Proposed Amendment to Prohibited Transaction Exemptions (PTEs) 90-30 Involving Bear, Stearns & Co. Inc., (D-10245) 90-32 Involving Prudential Securities Incorporated, (D-10246)
Federal RegisterMay 23, 1997
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
Proposed Amendment to Prohibited Transaction Exemptions (PTEs)
90-30 Involving Bear, Stearns & Co. Inc., (D-10245) 90-32 Involving
Prudential Securities Incorporated, (D-10246)
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of a proposed amendment to the Underwriter
Exemptions.1
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\1\ The term ``Underwriter Exemptions'' refers to the following
individual Prohibited Transaction Exemptions (PTEs): PTE 89-88, 54
FR 42582 (October 17, 1989); PTE 89-89, 54 FR 42569 (October 17,
1989); PTE 89-90, 54 FR 42597 (October 17, 1989); PTE 90-22, 55 FR
20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 17, 1990); PTE 90-
24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 21456 (May 24,
1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-30, 55 FR 21461
(May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 1990); PTE 90-32, 55
FR 23147 (June 6, 1990); PTE 90-33, 55 FR 23151 (June 6, 1990); PTE
90-36, 55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 (July 5,
1990); PTE 90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 55 FR
50250 (December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 1990);
PTE 90-88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 48178
(February 22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE
91-23, 56 FR 15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15,
1991); PTE 91-62, 56 FR 51406 (October 11, 1991); PTE 93-31, 58 FR
28620 (May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-
29, 59 FR 14675 (March 29, 1994); PTE 94-64, 59 FR 42312 (August 17,
1994); PTE 94-70, 59 FR 50014 (September 30, 1994); PTE 94-73, 59 FR
51213 (October 7, 1994); PTE 94-84, 59 FR 65400 (December 19, 1994);
PTE 95-26, 60 FR 17586 (April 6, 1995); PTE 95-59, 60 FR 35938 (July
12, 1995); PTE 95-89, 60 FR 49011 (September 21, 1995); PTE 96-11,
61 FR 3490 (January 31, 1996); PTE 96-22, 61 FR 14828 (April 3,
1996); PTE 96-84, 61 FR 58234 (November 13, 1996); PTE 96-92, 61 FR
66334 (December 17, 1996); PTE 96-94, 61 FR 68787 (December 30,
1996); PTE 97-05, 62 FR 1926 (January 14, 1997); and PTE 97-28, 62
FR (Norwest Investment Services).
In addition, the Department notes that it is also proposing
individual exemptive relief for Ironwood Capital Partners Ltd.,
Final Authorization Number (FAN) 97-02E and Deutsche Bank AG, New
York Branch and Deutsche Morgan Grenfell/C.J. Lawrence Inc., FAN 97-
03E, which received the approval of the Department to engage in
transactions substantially similar to the transactions described in
the Underwriter Exemptions pursuant to PTE 96-62.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to the
Underwriter Exemptions. The Underwriter Exemptions are individual
exemptions that provide relief for the origination and operation of
certain asset pool investment trusts and the acquisition, holding and
disposition of certain asset backed pass-through certificates
representing undivided interests in those investment trusts. The
proposed amendment, if granted, would: (1) Modify the definition of
``Trust'' to include a pre-funding account (the Pre-Funding Account)
and a capitalized interest account (the Capitalized Interest Account)
as part of the corpus of the Trust; (2) provide retroactive relief for
transactions involving asset pool investment trusts containing pre-
funding accounts which have occurred on or after January 1, 1992; (3)
include in the definition of ``Certificate'' a debt instrument that
represents an interest in a Financial Asset Securitization Investment
Trust (FASIT); and (4) make certain changes to the Underwriter
Exemptions that would reflect the Department's current interpretation
of the Underwriter Exemptions.
DATES: Written comments and requests for a hearing should be received
by the Department on or before July 7, 1997.
EFFECTIVE DATE: If adopted, the proposed amendment to the Underwriter
Exemptions would be effective for transactions occurring on or after
January 1, 1992, except as otherwise provided in subsection II.A.(7)
and section III.AA. of the proposed exemption.
ADDRESSES: All written comments and requests for a hearing (preferably
at least three copies) should be sent to: Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, Department of Labor, 200 Constitution Avenue, N.W., Washington,
D.C. 20210, Attn: Proposed Amendment to PTEs 90-30, 90-32, et al. The
applications pertaining to the amendment proposed herein and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Administration, U. S.
Department of Labor, Room N-5638, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
FOR FURTHER INFORMATION CONTACT: Wendy McColough of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed exemption to amend PTEs 90-30, 55
FR 21461 (May 24, 1990) and 90-32, 55 FR 23147 (June 6, 1990), two of
the Underwriter Exemptions. The Underwriter Exemptions are a group of
individual exemptions that provide substantially identical relief for
the operation of certain asset pool investment trusts and the
acquisition and holding by plans of certain asset-backed pass-through
certificates representing interests in those trusts. These exemptions
provide relief from certain of the restrictions of sections 406(a),
406(b) and 407(a) of the Act and from the taxes imposed by section
4975(a) and (b) of the Code, by reason of certain provisions of section
4975(c)(1) of the Code.
The proposed amendment was requested by application dated March 25,
1996, and as restated in a later submission dated February 26, 1997, on
behalf of Bear, Stearns & Co. Inc.2 and Prudential Security
Inc.\3\ (the Applicants). In preparing the application, the Applicants
received input from members of the PSA. The Bond Market Trade
Association (formerly the Public Securities Association) (PSA).
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\2\ PTE 90-30, 55 FR 21461 (May 24, 1990). Bear, Stearns & Co.
Inc. (Bear, Stearns) is an international investment banking firm
which engages in securities transactions as both a principal and
agent and which provides a broad range of underwriting, research and
financial services to its clients.
\3\ PTE 90-32, 55 FR 23147 (June 6, 1990). PTE 90-32 was granted
to Prudential-Bache Securities, Inc. which subsequently changed its
corporate name to Prudential Securities Incorporated (Prudential).
Prudential is a full service securities broker-dealer and investment
banking firm.
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The Department is proposing the amendment to these individual
exemptions pursuant to 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).4
In addition, the Department is proposing to provide the same relief on
its own motion pursuant to the authority described above for many of
the other Underwriter Exemptions which have substantially similar terms
and conditions.5 The Department is also proposing to provide
the same relief to Ironwood Capital Partners Ltd. (D-10424) and
Deutsche Bank AG, New York Branch and Deutsche Morgan Grenfell/C.J.
Lawrence Inc. (D-10433), which received the
[[Page 28503]]
approval of the Department to engage in transactions substantially
similar to the transactions described in the Underwriter Exemptions
pursuant to PTE 96-62.
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\4\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally
transferred the authority of the Secretary of the Treasury to issue
exemptions under section 4975(c)(2) of the Code to the Secretary of
Labor. In the discussion of the exemption, references to section 406
and 408 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
\5\ In this regard, the entities who received the other
Underwriter Exemptions were contacted concerning their participation
in this amendment process.
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Amendment to the Exemptions
The Applicants state that the proposed amendment is requested in
order to modify the definition of Trust contained in the Underwriter
Exemptions to include a Pre-Funding Account and a related Capitalized
Interest Account, both consisting of cash or temporary investments made
therewith (as further described herein). This would permit the Trust to
acquire a portion (not to exceed the limitations set forth below) of
its assets during an interim period (the Pre-Funding Period), following
the closing date of the Trust under the pooling and servicing agreement
or trust agreement pursuant to which the Trust is established (the
Closing Date). Allowing a portion of the Trust's assets to be acquired
during the Pre-Funding Period would be an alternative to requiring that
all of the receivables to be held in the Trust be transferred or
constitute a fixed pool of assets as of the Closing Date.6
The characteristics of the receivables to be acquired during the Pre-
Funding Period will be substantially similar to the characteristics of
the receivables conveyed to the Trust as of the Closing Date.
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\6\ The Department is of the view that the term ``Trust'' under
the Underwriter Exemptions would include a Trust: (a) the assets of
which, although all specifically identified by the sponsor or
originator as of the Closing Date, are not all transferred to the
Trust on the Closing Date for administrative or other reasons but
will be transferred to the Trust shortly after the Closing Date, or
(b) with respect to which certificates are not purchased by plans
until after the end of the Pre-Funding Period at which time all
receivables are contained in the Trust.
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Additionally, the Applicants request that the proposed amendment
include in the definition of ``Certificate'' a debt instrument that
represents an interest in a FASIT provided that each of the applicable
requirements of the Underwriter Exemptions are met. The Applicants also
request that the Department update the Underwriter Exemptions to
reflect: (1) those features which the Department has already approved
in recently granted Underwriter Exemptions; (2) certain other technical
corrections or clarifications; and (3) provisions authorizing yield
supplement agreements or similar yield maintenance
arrangements.7
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\7\ In a July 14, 1994 letter to Richard A. Gilbert, Esq. of
Orrick, Herrington & Sutcliffe, the Department expressed the view
that the definition of ``Trust'' in PTE 90-23, 55 FR 20545 (May 17,
1990) includes yield supplement agreements or similar yield
maintenance arrangements which obligates the sponsor, master
servicer or another party specified in the pooling and servicing
agreement to supplement the interest rates otherwise payable on the
obligations that are held in the Trust, provided that such
arrangements do not involve swap agreements or other notional
principal contracts.
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The Underwriter Exemptions
The Underwriter Exemptions permit plans to invest in pass-through
certificates representing undivided interests in the following
categories of trusts: 8 (1) single and multi-family
residential or commercial mortgage investment trusts; 9 (2)
motor vehicle receivables investment trusts; (3) consumer or commercial
receivables investment trusts; and (4) guaranteed governmental mortgage
pool certificate investment trusts.10 Residential and
commercial mortgage investment trusts may include mortgages on ground
leases of real property. The terms of the ground leases pledged to
secure leasehold mortgages will in all cases be at least ten years
longer than the terms of such mortgages.11
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\8\ A given trust may include receivables of the type described
below in one or more of the categories of trusts discussed herein.
\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 83-1 are
met. The Underwriter Exemptions provide relief for single-family
residential mortgages because the applicants preferred one exemption
for all trusts of similar structure. However, the applicants have
stated that they may still avail themselves 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.
\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, at 23150,
June 6, 1990).
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Each Trust is established under a pooling and servicing agreement
or an equivalent agreement among a sponsor, a servicer, and a trustee.
Prior to the Closing Date under the pooling and servicing agreement,
the sponsor and/or the servicer selects receivables from the classes of
assets described in Section III.B.(1)(a)-(f) of the Underwriter
Exemptions to be included in a Trust, establishes the Trust and
designates an independent entity as trustee for the Trust. Typically,
on or prior to the Closing Date, the sponsor acquires legal title to
all assets selected for the Trust. In some cases, legal title to some
or all of such assets continue to be held by the originator of the
receivables until the Closing Date. On the Closing Date, the sponsor
and/or the originator conveys to the Trust legal title to the assets,
and the trustee issues certificates representing fractional undivided
interests in the Trust assets.
Since the receivables to be held in the Trust were all transferred
as of the Closing Date, no exemptive relief was requested under the
Underwriter Exemptions for the Trust to hold any cash, or temporary
investments made therewith, other than cash representing undistributed
proceeds from payments of principal and interest by obligors under the
receivables. However, in the past several years, the transactions
relating to the funding of the Trust have changed.
Pre-Funding Accounts
The Applicants represent that while many transactions still occur
as described in the applications for the Underwriter Exemptions and as
summarized above, it is also common for other transactions to be
structured using a Pre-Funding Account and/or a Capitalized Interest
Account as described below. Pre-Funding Accounts allow the sponsor
additional time after the Closing Date to assemble the files for
receivables, complete quality control or other due-diligence procedures
and deliver the necessary documents to the trustee. The sale of
certificates prior to the origination of such receivables provides a
mechanism for both the originator and/or sponsor and plans to protect
against fluctuations in interest rates. Since many transaction costs
are fixed regardless of the size of the receivables pool, the sale of
additional receivables lowers the unit costs of the transaction, both
for the originators and/or the sponsor and for plans (who otherwise
might not be able to purchase the same volume of receivables on their
own at a comparable unit price).
Pre-Funding Accounts allow originators and/or sponsors to reduce
costs by permitting the sale of the existing receivables and delivery
of additional receivables without the need to warehouse the existing
receivables during the period that the additional receivables are being
acquired. The Applicants state that all of these uses of Pre-Funding
Accounts make
[[Page 28504]]
transactions more efficient, thereby reducing costs and producing
better execution for both sponsors and/or originators and plan
investors. Also, through the use of a Pre-Funding Account, sponsors
and/or originators are able to sell, and plans are able to purchase,
more securities at then current market rates than would be the case in
the absence of the Pre-Funding Account.
The Applicants assumed that the use of a Pre-Funding Account was
authorized under the original Underwriter Exemptions and transactions
including Pre-Funding Accounts have occurred since January 1, 1992. The
Applicants therefore request retroactive relief for transactions
involving Trusts containing Pre-Funding Accounts. The Applicants state
that transactions involving Pre-Funding Accounts which have occurred on
or after January 1, 1992 but prior to the date of this proposed
amendment, were entered into by the parties under a good faith belief
that the Department had sanctioned such use.
The Applicants represent that they are unaware of any circumstances
in which the use of pre-funding has harmed plan investors and there is
no evidence of any failure of a sponsor to meet its representations as
to the characteristics of the subsequently acquired receivables or of
any down-grading of a certificate rating at the end of the Pre-Funding
Period. PSA has canvassed its members who have been granted an
Underwriter Exemption and have solicited this same information from
four nationally recognized rating agencies referred to in the
Underwriter Exemptions. No such underwriter or rating agency is aware
of any transaction where the rating of the certificates has been down-
graded at the end of the Pre-Funding Period solely as a consequence of
use of a pre-funding mechanism.
The Pre-Funding Period for any Trust will be defined as the period
beginning on the Closing Date and ending on the earliest to occur of
(i) the date on which the amount on deposit in the Pre-Funding Account
is less than a specified dollar amount, (ii) the date on which an event
of default occurs under the related pooling and servicing agreement
12 or (iii) the date which is the later of three months or
ninety days after the Closing Date. If pre-funding is used, cash
sufficient to purchase the receivables to be transferred after the
Closing Date will be transferred to the Trust by the sponsor or
originator on the Closing Date. During the Pre-Funding Period, such
cash and temporary investments, if any, made therewith will be held in
a Pre-Funding Account and used to purchase the additional receivables,
the characteristics of which will be substantially similar to the
characteristics of the receivables transferred to the Trust on the
Closing Date. Certain specificity and monitoring requirements described
below must be met and will be disclosed in the pooling and servicing
agreement and/or the prospectus 13 or private placement
memorandum.
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\12\ The minimum dollar amount is generally the dollar amount
below which it becomes too uneconomical to administer the Pre-
Funding Account. An event of default under the pooling and servicing
agreement generally occurs when: (i) a breach of a covenant or a
breach of a representation and warranty concerning the sponsor, the
servicer or certain other parties occurs which is not cured; (ii)
there occurs a failure to make required payments to
certificateholders; or (iii) the servicer becomes insolvent.
\13\ References to the term ``prospectus'' herein shall include
any related prospectus supplement thereto, pursuant to which
certificates are offered to investors.
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For transactions involving a Trust using pre-funding, on the
Closing Date, a portion of the offering proceeds will be allocated to
the Pre-Funding Account generally in an amount equal to the excess of
(i) the principal amount of certificates being issued over (ii) the
principal balance of the receivables being transferred to the Trust on
such Closing Date. In certain transactions, the aggregate principal
balance of the receivables intended to be transferred to the Trust may
be larger than the total principal balance of the certificates being
issued. In these cases, the cash deposited in the Pre-Funding Account
will equal the excess of the principal balance of the total receivables
intended to be transferred to the trust over the principal balance of
the receivables being transferred on the Closing Date.
On the Closing Date, the sponsor transfers the assets to the Trust
in exchange for the certificates. The certificates are then sold to an
underwriter for cash or to the certificateholders directly if the
certificates are sold through a placement agent. The cash received by
the sponsor from the certificateholders (or the underwriter) from the
sale of the certificates issued by the Trust in excess of the purchase
price for the receivables and certain other trust expenses such as
underwriting or placement agent fees and legal and accounting fees,
constitutes the cash to be deposited in the Pre-Funding Account. Such
funds are either held in the trust and accounted for separately, or are
held in a sub-trust. In either event, these funds are not part of
assets of the sponsor.
Generally, the receivables are transferred at par value, unless the
interest rate payable on the receivables is not sufficient to service
both the interest rates to be paid on the certificates and the
transaction fees (i.e., servicing fees, trustee fees and fees to credit
support providers). In such cases, the receivables are sold to the
Trust at a discount, based on an objective, written, mechanical formula
which is set forth in the pooling and servicing agreement and agreed
upon in advance between the sponsor, the rating agency and any credit
support provider or other insurer. The proceeds payable to the sponsor
from the sale of the receivables transferred to the trust may also be
reduced to the extent they are used to pay transaction costs (which
typically include underwriting or placement agent fees and legal and
accounting fees). In addition, in certain cases, the sponsor may be
required by the rating agencies or credit support providers to set up
trust reserve accounts to protect the certificateholders against credit
losses.
The exemptive relief requested for Pre-Funding Accounts is limited
to those Trusts where the percentage or ratio of the amount allocated
to the pre-funding account, as compared to the total principal amount
of the certificates being offered (the Pre-Funding Limit) does not
exceed 25% for transactions occurring on or after the date the proposed
amendment is published in the Federal Register and did not exceed 40%
for transactions occurring on or after January 1, 1992, but prior to
the date the proposed amendment is published in the Federal Register.
The Pre-Funding Limit (which may be expressed as a ratio or as a stated
percentage or a combination thereof) will be specified in the
prospectus or the private placement memorandum.
Any amounts paid out of the pre-funding account are used solely to
purchase receivables and to support the certificate pass-through rate
(as explained below). Amounts used to support the pass-through rate are
payable only from investment earnings and are not payable from
principal. However, in the event that, after all of the requisite
receivables have been transferred into the Trust, any funds remain in
the Pre-Funding Account, such funds will be paid to the
certificateholders as principal prepayments. Upon termination of the
Trust, if no receivables remain in the Trust and all amounts payable to
certificateholders have been distributed, any amounts remaining in the
Trust would be returned to the sponsor.
[[Page 28505]]
A dramatic change in interest rates on the receivables held in a
Trust using a Pre-Funding Account would be handled as follows. If the
receivables (other than those with adjustable or variable rates) had
already been originated prior to the Closing Date, no action would be
required as the fluctuations in market interest rates would not affect
the receivables transferred to the Trust after the Closing Date. In
contrast, if interest rates fall after the Closing Date, loans
originated after the Closing Date will tend to be originated at lower
rates, with the possible result that the receivables will not support
the certificate pass-through rate. In such situations, the sponsor
could sell the receivables into the Trust at a discount and more
receivables will be used to fund the Trust in order to support the
pass-through rate. In a situation where interest rates drop
dramatically and the sponsor is unable to provide sufficient
receivables at the requisite interest rates, the pool of receivables
would be closed. In this latter event, under the terms of the pooling
and servicing agreement, the certificateholders would receive a
repayment of principal from the unused cash held in the Pre-Funding
Account. In transactions where the certificate pass-through rates are
variable or adjustable, the effects of market interest rate
fluctuations are mitigated. In no event will fluctuations in interest
rates payable on the receivables affect the pass-through rate for fixed
rate certificates.
The cash deposited into the Trust and allocated to the Pre-Funding
Account is invested in certain permitted investments (see below), which
may be commingled with other accounts of the Trust. The allocation of
investment earnings to each Trust account is made periodically as
earned in proportion to each account's allocable share of the
investment returns. As Pre-Funding Account investment earnings are
required to be used to support (to the extent authorized in the
particular transaction) the pass-through amounts payable to the
certificateholders with respect to a periodic distribution date, the
trustee is necessarily required to make periodic, separate allocations
of the Trust's earnings to each Trust account, thus ensuring that all
allocable commingled investment earnings are properly credited to the
Pre-Funding Account on a timely basis.
The Capitalized Interest Account
The Applicants state that in certain transactions where a Pre-
Funding Account is used, the sponsor and/or originator may also
transfer to the Trust additional cash on the Closing Date, which is
deposited in a Capitalized Interest Account and used during the Pre-
Funding Period to compensate the certificateholders for any shortfall
between the investment earnings on the Pre-Funding Account and the
pass-through interest rate payable under the certificates.
The Capitalized Interest Account is needed in certain transactions
since the certificates are supported by the receivables and the
earnings on the Pre-Funding Account, and it is unlikely that the
investment earnings on the Pre-Funding Account will equal the interest
rates on the certificates (although such investment earnings will be
available to pay interest on the certificates). The Capitalized
Interest Account funds are paid out periodically to the
certificateholders as needed on distribution dates to support the pass-
through rate. In addition, a portion of such funds may be returned to
the sponsor from time to time as the receivables are transferred into
the Trust and the need for the Capitalized Interest Account diminishes.
Any amounts held in the Capitalized Interest Account generally will be
returned to the sponsor and/or originator either at the end of the Pre-
Funding Period or periodically as receivables are transferred and the
proportionate amount of funds in the Capitalized Interest Account can
be reduced. Generally, the Capitalized Interest Account terminates no
later than the end of the Pre-Funding Period. However, there may be
some cases where the Capitalized Interest Account remains open until
the first date distributions are made to certificateholders following
the end of the Pre-Funding Period.
In other transactions, a Capitalized Interest Account is not
necessary because the interest paid on the receivables exceeds the
interest payable on the certificates at the applicable pass-through
rate and the fees of the Trust. Such excess is sufficient to make up
any shortfall resulting from the Pre-Funding Account earning less than
the certificate pass-through rate. In certain of these transactions,
this occurs because the aggregate principal amount of receivables
exceeds the aggregate principal amount of certificates.
Pre-Funding Account and Capitalized Interest Account Payments and
Investments
Pending the acquisition of additional receivables during the Pre-
Funding Period, it is expected that amounts in the Pre-Funding Account
and the Capitalized Interest Account will be invested in certain
permitted investments or will be held uninvested. Pursuant to the
pooling and servicing agreement, all permitted investments must mature
prior to the date the actual funds are needed. The permitted types of
investments in the Pre-Funding Account and Capitalized Interest Account
are investments which are either: (i) Direct obligations of, or
obligations fully guaranteed as to timely payment of principal and
interest by, the United States or any agency or instrumentality
thereof, provided that such obligations are backed by the full faith
and credit of the United States or (ii) have been rated (or the obligor
has been rated) in one of the three highest generic rating categories
by Standard and Poor's Structured Rating Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, L.P. (each a rating agency or collectively, the rating
agencies), as set forth in the pooling and servicing agreement and as
required by the rating agencies. The credit grade quality of the
permitted investments is generally no lower than that of the
certificates. The types of permitted investments will be described in
the pooling and servicing agreement.
The ordering of interest payments to be made from the Pre-Funding
and Capitalized Interest Accounts is pre-established and set forth in
the pooling and servicing agreement. The only principal payments which
will be made from the Pre-Funding Account are those made to acquire the
receivables during the Pre-Funding Period and those distributed to the
certificateholders in the event that the entire amount in the Pre-
Funding Account is not used to acquire receivables. The only principal
payments which will be made from the Capitalized Interest Account are
those made to certificateholders if necessary to support the
certificate pass-through rate or those made to the sponsor either
periodically as they are no longer needed or at the end of the Pre-
Funding Period when the Capitalized Interest Account is no longer
necessary.
The Characteristics of the Receivables Transferred During the Pre-
Funding Period
In order to ensure that there is sufficient specificity as to the
representations and warranties of the sponsor regarding the
characteristics of the receivables to be transferred after the Closing
Date, the Applicants have represented that:
(i) All such receivables will meet the same terms and conditions
for eligibility as those of the original receivables used to create the
Trust corpus (as described in the prospectus or private placement
memorandum and/or pooling and
[[Page 28506]]
servicing agreement for such certificates), which terms and conditions
have been approved by a rating agency. However, the terms and
conditions for determining the eligibility of a receivable may be
changed if such changes receive prior approval either by a majority
vote of the outstanding certificateholders or by a rating agency;
14
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\14\ In some transactions, the insurer and/or credit support
provider may have the right to veto the inclusion of receivables,
even if such receivables otherwise satisfy the underwriting
criteria. This right usually takes the form of a requirement that
the sponsor obtain the consent of these parties before the
receivables can be included in the Trust. The insurer and/or credit
support provider may, therefore, reject certain receivables or
require that the sponsor establish certain Trust reserve accounts as
a condition of including these receivables. Virtually all Trusts
which have insurers or other credit support providers are structured
to give such veto rights to these parties. The percentage of Trusts
that have insurers and/or credit support providers, and accordingly
feature such veto rights, varies.
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(ii) The transfer to the Trust of the receivables acquired during
the Pre-Funding Period will not result in the certificates receiving a
lower credit rating from the rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(iii) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the Trust at the
end of the Pre-Funding Period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the Trust on the Closing Date;
(iv) The trustee of the trust (or any agent with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to the Act.
In order to ensure that the characteristics of the receivables
actually acquired during the Pre-Funding Period are substantially
similar to receivables that were acquired as of the Closing Date, the
Applicants represent that for transactions occurring on or after the
date of publication of the proposed exemption, the characteristics of
the additional obligations subsequently acquired will either be
monitored by a credit support provider or other insurance provider
which is independent of the sponsor or an independent accountant
retained by the sponsor will provide the sponsor with a letter (with
copies provided to the rating agency, the underwriter and the trustees)
stating whether or not the characteristics of the additional
obligations acquired after the Closing Date conform to the
characteristics of such obligations described in the prospectus,
private placement memorandum and/or pooling and servicing agreement. In
preparing such letter, the independent accountant will use the same
type of procedures as were applicable to the obligations which were
transferred as of the Closing Date.
Each prospectus, private placement memorandum and/or pooling and
servicing agreement will set forth the terms and conditions for
eligibility of the receivables to be included in the Trust as of the
related Closing Date, as well as those to be acquired during the Pre-
Funding Period, which terms and conditions will have been agreed to by
the rating agencies which are rating the applicable certificates as of
the Closing Date. Also included among these conditions is the
requirement that the trustee be given prior notice of the receivables
to be transferred, along with such information concerning those
receivables as may be requested. Each prospectus or private placement
memorandum will describe the amount to be deposited in, and the
mechanics of, the Pre-Funding Account and will describe the Pre-Funding
Period for the Trust.
FASITs
The Applicants request that exemptive relief apply to FASITs which
are trusts, provided that each of the other applicable requirements of
the Underwriter Exemption are met. FASITs are a new type of statutory
entity created by the Small Business Job Protection Act of 1996 (SBA)
through amendments to the Code effective on September 1,
1997.15 FASITs are designed to facilitate the securitization
16 of debt obligations, such as credit card receivables,
home equity loans, and auto loans, and thus allows certain features
such as revolving pools of assets, trusts containing unsecured
receivables and certain hedging types of investments. A FASIT is not a
taxable entity and debt instruments issued by such trusts, which might
otherwise be recharacterized as equity, will be treated as debt in the
hands of the holder for tax purposes.
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\15\ Section 1621 of the SBA adds sections 860H, 860I, 860J,
860K and 860L to the Internal Revenue Code of 1986.
\16\ Securitization is the process of converting one type of
asset into another and generally involves the use of an entity
separate from the underlying assets. In the case of securitization
of debt instruments, the instruments created in the securitization
typically have different maturities and characteristics than the
debt instruments that are securitized.
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The Applicants represent that the rationale set forth in the
Department's statements regarding REMICs, which were published in the
Federal Register with respect to several of the earlier Underwriter
Exemptions also apply to FASITs. However, the Applicants note that the
representation in the Underwriter Exemptions 17 regarding
the tax requirement that a Trust must be maintained as an essentially
passive entity would not be true for all FASITs, as they are allowed
under the Code to have revolving pools of permitted assets. The
Applicants are only requesting exemptive relief for FASITs that are, in
fact, passive in nature, which would preclude (in the absence of other
exemptive relief) revolving asset pools. Thus, only FASITs with assets
which were comprised of secured debt and which did not allow revolving
pools of assets or hedging investments not specifically authorized by
the Underwriter Exemptions would be permissible under the proposed
amendment.
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\17\ 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.
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Parties to Transactions
The originator of a receivable is the entity that initially lends
money to a borrower (obligor), such as a homeowner or automobile
purchaser, or leases property to a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a Trust sponsor.
Originators of receivables included in the Trust 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
[[Page 28507]]
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.
The sponsor will be one of three entities: (i) a special-purpose or
other corporation unaffiliated with the servicer, (ii) a special-
purpose or other corporation affiliated with the servicer, or (iii) the
servicer itself. Where the sponsor is not also the servicer, the
sponsor's role will generally be limited to acquiring the receivables
to be included in the trust, establishing the Trust, designating the
trustee, and assigning the receivables to the trust. 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 the Underwriter, the Trust sponsor, the servicer or any
other member of the Restricted Group. The Underwriter represents that
the trustee will be a substantial financial institution or trust
company experienced in trust activities. The trustee receives a fee for
its services, which will be paid by the servicer, sponsor, or out of
the Trust assets. 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.
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.
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 the Underwriter. In other
cases, however, the Underwriter may originate or service receivables
included in a Trust or may sponsor a Trust.
Certificate Price, Pass-Through Rate and Fees
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.
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.18 This rate is generally determined by the same market
forces that determine the price of a certificate. The price of a
certificate and its pass-through, or coupon, rate together determine
the yield to investors. If an investor purchases a certificate at less
than par, that discount augments the stated pass-through rate;
conversely, a certificate purchased at a premium yields less than the
stated coupon.
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\18\ 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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As compensation for performing its servicing duties, the servicer
(who may also be the sponsor or an affiliate thereof, and receive fees
for acting in that capacity) will retain the difference between
payments received on the receivables in the trust and payments payable
(at the pass-through rate) to certificateholders, except that in some
cases a portion of the payments on receivables may be paid to a third
party, such as a fee paid to a provider of credit support. The servicer
may receive additional compensation by having the use of the amounts
paid on the receivables between the time they are received by the
servicer and the time they are due to the Trust (which time is set
forth in the pooling and servicing agreement). The servicer typically
will be required to pay the administrative expenses of servicing the
trust, including in some cases the trustee's fee, out of its servicing
compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the Trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in the Trust in excess of
the pass-through rate or paid in a lump sum at the time the Trust is
established.
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.
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
[[Page 28508]]
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.
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
The applicants represent 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 either: (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
The certificates will have received one of the three highest
ratings available from a rating agency. Insurance or other credit
support (such as surety bonds, letters of credit, guarantees, or
overcollateralization) will be obtained by the Trust sponsor to the
extent necessary for the certificates to attain the desired rating. The
amount of this credit support is set by the rating agencies at a level
that is typically a multiple of the worst historical net credit loss
experience for the type of obligations included in the issuing Trust.
Provision of Credit Support
In some cases, the master servicer, or an affiliate of the master
servicer, may provide credit support to the Trust (i.e. act as an
insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) from the credit support provider (which
may be the master servicer or an affiliate thereof) or, (c) in the case
of a Trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates, and
the master servicer will advance such funds in a timely manner. When
the servicer is the provider of the credit support and provides its own
funds to cover defaulted payments, it will do so either on the
initiative of the trustee, or on its own initiative on behalf of the
trustee, but in either event it will provide such funds to cover
payments to the full extent of its obligations under the credit support
mechanism. In some cases, however, the master servicer may not be
obligated to advance funds but instead would be called upon to provide
funds to cover defaulted payments to the full extent of its obligations
as insurer. Moreover, a master servicer typically can recover advances
either from the provider of credit support or from future payments on
the affected assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the Trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the Trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the Trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the Trust as payments on
receivables are passed through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the Trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all payments which are
past due more than a specified number of days 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
[[Page 28509]]
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
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 and the fact that principal amounts left in
the Pre-Funding Account at the end of the Pre-Funding Period will be
paid to certificateholders as a repayment of principal.
(b) A description of the Trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
(c) Identification of the independent trustee for the Trust;
(d) A description of the receivables contained in the Trust,
including the types of receivables, the diversification of the
receivables, their principal terms, and their material legal aspects,
and a description of any Pre-Funding Account used or Capitalized
Interest Account used in connection with a Pre-Funding Account;
(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, including the terms and conditions for
eligibility of any receivables transferred during the Pre-Funding
Period 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; a description of permitted investments for any
Pre-Funding Account or Capitalized Interest Account; identification of
the servicing compensation and a description of 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; and
(k) A statement as to the duration of any Pre-Funding Period and
the Pre-Funding Limit for the Trust.
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.
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, relief 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
relief 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 and copies of
the statements sent to certificateholders. 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.
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 (including
those purchased by the Trust from any Pre-Funding Account), payments
received or collected by the servicer, the amount of prepayments,
delinquencies, servicer advances, defaults and foreclosures, the amount
of any payments made pursuant to any credit support, and the amount of
compensation payable to the servicer. Such report also will be
delivered to or made available to the rating agency or agencies that
have rated the Trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the servicer,
paying agent or trustee summarizing information regarding the Trust and
its assets. Such statement will include information regarding the Trust
and its assets, including underlying receivables. Such statement will
typically contain information regarding payments and prepayments,
delinquencies, the remaining amount of the guaranty or other credit
support and a breakdown of payments between principal and interest.
Secondary Market Transactions
It is the Underwriter's normal policy to attempt to make a market
for securities for which it is lead or co-managing underwriter, and it
is the underwriter's intention to make a market for any certificates
for which the Underwriter is a lead or co-managing underwriter. At
times the Underwriter will facilitate sales by investors who purchase
certificates if the Underwriter has acted as agent or principal in the
original private placement of the certificates and if such investors
request the Underwriter's assistance.
[[Page 28510]]
Summary
In summary, the Applicants 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) In the case where a Pre-Funding Account is used, the
characteristics of the receivables to be transferred to the Trust
during the Pre-Funding Period must be substantially similar to the
characteristics of those transferred to the Trust on the Closing Date
thereby giving the sponsor and/or originator little discretion over the
selection process, and compliance with this requirement will be assured
by the specificity of the characteristics and the monitoring mechanisms
contemplated under the Proposed Amendment. In addition, certain cash
accounts will be established to support the certificate pass-through
rate and such cash accounts will be invested in short-term,
conservative investments; the Pre-Funding Period will be of a
reasonably short duration; a Pre-Funding Limit will be imposed; and any
Internal Revenue Service requirements with respect to pre-funding
intended to preserve the passive income character of the Trust will be
met. The fiduciary of the plans making the decision to invest in
certificates is thus fully apprised of the nature of the receivables
which will be held in the Trust and has sufficient information to make
a prudent investment decision.
(c) Certificates in which plans invest will have been rated in one
of the three highest rating categories by a rating agency. Credit
support will be obtained to the extent necessary to attain the desired
rating;
(d) All transactions for which the Underwriter seeks exemptive
relief will be governed by the pooling and servicing agreement, the
principal provisions of which are described in the prospectus or
private placement memorandum and which is made available to plan
fiduciaries for their review prior to the plan's investment in
certificates;
(e) Exemptive relief from sections 406(b) and 407 for sales to
plans is substantially limited; and
(f) The Underwriter has made and anticipates that it will continue
to make, a secondary market in certificates.
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 45 days from the date of publication
of this notice of proposed exemption in the Federal Register.
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 section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and 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 require, among other things, a fiduciary to
discharge his or her 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 requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption can be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interest of the
plans and of their participants and beneficiaries and protective of the
rights of participants and beneficiaries of the plans;
(3) The proposed amendment, 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 amendment, 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.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the proposed amendment to the address above,
within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the proposed amendment.
Comments received will be available for public inspection with the
referenced applications at the address set forth above.
Proposed Exemption
Under section 408(a) of ERISA 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, August 10, 1990), the Department proposes to
amend the following individual Prohibited Transaction Exemptions
(PTEs): PTE 89-88, 54 FR 42582 (October 17, 1989); PTE 89-89, 54 FR
42569 (October 17, 1989); PTE 89-90, 54 FR 42597 (October 17, 1989);
PTE 90-22, 55 FR 20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 17,
1990); PTE 90-24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 21456
(May 24, 1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-30, 55 FR
21461 (May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 1990); PTE 90-32,
55 FR 23147 (June 6, 1990); PTE 90-33, 55 FR 23151 (June 6, 1990); PTE
90-36, 55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 (July 5,
1990); PTE 90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 55 FR
50250 (December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 1990);
PTE 90-88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 48178
(February 22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE 91-
23, 56 FR 15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15,
1991); PTE 91-62, 56 FR 51406 (October 11, 1991); PTE 93-31, 58 FR
28620 (May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-29,
59 FR 14675 (March 29, 1994); PTE 94-64, 59 FR 42312 (August 17, 1994);
PTE 94-70, 59 FR 50014 (September 30, 1994); PTE 94-73, 59 FR 51213
(October 7, 1994); PTE 94-84, 59 FR 65400 (December 19, 1994); PTE 95-
26, 60 FR 17586 (April 6, 1995); PTE 95-59, 60 FR 35938 (July 12,
1995); PTE 95-89, 60 FR 49011 (September 21, 1995); PTE 96-11, 61 FR
3490 (January 31, 1996); PTE 96-22, 61 FR 14828 (April 3, 1996); PTE
96-84, 61 FR 58234 (November 13, 1996); PTE 96-92, 61 FR 66334
(December 17, 1996); PTE 96-94, 61 FR 68787 (December 30, 1996); PTE
97-05, 62 FR 1926 (January 14,1997);
[[Page 28511]]
and PTE 97-, 62 FR (Norwest Investment Services)(collectively, the
Underwriter Exemptions). In addition, the Department is considering
granting exemptions to Ironwood Capital Partners Ltd (D-10424) and
Deutsche Bank AG, New York Branch and Deutsche Morgan Grenfell/C.J.
Lawrence Inc. (D-10433), which received the approval of the Department
to engage in transactions substantially similar to the transactions
described in the Underwriter Exemptions pursuant to PTE 96-62.
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 of the Act 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.19
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\19\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 of the Act for any person rendering investment
advice to an Excluded Plan within the meaning of section
3(21)(A)(ii) of the Act, and regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold serviced by the same entity.20 For purposes of
this paragraph B.(1)(iv) only, an entity will not be considered to
service assets contained in a trust if it is merely a subservicer of
that trust;
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\20\ For purposes of this exemption, each plan participating in
a commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certifi cates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. 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.21
\21\ 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. For purposes
of this Amendment, references to ``prospectus'' include any related
prospectus supplement thereto, pursuant to which certificates are
offered to investors.
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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
from a rating agency (as defined in section III.W) at the time of such
acquisition that is in one of the three highest generic rating
categories;
(4) The trustee is not an affiliate of any other member of the
Restricted
[[Page 28512]]
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;
(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;
and
(7) In the event that the obligations used to fund a trust have not
all been transferred to the trust on the closing date, additional
obligations as specified in subsection III.B.(1) may be transferred to
the trust during the pre-funding period (as defined in Section III.BB.)
in exchange for amounts credited to the pre-funding account (as defined
in Section III.Z.), provided that:
(a) The pre-funding limit (as defined in Section III.AA.), is not
exceeded;
(b) All such additional obligations meet the same terms and
conditions for eligibility as those of the original obligations used to
create the trust corpus (as described in the prospectus or private
placement memorandum and/or pooling and servicing agreement for such
certificates), which terms and conditions have been approved by a
rating agency. Notwithstanding the foregoing, the terms and conditions
for determining the eligibility of an obligation may be changed if such
changes receive prior approval either by a majority vote of the
outstanding certificateholders or by a rating agency;
(c) The transfer of such additional obligations to the trust during
the pre-funding period does not result in the certificates receiving a
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(d) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the trust at the
end of the pre-funding period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the trust on the closing date;
(e) Effective for transactions occurring on or after May 23, 1997,
in order to ensure that the characteristics of the receivables actually
acquired during the pre-funding period are substantially similar to
those which were acquired as of the closing date, the characteristics
of the additional obligations will either be monitored by a credit
support provider or other insurance provider which is independent of
the sponsor or an independent accountant retained by the sponsor will
provide the sponsor with a letter (with copies provided to the rating
agency, the underwriter and the trustees) stating whether or not the
characteristics of the additional obligations conform to the
characteristics of such obligations described in the prospectus,
private placement memorandum and/or pooling and servicing agreement. In
preparing such letter, the independent accountant will use the same
type of procedures as were applicable to the obligations which were
transferred as of the closing date;
(f) The pre-funding period shall be described in the prospectus or
private placement memorandum provided to investing plans; and
(g) The trustee of the trust (or any agent with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to the Act.
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 either a Real Estate Mortgage
Investment Conduit (REMIC) or a Financial Asset Securitization
Investment Trust (FASIT) within the meaning of section 860D(a) or
Section 860L, respectively, of the Internal Revenue Code of 1986, as
amended: 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 the Underwriter
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)(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); and/or
(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/or
(c) Obligations that bear interest or are purchased at a discount
and which are
[[Page 28513]]
secured by single-family residential, multi-family residential and
commercial real property (including obligations secured by leasehold
interests on residential or commercial real property); and/or
(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.); and/or
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2); and/or
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this subsection B.(1); 22
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\22\ It is the Department's view that the definition of
``Trust'' contained in subsection III.B. includes a two-tier trust
structure under which certificates issued by the first trust, which
contains a pool of receivables described above, are transferred to a
second trust which issues certificates that are sold to plans.
However, the Department is of the further view that, since the
exemption provides relief for the direct or indirect acquisition or
disposition of certificates that are not subordinated, no relief
would be available if the certificates held by the second trust were
subordinated to the rights and interests evidenced by other
certificates issued by the first trust.
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(2) Property which had secured any of the obligations described in
subsection III.B.(1);
(3) (a) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and/or
(b) Cash or investments made therewith which are credited to an
account to provide payments to certificateholders pursuant to any yield
supplement agreement or similar yield maintenance arrangement to
supplement the interest rates otherwise payable on obligations
described in subsection III.B.(1) held in the trust, provided that such
arrangements do not involve swap agreements or other notional principal
contracts; and/or 23
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\23\ The Department notes that the definition of ``Trust''
contained in Section III.B. includes cash or investments credited to
an account to provide payments to certificateholders pursuant to a
yield supplement agreement or similar yield maintenance arrangement
to supplement the interest rates otherwise payable on obligations
described in section B.(1) held in the trust, provided that such
arrangements do not involve swap agreements or other notional
principal contracts.
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(c) Cash transferred to the trust on the closing date and permitted
investments made therewith which:
(i) Are credited to a pre-funding account established to purchase
additional obligations with respect to which the conditions set forth
in clauses (a)-(g) of subsection II.A.(7) are met and/or
(ii) Are credited to a capitalized interest account (as defined in
Section III.X.); and
(iii) Are held in the trust for a period ending no later than the
first distribution date to certificateholders occurring after the end
of the pre-funding period,
For purposes of this clause (c) of subsection III.B.(3), the term
``permitted investments'' means investments which are either: (i)
direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided that such obligations are backed
by the full faith and credit of the United States or (ii) have been
rated (or the obligor has been rated) in one of the three highest
generic rating categories by a rating agency; are described in the
pooling and servicing agreement; and are permitted by the rating
agency.
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship, yield supplement agreements
described in clause (b) of subsection III.B.(3) and other credit
support arrangements with respect to any obligations described in
subsection III.B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the obligations contained in the
investment pool consist only of assets of the type described in clauses
(a)-(f) of subsection III.B.(1) 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 a rating agency 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) An entity defined as an Underwriter
in subsection III.C.(1) of each of the Underwriter Exemptions that are
being amended by this proposed exemption. In addition, the term
Underwriter includes Ironwood Capital Partners Ltd. and Deutsche Bank
AG, New York Branch and Deutsche Morgan Grenfell/C.J. Lawrence Inc.
(which received the approval of the Department to engage in
transactions substantially similar to the transactions described in the
Underwriter Exemptions pursuant to PTE 96-62);
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such entity; or
(3) Any member of an underwriting syndicate or selling group of
which a person described in subsections III.C.(1) or (2) above 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;
[[Page 28514]]
(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 III.Q. below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations:
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(1) Which is secured by equipment which is leased;
(2) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) With respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust owns or holds a security interest in the lease;
(2) The trust owns or holds a security interest in the leased motor
vehicle; and
(3) The trust's interest in the leased motor vehicle is at least as
protective of the trust's rights as the trust would receive under a
motor vehicle installment loan contract.
V. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and ServicingAgreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. ``Rating Agency'' means Standard & Poor's Structured Rating
Group, Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co.
or Fitch Investors Service, L.P.
X. ``Capitalized Interest Account'' means a trust account: (i)
which is established to compensate certificateholders for shortfalls,
if any, between investment earnings on the pre-funding account and the
pass-through rate payable under the certificates; and (ii) which meets
the requirements of clause (c) of subsection III.B.(3).
Y. ``Closing Date'' means the date the trust is formed, the
certificates are first issued and the trust's assets (other than those
additional obligations which are to be funded from the pre-funding
account pursuant to subsection II.A.(7)) are transferred to the trust.
Z. ``Pre-Funding Account''--means a trust account: (i) which is
established to purchase additional obligations, which obligations meet
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and
(ii) which meets the requirements of clause (c) of subsection
III.B.(3).
AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount
allocated to the pre-funding account, as compared to the total
principal amount of the certificates being offered which is less than
or equal to: (i) 40 percent, effective for transactions occurring on or
after January 1, 1992, but prior to May 23, 1997; and (ii) 25 percent,
for transactions occurring on or after May 23, 1997.
BB. ``Pre-Funding Period'' means the period commencing on the
closing date and ending no later than the earliest to occur of: (i) the
date the amount on deposit in the pre-funding account is less than the
minimum dollar amount specified in the pooling and servicing agreement;
(ii) the date on which an event of default occurs under the pooling and
servicing agreement; or (iii) the date which is the later of three
months or 90 days after the closing date.
IV. Modifications
For the Underwriter Exemptions provided to Residential Funding
Corporation, Residential Funding Mortgage Securities, Inc., et. al. and
GE Capital Mortgage Services, Inc. and GECC Capital Markets (the
Applicants) (PTEs 94-29 and 94-73, respectively);
A. Section III.A. of this proposed amendment is modified to read as
follows:
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
(c) With respect to which (i) one of the Applicants or any of its
affiliates is the sponsor, and an entity which has received from the
Department an individual prohibited transaction exemption relating to
certificates which is similar to this exemption is the sole underwriter
or the manager or co-manager of the underwriting syndicate
[[Page 28515]]
or a selling or placement agent; or (ii) one of the Applicants or any
of its affiliates is the sole underwriter or the manager or co-manager
of the underwriting syndicate or a selling or placement agent; or
(2) A certificate denominated as a debt instrument--
(a) That represents an interest in either a Real Estate Mortgage
Investment Conduit (REMIC) or a Financial Asset Securitization
Investment Trust (FASIT) within the meaning of section 860D(a) or
section 860L, respectively, of the Internal Revenue Code of 1986, as
amended: and
(b) That is issued by and is an obligation of a trust with respect
to which (i) one of the Applicants or any of its affiliates is the
sponsor, and an entity which has received from the Department an
individual prohibited transaction exemption relating to certificates
which is similar to this exemption is the sole underwriter or the
manager or co-manager of the underwriting syndicate or a selling or
placement agent or (ii) one of the Applicants or any of its affiliates
is the sole underwriter or the manager or co-manager of the
underwriting syndicate, or 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. Section III.C. of this proposed amendment is modified to read as
follows:
C. ``Underwriter'' means:
(1) An entity defined as an Underwriter in subsection III.C.(1) of
each of the Underwriter Exemptions that are being amended by this
proposed exemption. In addition, the term Underwriter includes Ironwood
Capital Partners Ltd. and Deutsche Bank AG, New York Branch and
Deutsche Morgan Grenfell/C.J. Lawrence Inc. (which received the
approval of the Department to engage in transactions substantially
similar to the transactions described in the Underwriter Exemptions
pursuant to PTE 96-62);
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such entity;
(3) Any member of an underwriting syndicate or selling group of
which a person described in subsections III.C.(1) or (2) above is a
manager or co-manager with respect to the certificates; or
(4) An entity which has received from the Department an individual
prohibited transaction exemption relating to certificates which is
similar to this exemption.
EFFECTIVE DATE: This exemption will be effective for transactions
occurring on or after January 1, 1992 except as otherwise provided in
subsection II.A.(7) and section III.AA.
Signed at Washington, D.C., this 20th day of May, 1997.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-13673 Filed 5-22-97; 8:45 am]
BILLING CODE 4510-29-P
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