Proposed Exemptions; Equitable Life Assurance Society of the United States
Federal RegisterDec 19, 1997
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10236, et al.]
Proposed Exemptions; Equitable Life Assurance Society of the
United States
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ________, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The Equitable Life Assurance Society of the United States
(Equitable) Located in New York, New York; Proposed Exemption
[Exemption Application No. D-10236]
The Department of Labor (the Department) is considering granting an
exemption under the authority of section 408(a) of the Act and section
4975(c)(2) of the Code and in accordance with the procedures set forth
in 29 CFR, part 2570, subpart B (55 FR 32847, August 10, 1990). If the
exemption is granted, the restrictions of sections 406(a), 406(b)(1)
and (b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code shall not apply to: (1) the leasing of 13,086 square
feet of office space and 6,650 square feet of parking space by
Equitable Real Estate Investment Management, Inc. (ERE) until June 30,
2002 (the Tower 1 Lease); and (2) the leasing of 5,821 square feet of
office space and 3584 square feet of parking space by ERE's subsidiary,
Compass Management and Leasing, Inc. (Compass) until August 31, 1999
(the Tower 2 Leases), in office buildings located in Orange County,
California, that will be held by the Equitable Separate Account No. 8,
also known as the Prime Property Fund (the PPF) and to the 1996 renewal
of the original leases provided the following conditions are satisfied:
(a) the renewal
[[Page 66670]]
of the leases and the terms of the leases were reviewed, negotiated and
approved by a qualified independent fiduciary to PPF; (b) the qualified
independent fiduciary determined that the terms of the transactions
reflect fair market value and are at least as favorable to PPF as the
terms would have been in arm's length transactions between unrelated
parties; and (c) the independent fiduciary will continue to monitor the
leases on behalf of the PPF.
EFFECTIVE DATE OF EXEMPTION: This exemption, if granted, will have an
effective date of March 15, 1996. This exemption would expire for the
Tower 2 Leases, on August 31, 1999 and for the Tower 1 Lease, on June
30, 2002.
Summary of Facts and Representations
1. Equitable (the Applicant) is a life insurance company organized
under the laws of the State of New York and subject to supervision and
examination by the Superintendent of Insurance of the State of New
York. Equitable is one of the largest insurance companies in the United
States. Among the variety of insurance products and services it offers,
Equitable provides funding, asset management and other services for
several thousand employee benefit plans subject to the provisions of
Title I of ERISA.
Equitable maintains several pooled separate accounts (including
PPF) in which pension, profit-sharing, and thrift plans participate.
Equitable also has several single customer separate accounts and
investment management accounts pursuant to which Equitable manages all
or a portion of the assets of a number of large plans.
2. The Applicant represents that PPF is an insurance company
separate account as defined in section 3(17) of the Act. PPF was
established on August 20, 1973. Equitable maintains PPF for the
investment of corporate qualified and governmental pension plan assets
in real estate and real estate related investments. As of December 31,
1995, PPF held 171 investments in wholly-owned properties or equity
interests in real estate partnerships with an aggregate net value of
$3.1 billion. In addition, as of December 31, 1995, PPF had eight
investments in mortgage loans with an aggregate value of $311 million,
or 9.2 percent of PPF's total net asset value. PPF's portfolio is
diversified by property type and by geographic region.
As of December 31, 1995, approximately 206 plans participated in
PPF (collectively, the Plans). No plan holds more than a 20 percent
interest in PPF. The Equitable Retirement Plan for Employees, Managers
and Agents (the Plan), a defined benefit plan, participates in PPF. As
of December 31, 1995, 2.2 percent of the fair market value of the
assets of PPF were represented by the Plan's investment, and the Plan
had invested 4.36 percent of its assets in PPF.
3. ERE provides real estate investment advisory services to
Equitable and, through its Compass and Compass Retail, Inc.
subsidiaries, property management services with respect to certain
properties held by Equitable accounts. ERE provides real estate
investment advisory services with respect to the real property assets
of PPF and the Compass companies manage numerous PPF properties.
The Applicant provides that until 1997, ERE was an indirect wholly-
owned subsidiary of Equitable. All of the outstanding stock of ERE was
held by Equitable Holding Corporation (EHC), a Delaware corporation
wholly-owned by Equitable. However, Equitable has entered into a
purchase agreement dated April 19, 1997 whereby EHC transferred all of
its interests in ERE to Neptune Real Estate, Inc., a Delaware
corporation wholly-owned by Lend Lease Corporation, an Australian
corporation. As a result, ERE is no longer an affiliate of Equitable as
of the sale closing date on June 10, 1997. However, the Applicant
represents that the responsibilities of ERE with respect to Equitable's
accounts remain substantially unchanged and that the exemptive relief
requested is still required because ERE will continue to be a fiduciary
of PPF.
Equitable and ERE have substantial experience in managing real
estate investments. Of the more than $69 billion in total assets held
by Equitable at year-end 1995, Equitable's general account held $6.5
billion in real estate mortgage loans and approximately $5.3 billion in
equity investments in real property and interests in real estate joint
ventures. Additionally, more than $11 billion of real property
investments were held in Equitable's real estate separate accounts.
4. Equitable represents that the first of the transactions subject
to this proposed exemption originated in 1985, when Equitable, on
behalf of PPF, entered into a joint venture agreement with Brinderson
Towers I (Brinderson), for the purpose of developing a parcel of real
estate in Orange County, California. PPF provided construction
financing and Brinderson, an entity unrelated to Equitable, was the
developer and managing partner of the joint venture, Brin-Mar I, L.P.,
succeeded by Brin-Mar II, L.P. on December 24, 1991 (Brin-
Mar).1 One of the two buildings in the Newport Gateway
complex in Orange County was completed in 1987 and is a 14 story office
tower with a total of 286,132 square feet of rentable space (Tower 1).
On August 24, 1988, after completion of Tower 1, Banque Paribas
2 provided permanent financing to fully repay the PPF
construction loan for approximately $64 million.
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\1\ The Applicant represents that Brin-Mar is a real estate
operating company (REOC) within the meaning of the Department's
``plan asset'' regulation 20 CFR 2510.3-101(e) and that the assets
of the partnership are not plan assets for purposes of the
prohibited transaction provisions of the Act and the Code. Further,
as an entity predating the plan asset regulation, Brin-Mar achieved
REOC status as of January 1, 1987. The Department expresses no
opinion herein as to whether Brin-Mar is a REOC or whether the
partnership's assets constitute plan assets.
\2\ At the time of the transaction, Banque Paribas was unrelated
to Equitable. As a result of a change in Equitable's structure in
1992, Banque Paribas is now related to Equitable but with respect to
Plans invested in PPF, it is not a party in interest as defined
under section 3(14) of the Act by virtue of any relationship to
Equitable. Specifically, AXA Mutual Companies currently holds a 62.1
percent interest in Finaxa, an entity in which Banque Paribas holds
a 26.5 percent interest. Finaxa owns 60 percent of Midi-
Participations, which in turn owns 42.3 percent of AXA SA. AXA SA
owns 60.46 percent of Equitable Companies, Inc., which in turn holds
100 percent ownership of Equitable. Equitable represents that Banque
Paribas would be deemed to have, at most, a 4 percent interest in
Equitable and that this de minimis interest in no way affected the
terms of any of the transactions described in the Equitable
application.
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In July, 1987, Brin-Mar leased office space in Tower 1 to ERE as
its regional headquarters. The terms of the 10 year lease were
negotiated between ERE and Brinderson, acting as managing partner on
behalf of Brin-Mar, and reviewed by Cushman and Wakefield, to assure
that the terms reflected then-market rates. The lease commenced on July
1, 1987 and terminated on June 30, 1997 and includes subleases by ERE
for additional space. The Tower 1 Lease now covers a total of 13,086
square feet of office space at a monthly rental rate of $1.88 per
square feet. The Applicant represents that the original ERE lease did
not constitute a prohibited transaction because of Brin-Mar's status as
a REOC.
5. The Applicant provides that the second transaction subject to
the proposed exemption arose out of the development of a building
adjacent to Tower 1 (Tower 2). On October 18, 1988, Equitable (on
behalf of PPF) and Brinderson began development of Tower 2 under a
second amendment to the Brin-Mar joint venture agreement. PPF provided
the joint venture with construction financing in the amount of $61
million. However, deterioration of the rental market in Orange County
led the parties to restructure ownership of Towers 1 and 2 on December
24, 1991.
[[Page 66671]]
Equitable, on behalf of PPF, foreclosed on Tower 2 and took title to
Tower 2 in fee simple absolute. As a result, PPF holds 100 percent of
the ownership interest in Tower 2. With the improvement of the economy
in Orange County, Tower 2 is now 98 percent leased, and is valued at
approximately $38.5 million.
In 1992, Compass began leasing office space in Tower 2. The
applicant states that the total square footage now occupied by Compass
through the Tower 2 Leases is 5821 square feet of office space
(including 1,500 square feet of space used as the Compass property
management office) and 3584 square feet of parking space. The applicant
represents that the original Tower 2 Leases complied with the
requirements of Part III of PTE 84-14 which permits a qualified
professional asset manager (QPAM) to lease not in excess of the greater
of 7500 square feet or 1 percent of the rentable space of the office
building in which the investment fund managed by the QPAM (or an
affiliate) has the investment.3
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\3\ The Applicant represents that Equitable is a QPAM as that
term is defined in PTE 84-14. The Department expresses no opinion
herein as to whether Equitable is a QPAM or whether the original
Tower 2 Leases complied with the requirements of Part III of PTE 84-
14.
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Furthermore, the Applicant represents that in 1992, when the
original Tower 2 Leases were entered, PPF had two different investments
in the two buildings. First, PPF, through Equitable, owned 100 percent
of Tower 2. Second, PPF held a limited partnership interest in Brin-Mar
II, L.P., the successor to Brin-Mar the original joint venture, and the
owner of Tower 1. The Applicant states that because of this difference
in ownership, the leased spaces in Tower 1 and Tower 2 were treated
separately for the purposes of determining compliance with the space
limitations in Part III of PTE 84-14. The original Tower 2 Leases
expired but continued on a month-to-month basis while the parties
negotiated new lease terms.
6. Compass manages Towers 1 and 2 pursuant to PTE 91-8, granted to
Equitable by the Department on January 14, 1991 (56 Fed. Reg. 1411).
PTE 91-8 permits the provision of property management, leasing and
other services by Equitable affiliates with respect to properties held
by Equitable separate accounts in which plans invest. Such provision of
services is fully disclosed to plans participating in the separate
accounts and is approved by plan fiduciaries independent of Equitable.
Management fees and leasing commissions payable to Compass are also
reviewed and approved by an independent fiduciary and may not exceed
those fees charged by comparable firms for similar services. The
applicant states that, aside from the lease agreements provided to the
Department and described in the exemption application and the
Independent Fiduciary's reports, and the property management agreement
discussed above, there are no other separate agreements between the
parties governing the leased properties.
7. The Applicant represents that with respect to Tower 1, Banque
Paribas insisted on the December 24, 1991 restructuring of Brin-Mar so
that Equitable, on behalf of PPF, would obtain a 70 percent partnership
interest. As a result, Equitable became the managing partner of Brin-
Mar. On September 1, 1995, Banque Paribas sold the note on Tower 1 to
Equitable, on PPF's behalf, for $38.5 million. Equitable had first
offered the opportunity to purchase the note to Brin-Mar but Brinderson
refused. Thus, as of September 1, 1995, PPF held a 70 percent interest
in the Brin-Mar partnership owning Tower 1, as well as a $65 million
(par value) note secured by Tower 1 which was, at that time,
technically in default. Equitable determined that it would be in PPF's
best interests to foreclose on Tower 1 because the Brin-Mar partnership
had negative equity in Tower 1 (the building was worth $41 million but
was subject to a $65 million mortgage). In Equitable's view, any
actions taken to revive the partnership would only have the net effect
of providing an additional return to Brinderson without any additional
benefit to PPF. The foreclosure would result in the termination of the
Brin-Mar partnership and consolidation of ownership in PPF. It would
also clear title to Tower 1 because the outstanding note encumbered
title to Tower 1.
8. The applicant states that on March 15, 1996, Equitable, on
behalf of PPF, foreclosed on the note secured by Tower 1. As a result,
Tower 1 is now held 100 percent by PPF. Equitable states that the most
immediate effect of a Tower 1 foreclosure was to terminate the status
of Brin-Mar as a REOC because the foreclosure eliminated all of Brin-
Mar's interest in Tower 1. A 100 percent ownership interest in Tower 1
was vested directly in Equitable, on behalf of PPF. The continuing
Towers 1 and 2 Lease arrangements involving ERE and Compass were then
subject to the restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions of section 4975 of the Code.
Regulation 29 CFR 2510.3-101(h)(iii) provides that, notwithstanding
any other provision of the plan asset regulation, assets held in an
insurance company separate account (such as PPF) in which plans invest
constitute plan assets. Tower 1 became a plan asset upon foreclosure
and the Tower 1 Lease to ERE then constituted a lease between a plan
and a party in interest prohibited by section 406(a)(1)(A) of the Act.
Furthermore, because ERE is a fiduciary with respect to PPF and an
affiliate of Equitable, the Tower 1 Lease may be a violation of
sections 406(b)(1) and (b)(2). Thus, March 15, 1996 is the requested
effective date of this proposed exemption for the Tower 1 Lease.
9. The Tower 2 Leases with Compass, an affiliate of ERE, were also
affected by the foreclosure on Tower 1. Tower 1 and Tower 2 are now
both owned by PPF. The Applicant represents that, while before the
foreclosure it had relied upon Part III(a) of PTE 84-14 for relief from
the lease of Tower 2 to Compass, following foreclosure the aggregate
space leased by ERE and Compass in both Towers 1 and 2 exceeded the
limitations in Part III of PTE 84-14. The Applicant interprets Part
III(a) of PTE 84-14 to provide that the amount of leased space in
different buildings in an integrated office park or commercial center
in which the investment fund has the investment shall be aggregated for
purposes of determining compliance with the space limitations in Part
III. Therefore, the Applicant is also seeking relief for the Tower 2
leasing arrangements as of March 15, 1996.
10. Robert A. Alleborn Properties, Inc. (Alleborn) will act as
Independent Fiduciary for PPF with regard to the transactions that are
subject to the requested exemptions. Alleborn currently manages more
than 10 million square feet of commercial, office, industrial and
mixed-use property in the western United States. Alleborn is
experienced in and familiar with the real estate market in Southern
California. Alleborn is also directly familiar with the Newport Gateway
Towers through the provision of consulting services to Banque Paribas
during the bank's investment in these projects. The Applicant states
that Alleborn currently receives no fee income from Equitable, and
anticipates that in the future it will not receive more than 3 percent
of its annual income from Equitable and its affiliates, including fees
for its services as independent fiduciary.
The responsibilities of Alleborn with respect to the transactions
are set forth in a letter agreement between Alleborn and Equitable
signed on March 6, 1996 (the Agreement). Under the Agreement, Alleborn
assumed responsibility as
[[Page 66672]]
independent fiduciary on behalf of PPF to: review the existing ERE and
Compass leases; negotiate the ERE and Compass lease extensions,
renewals or modifications and prepare for delivery to Equitable, one or
more reports regarding these activities; and annually monitor the
compliance of ERE and Compass with the terms of the leases.
The Agreement provides that Alleborn's fees may only be changed by
written agreement among Alleborn and a majority in interest of the
plans participating in PPF. Alleborn may resign as independent
fiduciary at any time on no less than 90 days prior written notice to
Equitable and will be deemed to have resigned in the event that it no
longer meets the requirements for an independent fiduciary. In no event
shall Equitable or any affiliate have the authority to terminate
Alleborn's service as independent fiduciary. Alleborn may be removed
only by a vote of a majority in interest of the plans participating in
PPF.
Specifically, the Agreement provides that Alleborn has been
authorized by Equitable to determine on behalf of PPF whether it was in
the best interests of PPF to continue the Tower 1 and Tower 2 Leases
after the foreclosure date of March 15, 1996 under the existing terms.
This entailed a determination that the existing leases provides PPF
with a market-level return or better. Further, Alleborn was authorized
to represent PPF in negotiations regarding the extension, renewal or
modification of the Tower 1 and Tower 2 Leases. Alleborn has the
authority to determine whether and on what terms PPF will continue the
transactions. Upon completion of the negotiations, Alleborn was
required to determine whether the lease terms as negotiated were in the
best interests of PPF and to submit a report summarizing Alleborn's
activities.
Additionally, Alleborn will continue to monitor both the Tower 1
and Tower 2 Leases to assure compliance with the lease terms.
Compliance with lease terms will be reviewed at least annually either
directly by Alleborn or by an independent contractor reporting to
Alleborn. Based on this review, Alleborn will have the authority to
take any steps it deems necessary to assure lease compliance.
On March 12, 1996, Alleborn submitted an interim report to
Equitable that stated that Alleborn had evaluated the Towers 1 and 2
current leases and preliminarily concluded that the leases provided PPF
with above market returns. Alleborn submitted a more detailed review of
the current lease terms in the Towers 1 and 2 Leases, and informed
Equitable of its conclusion in the May 16, 1996 Independent Fiduciary
Review and Opinion of Existing Leases (Review) 4 that the
leases in both Tower 1 and Tower 2 provide PPF with above market
returns and it was in the best interests of PPF to continue the
existing leases pending renegotiation and extension of the leasing
relationships. The Review, submitted by the Applicant, compared eight
office complexes that would compete and compare favorably with Towers 1
and 2 for tenants and were used in comparing the existing tenancy for
rate and term leases.
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\4\ In a November 17, 1997 letter to the Department, Alleborn
stated that between the dates of March 15, 1996 and May 16, 1996,
there were no changes to the circumstances surrounding the
transactions subject to the requested exemptions that in any way
adversely affected Alleborn's May 16, 1996 conclusion.
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Alleborn has completed the renegotiation process for the leases to
Compass in Tower 2. The application for exemption contained copies of
the executed leases and the Independent Fiduciary's report dated
September 2, 1996 (Report 1) approving the leases between Equitable and
Compass for a three year term commencing September 1, 1996 and
terminating August 31, 1999. Report 1 states that the Compass leases
are market rates for comparable projects for Tower 1 and Tower 2 and
concludes that it is in the best interests of PPF to consummate the
Compass leases.
Alleborn has also completed the renegotiation process for the lease
to ERE in Tower 1. The application for exemption contained the
Independent Fiduciary's report dated October 1, 1996 (Report 2)
approving the new lease term between Equitable and ERE for 69 months,
commencing October 1, 1996 and terminating June 30, 2002. Report 2
states that concurrent with the execution of a new lease, a Termination
and Surrender Agreement for the original lease, dated April 1, 1987,
was executed by ERE. An unrelated tenant in Tower 1 has requested a
lease extension and at the same time desires to relinquish 231 square
feet of space. Effective January 1, 1997, ERE will incorporate the
additional 231 square feet into their base lease, allowing their total
occupancy for the remaining months on the lease to be 13,086 square
feet. Additionally, Alleborn required ERE to pay in their new lease,
the unamortized portion of the above market rate that remained in their
old lease dated April 1, 1987. This allowed Tower 1 to recapture the
potential of lost income between the new lease and the old lease.
Report 2 concludes that the lease is a market rate lease comparable to
buildings described in the Review and that it is in the best interests
of PPF to enter the renegotiated lease.
11. In summary, the applicant represents that the requested
exemption will satisfy the criteria of section 408(a) of the Act for
the following reasons: (a) the Towers 1 and 2 Leases and the renewals
of the original leases are for a limited term; (b) the terms of the
Tower 1 and 2 Leases as of March 15, 1996, and the renewal of the
leases have been reviewed, negotiated and approved by Alleborn, a
qualified independent fiduciary to PPF, who has determined that the
terms of the transactions reflect fair market value and are at least as
favorable to PPF as the terms would have been in arm's length
transactions between unrelated parties; and (c) Alleborn will continue
to monitor the leases on behalf of PPF.
For Further Information Contact: Ms. Wendy McColough of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
PNC Capital Markets, Inc. (PNC) Located in Pittsburgh, Pennsylvania;
Proposed Exemption
[Application No. D-10521]
I. Transactions
A. Effective October 21, 1997, the restrictions of sections 406(a)
and 407(a) of the Act and the taxes imposed by section 4975(a) and (b)
of the Code by reason of section 4975(c)(1) (A) through (D) of the Code
shall not apply to the following transactions involving trusts and
certificates evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A. (1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice
[[Page 66673]]
with respect to the assets of that Excluded Plan.5
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\5\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective October 21, 1997, the restrictions of sections
406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section
4975(a) and (b) of the Code by reason of section 4975(c)(1)(E) of the
Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) the plan is not an Excluded Plan;
(ii) solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) a plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.6 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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\6\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. Effective October 21, 1997, 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.7
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\7\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. Effective October 21, 1997, 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 member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
(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/
[[Page 66674]]
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 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) 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;
(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 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; 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 PNC or any of
its affiliates is either (i) the sole underwriter or the manager or co-
manager of the underwriting syndicate, or (ii) a selling or placement
agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. Trust means an investment pool, the corpus of which is held in
trust and consists solely of:
(1)(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 secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on 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 section B.(1);
(2) property which had secured any of the obligations described in
subsection B.(1);
(3) (a) undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
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
(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 certificate holders occurring after the end
of the pre-funding period.
[[Page 66675]]
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 investment pool consists only of assets
of the type described in clauses (a) through (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) PNC;
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
PNC; or
(3) any member of an underwriting syndicate or selling group of
which PNC or a person described in (2) is a manager or co-manager with
respect to the certificates.
D. Sponsor means the entity that organizes a trust by depositing
obligations therein in exchange for certificates.
E. Master Servicer means the entity that is a party to the pooling
and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. Subservicer means an entity which, under the supervision of and
on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. Servicer means any entity which services loans contained in the
trust, including the master servicer and any subservicer.
H. Trustee means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. Insurer means the insurer or guarantor of, or provider of other
credit support for, a trust. Notwithstanding the foregoing, a person is
not an insurer solely because it holds securities representing an
interest in a trust which are of a class subordinated to certificates
representing an interest in the same trust.
J. Obligor means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. Excluded Plan means any plan with respect to which any member of
the Restricted Group is a ``plan sponsor'' within the meaning of
section 3(16)(B) of the Act.
L. Restricted Group with respect to a class of certificates means:
(1) each underwriter;
(2) each insurer;
(3) the sponsor;
(4) the trustee;
(5) each servicer;
(6) any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) any affiliate of a person described in (1)-(6) above.
M. Affiliate of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. Control means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
O. A person will be independent of another person only if:
(1) such person is not an affiliate of that other person; and
(2) the other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. Sale includes the entrance into a forward delivery commitment
(as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. Forward delivery commitment means a contract for the purchase or
sale of one or more certificates to be delivered at an agreed future
settlement date. The term includes both mandatory contracts (which
contemplate obligatory delivery and acceptance of the certificates) and
optional contracts (which give one party the right but not the
obligation to deliver certificates to, or demand delivery of
certificates from, the other party).
R. Reasonable compensation has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. Qualified Administrative Fee means a fee which meets the
following criteria:
(1) the fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) the servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) the ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) the amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. Qualified Equipment Note Secured By A Lease means an equipment
note:
(1) which is secured by equipment which is leased;
(2) which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
[[Page 66676]]
(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 holds a security interest in the leased motor
vehicle; and
(3) the trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. Rating Agency means Standard & Poor's Structured Rating Group
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps
Credit Rating Co. (D & P) or Fitch Investors Service, L.P. (Fitch);
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 25 percent.
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.
CC. PNC means PNC Capital Markets, Inc. and its affiliates.
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts at 35932.
Summary of Facts and Representations
1. PNC is an indirect, wholly-owned, separately capitalized
investment banking and registered broker-dealer subsidiary of PNC Bank
Corp. (the Corporation). As of September 30, 1997, PNC's capitalization
was approximately $54.9 million. The Corporation is a diversified
financial services company incorporated under the laws of the
Commonwealth of Pennsylvania and a multi-bank holding company
registered under the Bank Holding Act of 1956, as amended. As of
September 30, 1997, the Corporation's consolidated assets were
approximately $71.8 billion. The principal executive offices of the
Corporation are located in Pittsburgh, Pennsylvania. As of September
30, 1997, the Corporation had indirectly-held subsidiary banks located
in seven states. In addition, indirectly-held non-bank subsidiaries of
the Corporation offer a wide range of insurance, securities brokerage,
investment banking, venture capital investment, mortgage banking and
consumer finance products and services.
PNC Mortgage Corp. of America (PNC Mortgage), an Ohio corporation
having its principal place of business in Vernon Hills, Illinois, is
one of the largest mortgage banking originators in the United States,
with offices in all 50 states.
PNC Bank, National Association (the Bank), an indirect, wholly-
owned subsidiary of the Corporation, is a national banking association
engaged in banking and related activities and is the largest bank in
the Corporation's banking group. The Bank is the sole shareholder of
PNC Mortgage. As of September 30, 1997, the Bank had total assets of
approximately $57.5 billion. The principal executive offices of the
Bank are located in Pittsburgh, Pennsylvania. Six other commercial
banks and one federal savings bank, located in six states, had
aggregated assets slightly exceeding $13.2 billion as of September 30,
1997.
PNC was incorporated in 1984 as a Pennsylvania corporation. PNC
maintains its principal place of business in Pittsburgh, Pennsylvania
and has branch offices in Pennsylvania, New Jersey, Ohio, and Kentucky.
In 1987, PNC received Federal Reserve Board authorization to
underwrite and deal in commercial paper, municipal revenue bonds,
residential mortgage-related securities and consumer receivable-related
securities. This order is currently subject to the condition that PNC
does not derive more than 25% of its total gross revenues from such
activities. In addition, PNC's affiliates have the power to sell
interests in their own assets in the form of asset-backed securities.
PNC is a member of the National Association of Securities Dealers
and the Securities Investor Protection Corporation and underwrites and
deals in corporate debt securities, commercial paper, municipal
securities, high-yield securities and asset-backed securities, provides
private placement and corporate finance advisory services, including
merger and acquisition advisory services, publishes research on a wide
range of securities and issuers, and engages in the syndication and
arranging and trading of bank loans.
PNC has significant experience in asset securitizations. PNC's
participation in securitization transactions includes the underwriting
of public offerings and serving as private placement agent or
commercial paper conduit agent/dealer for transactions backed by retail
auto receivables and bank and retail credit card receivables.
Trust Assets
2. PNC seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) single and multi-family residential or
commercial mortgage investment trusts;8 (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed
[[Page 66677]]
governmental mortgage pool certificate investment trusts.9
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\8\ The Department notes that PTE 83-1 [48 FR 895, January 7,
1983], a class exemption for mortgage pool investment trusts, would
generally apply to trusts containing single-family residential
mortgages, provided that the applicable conditions of PTE 83-l are
met. PNC requests relief for single-family residential mortgages in
this exemption because it would prefer one exemption for all trusts
of similar structure. However, PNC has stated that it may still
avail itself of the exemptive relief provided by PTE 83-1.
\9\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mort gages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.10
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\10\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee.11 The
sponsor or servicer of a trust selects assets to be included in the
trust.12 These assets are receivables which may have been
originated by a sponsor or servicer of the trust, an affiliate of the
sponsor or servicer, or by an unrelated lender and subsequently
acquired by the trust sponsor or servicer.13
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\11\ The Department is of the view that the term ``trust''
includes a trust: (a) the assets of which, although all specifically
identified by the sponsor or the 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.
\12\ It is the Department's view that the definition of
``trust'' contained in III.B. includes a two-tier structure under
which certificates issued by the first trust, which contains a pool
of receivables described above, are transferred to a second trust
which issues securities that are sold to plans. However, the
Department is of the further view that, since the exemption provides
relief for the direct or indirect acquisition or disposition of
certificates that are not subordinated, no relief would be available
if the certificates held by the second trust were subordinated to
the rights and interests evidenced by other certificates issued by
the first trust.
\13\ It is the view of the Department that section III.B.(4)
includes within the definition of the term ``trust'' rights under
any yield supplement or similar arrangement which obligates the
sponsor or master servicer, or another party specified in the
relevant pooling and servicing agreement, to supplement the interest
rates otherwise payable on the obligations described in section
III.B.(1), in accordance with the terms of a yield supplement
arrangement described in the pooling and servicing agreement,
provided that such arrangements do not involve swap agreement or
other notional principal contracts.
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Typically, on or prior to the closing date, the sponsor acquires
legal title to all assets selected for the trust, establishes the trust
and designates an independent entity as trustee. On the closing date,
the sponsor conveys to the trust legal title to the assets, and the
trustee issues certificates representing fractional undivided interests
in the trust assets. Typically, all receivables to be held in the trust
are transferred as of the closing date, but in some transactions, as
described more fully below, a limited percentage of the receivables to
be held in the trust may be transferred during a limited period of time
following the closing date, through the use of a pre-funding account.
PNC, alone or together with other broker-dealers, acts as
underwriter or placement agent with respect to the sale of the
certificates. All of the public offerings of certificates presently
contemplated are to be underwritten by PNC on a firm commitment basis.
In addition, PNC anticipates that it may privately place certificates
on both a firm commitment and an agency basis. PNC may also act as the
lead underwriter for a syndicate of securities underwriters.
Certificateholders will be entitled to receive monthly, quarterly
or semi-annual installments of principal and/or interest, or lease
payments due on the receivables, adjusted, in the case of payments of
interest, to a specified rate--the pass-through rate--which may be
fixed or variable.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
certificateholders) to hold funds received between distribution dates.
The account is under the sole control of the trustee, who invests the
account's assets in short-term securities which have received a rating
comparable to the rating assigned to the certificates. In some cases,
the servicer may be permitted to make a single deposit into the account
once a month. When the servicer makes such monthly deposits, payments
received from obligors by the servicer may be commingled with the
servicer's assets during the month prior to deposit. Usually, the
period of time between receipt of funds by the servicer and deposit of
these funds in a segregated account does not exceed one month.
Furthermore, in those cases where distributions are made semi-annually,
the servicer will furnish a report on the operation of the trust to the
trustee on a monthly basis. At or about the time this report is
delivered to the trustee, it will be made available to
certificateholders and delivered to or made available to each rating
agency that has rated the certificates.
5. Some of the certificates will be multi-class certificates. PNC
requests exemptive relief for two types of multi-class certificates:
``strip'' certificates and ``fast-pay/ slow-pay'' certificates. Strip
certificates are a type of security in which the stream of interest
payments on receivables is split from the flow of principal payments
and separate classes of certificates are established, each representing
rights to disproportionate payments of principal and interest.\14\
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\14\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying receivables are distributed first
to the class of certificates having the earliest stated maturity of
principal, and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class
[[Page 66678]]
pass-through arrangement is the order in which distributions are made
to certificateholders. In each case, certificateholders will have a
beneficial ownership interest in the underlying assets. In neither case
will the rights of a plan purchasing a certificate be subordinated to
the rights of another certificateholder in the event of default on any
of the underlying obligations. In particular, if the amount available
for distribution to certificateholders is less than the amount required
to be so distributed, all senior certificateholders then entitled to
receive distributions will share in the amount distributed on a pro
rata basis.\15\
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\15\ If a trust issues subordinated certificates, holders of
such subordinated certificates may not share in the amount
distributed on a pro rata basis with the senior certificateholders.
The Department notes that the exemption does not provide relief for
plan investment in such subordinated certificates.
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6. The trust will 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.
In some cases the trust will be maintained as a Financial Asset
Securitization Investment Trust (``FASIT''), a statutory entity created
by the Small Business Job Protection Act of 1996, adding sections 860H,
860J, 860K and 860L to the Code. In general, a FASIT is designed to
facilitate the securitization 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. However, a trust
which is the subject of the proposed exemption will be maintained as a
FASIT only where the assets held by the FASIT will be comprised of
secured debt; revolving pools of assets or hedging investments will not
be allowed unless specifically authorized by the exemption, if granted,
so that a trust maintained as a FASIT will be maintained as an
essentially passive entity.
Trust Structure with Pre-Funding Account
Pre-Funding Accounts
7. As described briefly above, some transactions may be structured
using a pre-funding account or a capitalized interest account. 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. 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 or (iii) the date which is
the later of three months or ninety days after the closing date.
Certain specificity and monitoring requirements described below will be
met and will be disclosed in the pooling and servicing agreement and/or
the prospectus or private placement memorandum.
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 PNC
for cash or to the certificateholders directly if the certificates are
sold through PNC as a placement agent. The cash received by the sponsor
from the certificateholders (or PNC) 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 pre-funding account of any trust will be limited so that 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) will not exceed 25%. 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
[[Page 66679]]
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.
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 the 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 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 receivable 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 earning 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
8. 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
9. 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 a rating agency, 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
10. 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:
(i) All such receivables will meet the same terms and conditions
for eligibility
[[Page 66680]]
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 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;
(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 agency 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
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, PNC and the
trustee) 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.
Parties to Transactions
11. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a home-owner or automobile
purchaser, or leases property to a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their businesses,
including finance companies for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
12. 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.
13. 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 PNC, the trust sponsor, the servicer or any other member
of the Restricted Group (as defined in section III.L.). PNC represents
that the trustee will be a substantial financial institution or trust
company experienced in trust activities. The trustee receives a fee for
its services, which will be paid by the servicer or sponsor 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.
14. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, the receivables may be
``subserviced'' by their respective originators and a single entity may
``master service'' the pool of receivables on behalf of the owners of
the related series of certificates. Where this arrangement is adopted,
a receivable continues to be serviced from the perspective of the
borrower by the local subservicer, while the investor's perspective is
that the entire pool of receivables is serviced by a single, central
master servicer who collects payments from the local subservicers and
passes them through to certificateholders.
Receivables of the type suitable for inclusion in a trust
invariably are serviced with the assistance of a computer. After the
sale, the servicer keeps the sold receivables on the computer system in
order to continue monitoring the accounts. Although the records
relating to sold receivables are kept in the same master file as
receivables retained by the originator, the sold receivables are
flagged as having been sold. To protect the investor's interest, the
servicer ordinarily covenants that this ``sold flag'' will be included
in all records relating to the sold receivables, including the master
file, archives, tape extracts and printouts.
The sold flags are invisible to the obligor and do not affect the
manner in which the servicer performs the billing, posting and
collection procedures
[[Page 66681]]
related to the sold receivables. However, the servicer uses the sold
flag to identify the receivables for the purpose of reporting all
activity on those receivables after their sale to investors.
Depending on the type of receivable and the details of the
servicer's computer system, in some cases the servicer's internal
reports can be adapted for investor reporting with little or no
modification. In other cases, the servicer may have to perform special
calculations to fulfill the investor reporting responsibilities. These
calculations can be performed on the servicer's main computer, or on a
small computer with data supplied by the main system. In all cases, the
numbers produced for the investors are reconciled to the servicer's
books and reviewed by public accountants.
The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates are generally made on a
firm commitment basis. Private placement of certificates may be made on
a firm commitment or agency basis.
It is anticipated that the lead and co-managing underwriters will
make a market in certificates offered to the public.
In some cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (although they may
themselves be related) will be unrelated to PNC. In other cases,
however, affiliates of PNC may originate or service receivables
included in a trust or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
15. 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.
16. 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.16 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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\16\ 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.
---------------------------------------------------------------------------
17. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting in that capacity) will retain the difference
between payments received on the receivables in the trust and payments
payable (at the pass-through rate) to certificateholders, except that
in some cases a portion of the payments on receivables may be paid to a
third party, such as a fee paid to a provider of credit support. The
servicer may receive additional compensation by having the use of the
amounts paid on the receivables between the time they are received by
the servicer and the time they are due to the trust (which time is set
forth in the pooling and servicing agreement). The servicer typically
will be required to pay the administrative expenses of servicing the
trust, including in some cases the trustee's fee, out of its servicing
compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is
established.
18. 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.
19. Payments on receivables may be made by obligors to the servicer
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and
servicing agreement may permit the servicer to place these payments in
non-interest bearing accounts maintained with itself or to commingle
such payments with its own funds prior to the distribution dates. In
these cases, the servicer would be entitled to the benefit derived from
the use of the funds between the date of payment on a receivable and
the pass-through date. Commingled payments may not be protected from
the creditors of the servicer in the event of the servicer's bankruptcy
or receivership. In those instances when payments on receivables are
held in non-interest bearing accounts or are commingled with the
servicer's own funds, the servicer is required to deposit these
payments by a date specified in the pooling and servicing agreement
into an account from which the trustee makes payments to
certificateholders.
20. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would consist of the difference
between what the underwriter receives for the certificates that it
distributes and what it pays the sponsor for those certificates. In a
private placement, the fee normally takes the form of an agency
commission paid by the sponsor. In a best efforts underwriting in which
the underwriter would sell certificates in a public offering on an
agency basis, the underwriter would receive an agency commission rather
than a fee based on the difference between the price at which the
certificates are sold to the public and what it pays the sponsor. In
some private placements, the underwriter may buy certificates as
principal, in which case its compensation would be the difference
between what it receives for the
[[Page 66682]]
certificates that it sells and what it pays the sponsor for these
certificates.
Purchase of Receivables by the Servicer
21. The applicant represents that as the principal amount of the
receivables in a trust is reduced by payments, the cost of
administering the trust generally increases, making the servicing of
the trust prohibitively expensive at some point. Consequently, the
pooling and servicing agreement generally provides that the servicer
may purchase the receivables remaining in the trust when the aggregate
unpaid balance payable on the receivables is reduced to a specified
percentage (usually 5 to 10 percent) of the initial aggregate unpaid
balance.
The purchase price of a receivable is specified in the pooling and
servicing agreement and will be at least equal to: (1) the unpaid
principal balance on the receivable plus accrued interest, less any
unreimbursed advances of principal made by the servicer; or (2) the
greater of (a) the amount in (1) or (b) the fair market value of such
obligations in the case of a REMIC, or the fair market value of the
receivables in the case of a trust that is not a REMIC.
Certificate Ratings
22. 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 a multiple of the worst historical net credit loss experience
for the type of obligations included in the issuing trust.
Provision of Credit Support
23. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust (i.e. act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) from the credit support provider (which
may be the master servicer or an affiliate thereof) or, (c) in the case
of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates, and
the master servicer will advance such funds in a timely manner. When
the servicer is the provider of the credit support and provides its own
funds to cover defaulted payments, it will do so either on the
initiative of the trustee, or on its own initiative on behalf of the
trustee, but in either event it will provide such funds to cover
payments to the full extent of its obligations under the credit support
mechanism. In some cases, however, the master servicer may not be
obligated to advance funds but instead would be called upon to provide
funds to cover defaulted payments to the full extent of its obligations
as insurer. Moreover, a master servicer typically can recover advances
either from the provider of credit support or from future payments on
the affected assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the trust as payments on
receivables are passed through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount thereafter is subject
to reduction only for actual draws. From the time that the floor amount
is effective until the end of the life of the trust, there are no
proportionate reductions in the credit support amount caused by
reductions in the pool principal balance. Indeed, since the floor is a
fixed dollar amount, the amount of credit support ordinarily increases
as a percentage of the pool principal balance during the period that
the floor is in effect.
Disclosure
24. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust
[[Page 66683]]
was formed by the seller/servicer or other sponsor of the transaction;
(c) Identification of the independent trustee for the trust;
(d) A description of the receivables contained in the trust,
including the types of receivables, the diversification of the
receivables, their principal terms, and their material legal aspects;
(e) A description of the sponsor and servicer;
(f) A description of the pooling and servicing agreement, including
a description of the seller's principal representations and warranties
as to the trust assets, 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 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.
(k) A statement as to the duration of any pre-funding period and
the pre-funding limit for the trust.
25. 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.
26. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates 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.
27. 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 or
trustee summarizing information regarding the trust and its assets.
Such statement will include information regarding the trust and its
assets, including underlying receivables. Such statement will typically
contain information regarding payments and prepayments, delinquencies,
the remaining amount of the guaranty or other credit support and a
breakdown of payments between principal and interest.
Forward Delivery Commitments
28. To date, no forward delivery commitments have been entered into
by PNC in connection with the offering of any certificates, but PNC may
contemplate entering into such commitments. The utility of forward
delivery commitments has been recognized with respect to offering
similar certificates backed by pools of residential mortgages, and PNC
may find it desirable in the future to enter into such commitments for
the purchase of certificates.
Secondary Market Transactions
29. It is PNC's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter, and it is
PNC's intention to make a market for any certificates for which it is
lead or co-managing underwriter, although it is under no obligation to
do so. At times PNC will facilitate sales by investors who purchase
certificates if PNC has acted as agent or principal in the original
private placement of the certificates and if such investors request
PNC's assistance.
Retroactive Relief
30. PNC represents that it has not engaged in transactions related
to mortgage-backed and asset-backed securities based on the assumption
that retroactive relief would be granted prior to the date of their
application. However, PNC requests the exemptive relief granted to be
retroactive to October 21, 1997, the date of their application, and
would like to rely on such retroactive relief for transactions entered
into prior to the date exemptive relief may be granted.
Summary
31. In summary, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute receivables
contained in the trust once the trust has been formed;
(b) 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 will 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
[[Page 66684]]
proposed exemption. 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 PNC seeks exemptive relief will be
governed by the pooling and servicing agreement, which is made
available to plan fiduciaries for their review prior to the plan's
investment in certificates;
(e) Exemptive relief from sections 406(b) and 407 for sales to
plans is substantially limited; and
(f) PNC anticipates that it will make a secondary market in
certificates (although it is under no obligation to do so).
Notice to Interested Persons
The applicant represents that because those potentially interested
participants and beneficiaries cannot all be identified, the only
practical means of notifying such participants and beneficiaries of
this proposed exemption is by the publication of this notice in the
Federal Register. Comments and requests for a hearing must be received
by the Department not later than 30 days from the date of publication
of this notice of proposed exemption in the Federal Register.
For Further Information Contact: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Jeffrey R. Light, M.D., Inc. Profit Sharing Plan (the Plan) Located
in Garden Grove, CA; Proposed Exemption
[Application No. D-10530]
The Department of Labor is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b)(1) and
(b)(2) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to the sale (the Sale) by the
individual, self-directed account of Jeffrey R. Light, M.D. within the
Plan (the Account) of two parcels of real property (the Property) to
Jeffrey R. Light, M.D. (Dr. Light), a party in interest with respect to
the Plan; provided the following conditions are satisfied:
(A) The terms and conditions of the transaction are no less
favorable to the Plan than those which the Plan would receive in an
arm's-length transaction with an unrelated party;
(B) The Sale is a one-time transaction for cash;
(C) The Plan does not incur any expenses from the Sale; and
(D) The Plan receives as consideration from the Sale no less than
the fair market value of the Property as determined on the date of the
Sale by a qualified, independent appraiser.
Summary of Facts and Representations
1. Jeffrey R. Light, M.D., Inc., located in Garden Grove,
California, a California corporation for the practice of medicine, is
sponsor of the Plan. Dr. Light is a medical physician and a
pathologist, whose practice involves tissue analysis, sample reviews,
and providing opinions regarding such analysis and review.
The Plan is a defined contribution plan that is intended to qualify
under section 401(a) of the Code. The applicant represents that on
December 31, 1996, the Plan had 26 participants and total assets of
$523,077, and of the total assets $404,582 was in Dr. Light's Account.
The applicant represents that the Plan permits its participants to
self-direct their respective accounts into various investments. Dr.
Light is represented by the applicant to be the fiduciary and trustee
with respect to the Plan.
2. The Property consists of two lots of unimproved land. One of the
lots is located at 370 Ranch Road in Mammoth Lakes, California,
consists of 0.38 of an acre (16,553 square feet), and is designated as
Ranch at Snowcreek Lot #14 (Lot #14). The second lot is located at
Majestic Pines Drive in Mammoth, California, consists of 0.2 of an acre
(8,750 square feet), and is designated as Mammoth Vista III Lot #34
(Lot #34). The applicant represents that Lot #14 was purchased on
January 29, 1996, for the sum of $126,892 and Lot #34 was purchased on
January 7, 1991, for the sum of $127,639.55.
The applicant also represents that the Property was purchased only
for investment purposes and it has been held in the Account since the
respective dates of purchase with no improvements made on or to the
Property. Also, the applicant represents that the Property has not been
used or leased by anyone since being acquired by the Account.
The Property was appraised on October 3, 1997, by Mitch Dunshee,
MAI, AG002575 and Cheryl Bretton, Appraiser, AG023954, The Dunshee
Appraisal Group, located in Frensno, California; and Lot #14 was
determined to have a fair market value of $130,000 and Lot #34 was
determined to have a fair market value of $120,000. Also the appraisal
of the Property represented that the Property is zoned residential and
located in an earthquake zone that is designated Zone 1: High Risk
Damage; Reference: ISO Earthquake Zones, 1981.
3. Dr. Light proposes to purchase the Property from the Account for
cash with no expenses incurred by the Plan in a one-time transaction,
paying to the Account the fair market value of the Property as
determined by a qualified, independent appraiser on the date of the
Sale.
Dr. Light is prompted to take this action by Mr. Douglas B. George,
Financial Counsel, Newport Beach, California, whose services were
recently employed by Dr. Light with respect to the Plan's finances. The
applicant represents the need for the Account to diversify its
investments, noting that the Property represents more than 62 percent
of the total value of the assets in the Account. Also, Mr. George
expressed concern about the lack of investment diversity in the Account
and the location of the Property being in the high risk earthquake zone
of California.
4. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act because
(a) the Sale is a one-time transaction for cash; (b) the Plan and the
Account will receive the fair market value of the Property as
determined by a qualified, independent appraiser on the date of the
transaction; (c) the transaction will enable the Account to avoid any
risk associated with the continued holding of the Property and enable
the Dr. Light to direct Account assets to active and safer investments;
(d) neither the Plan or the Account will incur any expenses from the
transaction; and (e) other than Dr. Light, no other participant of the
Plan will be affected by the transaction, and
[[Page 66685]]
he desires that the transaction be consummated.
Notice to Interested Persons
Because the only Plan assets involved in the proposed transaction
are those in the Account of Dr. Light and he is the only participant
affected by the proposed transaction, there is no need to distribute
the notice of the proposed transaction to interested persons. Comments
and requests for a hearing are due 30 days from the date of publication
of this proposed exemption in the Federal Register.
For Further Information Contact: Mr. C.E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 16th day of December 1997.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 97-33179 Filed 12-18-97; 8:45 am]
BILLING CODE 4510-29-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.