutes the

bulk of their operations, financial institutions for whom such

origination constitutes a substantial part of their operations, and any

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

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

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

receivables may also function as the trust sponsor or servicer.

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

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

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

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

will generally be limited

[[Page 5582]]

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 First Union, the trust sponsor or the servicer. First

Union represents that the trustee will be a substantial financial

institution or trust company experienced in trust activities. The

trustee receives a fee for its services, which will be paid by the

servicer or sponsor. The method of compensating the trustee which is

specified in the pooling and servicing agreement will be disclosed in

the prospectus or private placement memorandum relating to the offering

of the certificates.

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

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

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

maintaining records of payments received on receivables and instituting

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

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

different originators and deposited in a trust, the receivables may be

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

``master service'' the pool of receivables on behalf of the owners of

the related series of certificates. Where this arrangement is adopted,

a receivable continues to be serviced from the perspective of the

borrower by the local subservicer, while the investor's perspective is

that the entire pool of receivables is serviced by a single, central

master servicer who collects payments from the local subservicers and

passes them through to certificateholders.

Receivables of the type suitable for inclusion in a trust

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

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

order to continue monitoring the accounts. Although the records

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

receivables retained by the originator, the sold receivables are

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

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

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

file, archives, tape extracts and printouts.

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

manner in which the servicer performs the billing, posting and

collection procedures related to the sold receivables. However, the

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

of reporting all activity on those receivables after their sale to

investors.

Depending on the type of receivable and the details of the

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

reports can be adapted for investor reporting with little or no

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

calculations to fulfill the investor reporting responsibilities. These

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

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

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

books and reviewed by public accountants.

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

underwriter or placement agent with respect to the sale of the

certificates. Public offerings of certificates are generally made on a

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

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

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

the public.

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

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

themselves be related) will be unrelated to First Union. In some cases

the underwriter will be unrelated to First Union. In other cases,

however, First Union 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.

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''

[[Page 5583]]

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

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

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

established.

14. The servicer may be entitled to retain certain administrative

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

fees fall into three categories: (a) prepayment fees; (b) late payment

and payment extension fees; and (c) expenses, fees and charges

associated with foreclosure or repossession, or other conversion of a

secured position into cash proceeds, upon default of an obligation.

Compensation payable to the servicer will be set forth or referred

to in the pooling and servicing agreement and described in reasonable

detail in the prospectus or private placement memorandum relating to

the certificates.

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

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

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

servicing agreement may permit the servicer to place these payments in

non-interest bearing accounts maintained with itself or to commingle

such payments with its own funds prior to the distribution dates. In

these cases, the servicer would be entitled to the benefit derived from

the use of the funds between the date of payment on a receivable and

the pass- through date. Commingled payments may not be protected from

the creditors of the servicer in the event of the servicer's bankruptcy

or receivership. In those instances when payments on receivables are

held in non-interest bearing accounts or are commingled with the

servicer's own funds, the servicer is required to deposit these

payments by a date specified in the pooling and servicing agreement

into an account from which the trustee makes payments to

certificateholders.

16. The underwriter will receive a fee in connection with the

securities underwriting or private placement of certificates. In a firm

commitment underwriting, this fee would consist of the difference

between what the underwriter receives for the certificates that it

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

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

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

the underwriter would sell certificates in a public offering on an

agency basis, the underwriter would receive an agency commission rather

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

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

some private placements, the underwriter may buy certificates as

principal, in which case its compensation would be the difference

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

pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

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

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

administering the trust generally increases, making the servicing of

the trust prohibitively expensive at some point. Consequently, the

pooling and servicing agreement generally provides that the servicer

may purchase the receivables remaining in the trust when the aggregate

unpaid balance payable on the receivables is reduced to a specified

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

balance.

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

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

principal balance on the receivable plus accrued interest, less any

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

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

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

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

Certificate Ratings

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

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

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

guarantees, or the creation of a class of certificates with

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

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

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

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

for the type of obligations included in the issuing trust.

Provision of Credit Support

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

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

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

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

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

payments by the obligors, (b) 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

[[Page 5584]]

after which delinquent obligations ordinarily will be considered

uncollectible;

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;

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

including the types of receivables, the diversification of the

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

(e) A description of the sponsor and servicer;

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

a description of the seller's principal representations and warranties

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

a description of the procedures for collection of payments on

receivables and for making distributions to investors, and a

description of the accounts into which such payments are deposited and

from which such distributions are made; identification of the servicing

compensation and any fees for credit enhancement that are deducted from

payments on receivables before distributions are made to investors; a

description of periodic statements provided to the trustee, and

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

description of the events that constitute events of default under the

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

the investors' remedies incident thereto;

(g) A description of the credit support;

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

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

through securities by a typical investor;

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

pass-through securities to investors; and

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

if any, for the certificates.

21. Reports indicating the amount of payments of principal and

interest are provided to certificateholders at least as frequently as

distributions are made to certificateholders. Certificateholders will

also be provided with periodic information statements setting forth

material information concerning the underlying assets, including, where

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

defaulted loans or receivables.

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

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

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

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

certificates in a public offering will file quarterly reports on Form

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

application to the Securities and Exchange Commission, a complete

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

and a modification of the disclosure requirements for annual reports on

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

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

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

certificates. While the Securities and Exchange Commission's

interpretation of the periodic reporting requirements is subject to

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

required under the Securities Exchange Act of 1934.

23. At or about the time distributions are made to

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

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

Such report will typically contain information regarding the trust's

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

prepayments, delinquencies, servicer advances, defaults and

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

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

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

or agencies that have rated the trust's certificates.

In addition, promptly after each distribution date,

certificateholders will receive a statement prepared by the servicer,

paying agent or trustee summarizing information regarding the trust and

its assets. Such statement will include information regarding the trust

and its assets, including underlying receivables. Such statement will

typically contain information regarding payments and prepayments,

delinquencies, the remaining amount of the guaranty or other credit

support and a breakdown of payments between principal and interest.

Forward Delivery Commitments

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

by First Union in connection with the offering of any certificates, but

First Union may contemplate entering into such commitments. The utility

of forward delivery commitments has been

[[Page 5585]]

recognized with respect to offering similar certificates backed by

pools of residential mortgages, and First Union may find it desirable

in the future to enter into such commitments for the purchase of

certificates.

Secondary Market Transactions

25. It is First Union's normal policy to attempt to make a market

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

Union anticipates that it will make a market in certificates.

Summary

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

which exemptive relief is requested satisfy the statutory criteria of

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

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

discretion on the part of the trust sponsor to substitute receivables

contained in the trust once the trust has been formed;

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

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

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

desired rating;

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) First Union anticipates that it will make a secondary market in

certificates.

Discussion of Proposed Exemption

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

The exemptive relief proposed herein is similar to that provided in

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

Transactions Involving Mortgage Pool Investment Trusts, amended and

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

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

interest-bearing obligations secured by first or second mortgages or

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

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

transfer in the initial issuance of mortgage pool certificates between

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

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

continued holding of such certificates, provided that the conditions

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

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

described transactions when the sponsor, trustee or insurer of the

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

certificates, provided that additional conditions set forth in the

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

upon the approval of the transaction by an independent fiduciary.

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

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

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

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

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

the Act for transactions in connection with the servicing and operation

of the mortgage trust.

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

conditioned upon the sponsor and the trustee of the mortgage trust

maintaining a system for insuring or otherwise protecting the pooled

mortgage loans and the property securing such loans, and for

indemnifying certificateholders against reductions in pass-through

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

system must provide such protection and indemnification up to an amount

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

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

mortgage.

The exemptive relief proposed herein differs from that provided by

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

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

proposed exemption covers transactions involving trusts containing a

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

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

proposed exemption conditions relief upon the certificates having

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

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

obtained only to the extent necessary for the certificates to attain

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

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

II. Ratings of Certificates

After consideration of the representations of the applicant and

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

\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

First Union 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

[[Page 5586]]

purchase certificates where trust funds will be used to benefit a party

in interest.

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

herein is limited to certificates with respect to which First Union

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

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

selling or placement agent.

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

affiliate of First Union, 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 First Union

is not a fiduciary with respect to plan assets to be invested in

certificates.

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Additionally, First Union 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. First Union 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, First Union represents that to the extent there is a plan

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

investment in certificates by a plan covering employees of an obligor

under receivables contained in a trust may be prohibited by sections

406(a) and 407(a) of the Act.

After consideration of the issues involved, the Department has

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

specified in the proposed exemption.

NOTICE TO INTERESTED PERSONS: The applicant represents that because

those potentially interested participants and beneficiaries cannot all

be identified, the only practical means of notifying such participants

and beneficiaries of this proposed exemption is by the publication of

this notice in the Federal Register. Comments and requests for a

hearing must be received by the Department not later than 30 days from

the date of publication of this notice of proposed exemption in the

Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,

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

General Information

The attention of interested persons is directed to the following:

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

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

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

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

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

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

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

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

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

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

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

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

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

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

Code, including statutory or administrative exemptions and transitional

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

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

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

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

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

the material facts or representations described in the application

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

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

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

Signed at Washington, DC, this 2nd day of February, 1996.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 96-3117 Filed 2-12-96; 8:45 am]

BILLING CODE 4510-29-P

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.