Proposed Exemptions; Toyota Motor Credit Corporation

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10438, et al.]

Proposed Exemptions; Toyota Motor Credit Corporation

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.

Toyota Motor Credit Corporation and Certain of its Affiliates,

Located in Torrance, California

[Application No. D-10438]

Proposed Exemption

The Department is considering granting an exemption under the

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

Code and in accordance with the procedures set

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forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,

1990).

Section I--Transactions

A. If the proposed exemption is granted, 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 as of September 1, 1997, 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 Section 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, as defined in Section III.K. below, by any person who

has discretionary authority or renders investment advice with respect

to the assets of that Excluded Plan.1

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\1\ 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. If the proposed exemption is granted, 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 as of September 1, 1997, 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,

as defined in Section III.L., 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.2 For purposes of

this paragraph B.(1)(iv) only, an entity shall not be considered to

service assets contained in a trust if it is merely a subservicer of

that trust;

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\2\ 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 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 Section I.B.(1) or (2).

C. If the proposed exemption is granted, the restrictions of

sections 406(a), (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 as of September 1, 1997 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 Agreement; 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.3

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\3\ 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 the 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. below.

D. If the proposed exemption is granted, 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 as of September 1, 1997, to

any transaction 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 as 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.

Section II--General Conditions

A. The relief provided under Section I will be 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 such terms would be in an arm's-length transaction with an

unrelated party;

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

subordinated to the rights and interests evidenced by other

certificates of the same trust;

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

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

generic rating categories from either Standard & Poor's Ratings

Services, Moody's Investor Service, Inc., Duff & Phelps Inc., or Fitch

Investors Service, Inc. (collectively, the Rating Agencies);

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

Restricted Group. However, the trustee shall not be

[[Page 36948]]

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 the 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 or retained by the sponsor pursuant to the assignment of obligations

(or interest therein) to the trust represents not more than the fair

market value of such obligation (or interest); and the sum of all

payments made to and retained by the servicer represents not more than

reasonable compensation for the servicer's services under the Pooling

and Servicing Agreement and reimbursement of the servicer's reasonable

expenses in connection therewith;

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

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

Securities and Exchange Commission under the Securities Act of 1933;

(7) To the extent that the pool of leases used to create a

portfolio for a trust is not closed on the date of the issuance of

certificates by the trust, additional leases may be added during a

period of no more than 15 consecutive months from the closing date used

for the initial allocation of leases that was made to create such

portfolio, provided that:

(a) all such additional leases meet the same terms and conditions

for eligibility as the original leases used to create the portfolio (as

described in the prospectus or private placement memorandum for such

certificates), which terms and conditions have been approved by the

Rating Agencies. Notwithstanding the foregoing, the terms and

conditions for an ``eligible lease'' (as defined in Section III.X

below) may be changed if such changes receive prior approval either by

a majority vote of the outstanding certificateholders or by the Rating

Agencies; and

(b) such additional leases do not result in the certificates

receiving a lower credit rating from the Rating Agencies, upon

termination of the period during which additional leases may be added

to the portfolio, than the rating that was obtained at the time of the

initial issuance of the certificates by the trust;

(8) Any additional period described in Section II.A.(7) must be

described in the prospectus or private placement memorandum provided to

investing plans;

(9) The average annual percentage lease rate (the Average Lease

Rate) for the pool of leases in the portfolio for the trust, after the

additional period described in Section II.A.(7), shall not be more than

200 basis points greater than the Average Lease Rate for the original

pool of leases that was used to create such portfolio for the trust;

(10) For the duration of the additional period described in Section

II.A.(7), principal collections that are reinvested in additional

leases are first reinvested in the ``eligible lease contract'' (as

defined in Section III.X. below) with the earliest origination date,

then in the ``eligible lease contract'' with the next earliest

origination date, and so forth, beginning with any lease contracts that

have been reserved specifically for such purposes at the time of the

initial allocation of leases to the pool of leases used to create the

particular portfolio, but excluding those specific lease contracts

reserved for allocation to or allocated to other pools of leases used

to create other portfolios;

(11) The trustee of the trust (or the agent with which the trustee

contracts to provide trust services) is a substantial financial

institution or trust company experienced in trust activities and is

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, enforces all the rights created in favor of

certificateholders of such trust, including employee benefit plans

subject to the Act;

(12) The Pooling and Servicing Agreement and other governing

documents require that funds collected by the servicer with respect to

trust assets be deposited on a monthly basis in a trust account, even

though distributions on the certificates may be scheduled to be made

less frequently than monthly, and invested in certain highly rated debt

instruments known as ``permitted investments'; and

(13) The Pooling and Servicing Agreement expressly provides that

funds collected by the servicer with respect to trust assets are

required to be deposited in a trust account within two business days

after such collection, if TMCC's short-term unsecured debt is no longer

rated P-1 by Moody's Investors Service and A-1 by Standard & Poor's

Ratings Services (or successors thereto), unless such Rating Agencies

accept an alternative arrangement.

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

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 Section I, if the provision in Section II.A.(6) above is

not satisfied for the 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 shall be required to

make a written representation regarding compliance with the condition

set forth in Section II.A.(6).

C. Toyota Motor Credit Corporation (TMCC) and its Affiliates abide

by all securities and other laws applicable to any offering of

interests in securitized assets, such as certificates in a trust as

described herein, including those laws relating to disclosure of

material litigation, investigations and contingent liabilities.

Section III--Definitions

For purposes of this proposed 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

(except during the period described in Section II.A.(7), if any),

interest, and/or other payments made in connection with the assets of

such trust; or

(2) A certificate denominated as a debt instrument that is issued

by and is an obligation of a trust;

With respect to certificates defined in Section III.A.(1) and (2)

above, the underwriter shall be an entity which has received from the

Department an individual prohibited transaction exemption relating to

certificates which is substantially similar to this proposed exemption

(as noted below in Section III.C.) and shall be either (i) the sole

underwriter or the manager or co-manager of the underwriting syndicate,

or (ii) a selling or placement agent.

[[Page 36949]]

For purposes of this proposed exemption, references to

``certificates representing an interest in a trust'' include

certificates denominated as debt which are issued by a trust.

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

in trust and consists solely of:

(1) Either.

(a) Qualified motor vehicle leases (as defined in Section III.T.);

or

(b) Fractional undivided interests in a trust containing assets

described in paragraph (a) of this Section III.B.(1), where such

fractional interest is not subordinated to any other interest in the

same pool of qualified motor vehicle leases held by such trust;

4

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\4\ It is the Department's view that the definition of ``Trust''

contained in Section III.B. includes a two-tier trust structure

under which certificates issued by the first trust, which contains a

pool of receivables described above, are transferred to a second

trust which issues certificates that are sold to plans. However, the

Department is of the further view that, since the exemption provides

relief for the direct or indirect acquisition or disposition of

certificates that are not subordinated, no relief would be available

if the certificates held by the second trust were subordinated to

the rights and interests evidenced by other certificates issued by

the first trust.

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

Section III.B.(1);

(3) Undistributed cash or temporary investments made therewith

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

made to certificateholders, except during the period described in

Section II.A.(7) above when temporary investments are made until such

cash can be reinvested in additional leases described in paragraph (a)

of this Section III.B.(1); and

(4) Rights of the trustee under the Pooling and Servicing

Agreement, and rights under motor vehicle dealer agreements, any

insurance policies, third-party guarantees, contracts of suretyship and

other credit support arrangements for any obligations described in

Section 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 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 categories by the Rating

Agencies 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 any investment banking firm that has

received an individual prohibited transaction exemption from the

Department that provides relief for so-called ``asset-backed''

securities that is substantially similar in format and structure to

this proposed exemption (the Underwriter Exemptions); 5 or

any person directly or indirectly, through one or more intermediaries,

controlling, controlled by or under common control with such investment

banking firm; and any member of an underwriting syndicate or selling

group of which such firm or person described above is a manager or co-

manager with respect to the certificates.

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\5\ For a listing of the Underwriter Exemptions, see the

description provided in the text of the operative language of

Prohibited Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21,

1997).

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D. ``Sponsor'' means an entity affiliated with Toyota Motor

Corporation that organizes a trust by depositing obligations therein in

exchange for certificates.

E. ``Master Servicer'' means TMCC or an entity affiliated with TMCC

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 TMCC or an entity affiliated with TMCC

which, under the supervision of and on behalf of the master servicer,

services leases contained in the trust, but is not a party to the

Pooling and Servicing Agreement.

G. ``Servicer'' means TMCC or an entity affiliated with TMCC which

services leases contained in the trust, including the master servicer

and any subservicer.

H. ``Trustee'' means an entity that is independent of TMCC and its

Affiliates which is the trustee of the trust. In the case of

certificates which are denominated as debt instruments, ``trustee''

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. In

addition, a person is not an insurer if such person merely provides:

(1) property damage or liability insurance to an Obligor with respect

to a lease or leased vehicle; or (2) property damage, excess liability

or contingent liability insurance to any lessor, sponsor or servicer,

if such entities are included in the same insurance policy, with

respect to a lease or leased vehicle.

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

obligated to make payments for a lease 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 and at

the end of the period described in Section II.A.(7); 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 shall 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 assets of such person.

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

commitment (as defined in Section III.Q. below), provided:

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

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

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

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

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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 proposed

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 for 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 shall not be reduced

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

T. ``Qualified Motor Vehicle Lease'' means a lease of a motor

vehicle where:

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

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

vehicle; and

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

protective of the trust's rights as the trust would receive under a

motor vehicle installment loan contract.

U. ``Pooling and Servicing Agreement'' means, collectively, (i) the

securitization trust agreement between a sponsor and the trustee

establishing a trust, (ii) the trust and servicing agreement relating

to an origination trust and the servicing supplement thereto, and (iii)

the supplemental agreement establishing a beneficial interest in

certain specified origination trust assets (referred to herein as a

``special unit of beneficial interest'' or ``SUBI''). 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.

V. ``Lease Rate'' means an implicit rate in each lease calculated

as an annual percentage rate on a constant yield basis, based on the

capitalized cost of the leased vehicle as determined under the

particular lease contract for the vehicle. With respect to the

determination of a ``Lease Rate'', each lease will provide for equal

monthly payments such that at the end of the lease contract term the

capitalized cost will have been amortized to an amount equal to the

residual value of the leased vehicle established at the time of

origination of such contract. The amount to which the capitalized cost

has been amortized at any point in time will be the outstanding

principal balance for the lease.

W. ``Average Lease Rate'' means the average annual percentage lease

rate, as defined in Section III.V. above, for all leases included at

any particular time in a portfolio used to create a trust from which

certificates are issued.

X. ``Eligible Lease'' or ``Eligible Lease Contract'' means a

Qualified Motor Vehicle Lease, as defined in Section III.T. above,

which meets the eligibility criteria established for, among other

things, the term of the lease, place of origination, date of

origination, and provisions for default, as described in the particular

prospectus or private placement memorandum for the certificates

provided to investors, if such terms and conditions have been approved

by the Rating Agencies prior to the issuance of such certificates.

Y. ``Permitted Investments'' means investments which: (i) are

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.

The Department notes that this proposed exemption, if granted, will

be included within the meaning of the term ``Underwriter Exemption'' as

it is defined in Section V(h) of the Grant of the Class Exemption for

Certain Transactions Involving Insurance Company General Accounts,

which was published in the Federal Register on July 12, 1995 (see PTE

95-60, 60 FR 35925).

Effective Date: This proposed exemption, if granted, will be

effective for all transactions described herein which occur on or after

September 1, 1997.

Summary of Facts and Representations

1. TMCC is a California corporation that has 34 branches in various

locations in the United States. TMCC's primary business is providing

retail leasing, retail and wholesale financing and certain other

financial services to authorized Toyota and Lexus vehicle and Toyota

industrial equipment dealers and their customers in the United States

(excluding Hawaii). TMCC is a wholly-owned subsidiary of Toyota Motor

Sales, U.S.A., Inc. (TMS), which is primarily engaged in the wholesale

distribution of automobiles, light duty trucks, industrial equipment

and related replacement parts and accessories throughout the United

States (excluding Hawaii). Substantially all of TMS's products are

either manufactured by its Affiliates or are purchased from Toyota

Motor Corporation (TMC), which indirectly wholly owns TMS, or its

Affiliates.

Toyota Leasing, Inc. (TLI) will be formed as a California

corporation, and will be a wholly-owned, special purpose subsidiary of

TMCC.

2. TMCC and its Subsidiaries,6 including TLI

(collectively, the Applicant) seek an exemption to permit employee

benefit plans to invest in certificates indirectly representing

undivided interests in a trust which contains motor vehicle leases and

the motor vehicles related to those leases. The exemption TMCC seeks is

substantially similar to the Underwriter Exemptions granted by the

Department to various broker-dealers and banks to permit investments

in, among other things, motor vehicle receivable investment trusts. In

the exemption sought by TMCC, the primary asset of the trust in which

investors have beneficial interests (i.e. the Securitization Trust) is

a special unit of beneficial interest (SUBI) in a separate trust that

actually holds the motor vehicle leases and related motor vehicles

(i.e., the Origination Trust). The Underwriter Exemptions may also

include such a two-tier trust structure (as noted above in Footnote 4).

However, unlike the trusts described in the Underwriter Exemptions, the

Securitization Trusts established by TMCC will not contain beneficial

interests in fixed pools of assets (i.e. qualified motor vehicle leases

and related motor vehicles) for at least a

[[Page 36951]]

year, as discussed further below. TMCC states that the Securitization

Trusts meet all other requirements of the Underwriter Exemptions. Such

requirements include: (i) that investor certificates covered by the

exemption have received a rating from one of the Rating Agencies that

is in one of the three highest generic rating categories; (ii) that

there be no subordination of investor certificates purchased by

employee benefit plans to the rights and interests evidenced by other

certificates of the same trust; and (iii) that there be a pass-through

of principal, interest and other payments received by the trust

relating to the receivables beneficially owned by the trust, less

certain specified servicing fees which are disclosed and approved by

the investors prior to the acquisition of any trust certificates.

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\6\ For purposes hereof, the term ``Subsidiary'' means any

corporation, partnership or other business entity controlled by

TMCC.

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3. The Origination Trust is formed pursuant to a trust agreement

between the sponsor of the Origination Trust and its trustee (the

Origination Trustee). The sponsor of the Origination Trust is currently

TLI, but could be another entity affiliated with TMC. The Origination

Trustee is a wholly-owned subsidiary of an independent entity qualified

to provide trust services, and in fact provides such services to the

Origination Trust under contract with its subsidiary (i.e. the Trust

Agent). TMCC represents that the Trust Agent will be a financial

institution that is not affiliated in any way with TMCC, other than as

a service provider. TMCC or an Affiliate acts as servicer (the

Servicer) for all of the leases and leased vehicles owned by the

Origination Trust, pursuant to an amended and restated trust and

servicing agreement (the Origination Trust Agreement) with the

Origination Trustee and one or more servicing supplements to the

Origination Trust Agreement (collectively, the Servicing Agreement).

4. The assets of the Origination Trust include retail closed-end

automobile and light-duty truck lease contracts assigned to the

Origination Trust by certain dealers, the automobiles and light duty

trucks relating thereto, all proceeds thereof (including any sale of

such vehicles), payments made under certain insurance policies relating

to such leases or the related lessees or leased vehicles, and all

security deposits with respect to such lease contracts to the extent

due to the lessor thereunder. TMCC is the initial holder of a sole

beneficial interest (i.e. the ``Undivided Trust Interest'' or ``UTI'')

in the Origination Trust.

The Origination Trust is open-ended; that is, as leases are

originated by dealers, they will be assigned by the dealers directly to

the Origination Trust and the Origination Trust will be listed as the

owner of the related vehicles on the related certificates of title.

When the aggregate dollar amount of leases and leased vehicles in the

Origination Trust grows large enough to justify a securitization, TMCC,

as holder of the UTI, may direct the trustee of the Origination Trust

to segregate from among all the leases and leased vehicles within the

Origination Trust a specified portfolio of leases and related leased

vehicles. Pursuant to a supplement to the Origination Trust Agreement

(known as a ``SUBI'' Supplement), the trustee then issues to TMCC a

separate certificate representing a ``Separate Unit of Beneficial

Interest'' or ``SUBI'' in that segregated portfolio. It is this SUBI

that becomes the basis for a securitization and the creation of a

separate Securitization Trust.

Any leases and leased vehicles held by the Origination Trust that

are not included in a SUBI portfolio at the time of such segregation,

as well as any new leases and related vehicles acquired subsequent to

the specified date on which the new SUBI portfolio is identified,

remain part of the UTI portfolio, and the original UTI continues to

represent a beneficial interest therein.

New leases and related leased vehicles are added to the SUBI's

segregated portfolio by TMCC in an aggregate amount approximately equal

to principal collections on the leases and leased vehicles already

allocated to the SUBI,7 for a fixed period (which will be no

more than fifteen consecutive months) after the closing date used for

the initial allocation of leases made to create the SUBI portfolio.

(This period is referred to hereafter as the ``revolving period''). The

applicant represents that this fixed ``revolving period'' for principal

collections on the leases and leased vehicles is established so that

the investor certificates issued by the Securitization Trust are

treated as debt for Federal and state income tax purposes, but does not

affect the characterization of those certificates as beneficial

interests in the Securitization Trust property for accounting and other

state law purposes.

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\7\ TMCC represents that the aggregate amount of new leases

added to a SUBI portfolio is approximately equal, rather than

exactly equal, to principal collections on the existing leases

because, when additional leases are added, the outstanding principal

balance of the new leases is not always equal to the principal

collections available for reinvestment. The uninvested principal

amounts are held by the Securitization Trust in a cash account and

temporarily invested in short-term investments, with interest

thereon accruing to the Securitization Trust, until such amounts can

be reinvested in additional leases for the SUBI portfolio. TMCC

states that any uninvested principal amounts, and interest on such

amounts, held by the Securitization Trust are distributed to the

certificateholders once principal payments on the leases in the SUBI

portfolio are passed-through to investors.

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After the ``revolving period'', the pool of leases and leased

vehicles allocated to the SUBI (i.e. the SUBI portfolio) remains fixed.

Any leases which are added to the SUBI portfolio during the ``revolving

period'' must meet the same terms and conditions for eligibility as the

original leases in the portfolio, as described in the prospectus or

private placement memorandum, which terms and conditions have been

approved by the Rating Agencies prior to the ``revolving period''.

However, TMCC states that the terms and conditions for an ``eligible

lease'' (as defined in Section III.X above) may be changed if such

changes receive prior approval either by a majority vote of the

outstanding certificateholders or by the Rating Agencies. Further,

under the conditions of the proposed exemption, TMCC must ensure that

the additional leases added to the SUBI portfolio do not result in the

certificates receiving a lower credit rating from the Rating Agencies

at the end of the ``revolving period'' than the rating that was

obtained at the time of the initial issuance of the certificates by the

trust (see Section II.A.(7)(b) above).

TMCC states that for the duration of the ``revolving period'',

principal collections that are reinvested in additional leases are

first reinvested in the ``eligible lease contract'' (as defined in

Section III.X. above) with the earliest origination date, then in the

``eligible lease contract'' with the next earliest origination date,

and so forth (i.e. on a ``FIFO basis), beginning with any lease

contracts that have been reserved by TMCC specifically for such

purposes at the time of the initial allocation of leases to the

particular SUBI portfolio. However, those lease contracts reserved for

allocation to, or actually allocated to, other pools of leases (i.e.

other SUBI portfolios used to create different trusts) will be excluded

from the available additional leases to be added to the particular SUBI

portfolio. TMCC states that no adverse selection procedures may be

employed in selecting leases during the ``revolving period''. Thus,

TMCC represents that it will not be able to manipulate the order in

which leases are added to a particular SUBI portfolio during the

``revolving period'' in order to improve its economic position with

respect to the assets held in a particular SUBI portfolio. TMCC states

further that at all times there will be a clear identification within

the Origination Trust of which leases and leased

[[Page 36952]]

vehicles belong in each SUBI portfolio and which belong in the UTI or

``residual'' portfolio. The holders of beneficial interests in each

SUBI have also agreed in writing to rely solely upon the assets

contained within their respective portfolios to satisfy any payment

obligations.

This ``revolving period'' arrangement differs from the arrangements

considered in the Underwriter Exemptions wherein each trust contains a

``fixed pool'' of assets and substitution of receivables by the trust

sponsor is permitted only in the event of defects in documentation

discovered within a limited time after the issuance of trust

certificates. The Applicant states that during any ``revolving

period'', the outstanding principal balance of the SUBI's portfolio of

leases remains unchanged and the certificateholders receive only

interest payments with respect to their certificates. Once the

``revolving period'' ends, principal payments are no longer reinvested

but rather are paid out to certificateholders.

To the extent that leases added to the SUBI portfolio during the

``revolving period'' have a higher Lease Rate (as defined in Section

III.V. above) than do the original leases in the SUBI portfolio at the

time of the initial offering of the certificates to investors, total

returns on the ultimate lease pool in excess of that promised to

investors on the trust certificates may inure to affiliates of the

Servicer. However, TMCC states that the Average Lease Rate (as defined

in Section III.W. above) for the pool of leases allocated to a SUBI

portfolio owned by a particular Securitization Trust, after accounting

for all the leases added to the SUBI portfolio during the ``revolving

period'', shall not be more than 200 basis points (i.e. 2 percent)

greater than the Average Lease Rate for the leases in the SUBI

portfolio on the closing date used for the initial allocation of leases

to the SUBI portfolio owned by the Securitization Trust.

The Average Lease Rate for the leases in the trust at the time of

the initial offering of the certificates is described in the prospectus

or offering memorandum provided to investors. The Applicant represents

that changes to the Average Lease Rate based on new leases added to a

trust during the ``revolving period'' depend on current interest rates

and market conditions as well as the amount of lessee prepayments and

repossessions on the leased vehicles. Thus, potential plan investors at

the time of the initial offering of trust certificates know the total

dollar amount of leases in the trust, the Average Lease Rate on those

leases, the fact that principal received by the trust during the

``revolving period'' is used to invest in additional leases, and the

length of the ``revolving period''. Under the terms of the proposed

exemption, potential plan investors shall also be provided with a

statement disclosing the fact that the relief provided by the exemption

shall be available to the Servicer and its affiliates only if the

additional leases do not cause the Average Lease Rate for the leases in

the pool after the ``revolving period'' to increase by more than 200

basis points.

5. Pursuant to the Servicing Agreement, TMCC, acting as Servicer on

behalf of the Origination Trustee, selects the assets to be represented

by each SUBI (as discussed above). Certificates representing the entire

beneficial interest in each SUBI are issued to the sponsor of the

Securitization Trust. The sponsor will be TLI, or another wholly-owned

subsidiary of TMC (or a limited liability company or partnership in

which a TMC subsidiary is a member). The sponsor creates the

Securitization Trust and transfers a certificate representing the

beneficial interest in the SUBI to the Securitization Trust, pursuant

to a trust agreement between the sponsor and the trustee of the

Securitization Trust (the Securitization Trustee).8 The

Securitization Trustee is an unrelated commercial institution with

trust powers, meeting certain specified requirements. In addition,

pursuant to the Securitization Trust Agreement, the Securitization

Trust issues to its sponsor investor certificates representing

fractional undivided interests in the Securitization Trust, the assets

of which include the SUBI, which itself represents a beneficial

interest in a portfolio of motor vehicle leases and related leased

motor vehicles held by the Origination Trust.

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\8\ TMCC or an affiliate retains a de minimis interest in each

SUBI portfolio, which represents a subordinated interest in the

portfolio, under requirements established by the Rating Agencies, in

order to meet certain Federal tax code objectives.

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6. The sponsor of the Securitization Trust sells the investor

certificates to various outside investors, including employee benefit

plans subject to the Act. In order to achieve the desired rating for

such certificates, the sponsor may retain a subordinated interest in

the Securitization Trust, as required by the Rating Agencies, so that

unanticipated losses with the SUBI portfolio will first by borne by

TMCC. With respect to the certificates sold to outside investors, there

may be two or more classes of securities. The investor certificates are

either publicly or privately offered.9 Except under rare

circumstances, physical certificates will not be issued to investors in

a public senior class of certificates. Instead, the Securitization

Trust will use a book-entry registration system through the Depository

Trust Company (DTC), a limited-purpose trust company organized under

New York law, which is a member of the Federal Reserve System, and a

clearing agency under Section 17A of the Securities Exchange Act of

1934.

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\9\ TMCC is not requesting an exemption for the purchase of any

subordinated class of certificates by employee benefit plans.

However, the applicant is requesting relief for prohibited

transactions that may occur as a result of the investments in a

trust made by an insurance company's general account which are

considered to be ``plan assets'' under the recent U.S. Supreme Court

decision in John Hancock Mutual Life Insurance Co. v. Harris Trust &

Savings Bank, 114 S.Ct. 517 (1993) (Harris Trust). As a result of

the decision in Harris Trust and the Department's plan assets

regulation (see 29 CFR 2510.3-101), an insurance company investing

general account assets could be viewed as a ``benefit plan

investor'' for purposes of calculating the 25 percent significant

participation test in section 2510. 3-101(f)(1) of the regulation.

The Department notes that Section III of the Class Exemption for

Certain Transactions Involving Insurance Company General Accounts

(PTE 95-60, 60 FR 35925, July 12, 1995) provides an exemption for

transactions in connection with the operation of asset pool

investment trusts notwithstanding that the certificates acquired by

the general account are subordinated to the rights and interests

evidenced by other certificates of the same trust. In this regard,

the Department has included a paragraph at the end of the operative

language of the proposed exemption which states that this exemption,

if granted, will be included within the definition of the term

``Underwriter Exemption'' under Section V(h) of PTE 95-60.

Therefore, the exemptive relief provided by PTE 95-60 will be

available for subordinated investments in a trust described herein

by insurance company general accounts.

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Investors are entitled to receive periodic payments of interest at

a fixed certificate rate, and after the ``revolving period'' described

above, payments of principal. Principal payments on the investor

certificates will be made on each distribution date (i.e., monthly,

quarterly, semi-annually or annually), based on formulas allocating

among the classes of certificates the maximum amount distributable

thereto on each such date and in each case subject to the amount

actually collected on the receivables. All net collections collected

for the assets underlying each SUBI, including all net proceeds from

the sale of a vehicle upon repossession, early lease termination or

maturity of the related lease, and, if so specified in the governing

documents, earnings derived from temporary investment of trust funds

prior to the next scheduled distribution date, are available to make

payments on the investor certificates.

The price of the investor certificates, both in the initial

offering and in the secondary market, is affected by market forces

including investor demand. Certificate interest rates are set at the

[[Page 36953]]

time of the pricing of each securitization. While the Average Lease

Rate for the particular lease portfolio is a factor in the interest

rates a Securitization Trust will be able to pay, the actual interest

rate set for the certificates issued is determined by a combination of

additional factors. Specifically, these factors include: (a) the then-

current yields on U.S. Treasury Notes with a remaining term equivalent

to the anticipated average life of the particular Securitization Trust,

and (b) the then-current ``spreads'' on similarly-rated competitive

investments available in the marketplace, as determined by the Rating

Agencies. Once the certificate rate is set for the certificates issued

by the Securitization Trust, that rate remains fixed for its duration,

regardless of any changes to the Average Lease Rate of the SUBI

portfolio occurring during the ``revolving period''. The price of an

investor certificate and the certificate rate together determine the

yield to investors. If an investor purchases a certificate at less than

par, that discount augments the certificate rate; conversely, a

certificate purchased at a premium yields less than the stated coupon.

7. TMCC represents that the certificates issued by a Securitization

Trust may involve multi-class certificates. Such multi-class

certificates may be one of two types: (i) ``strip'' certificates; and

(ii) ``fast-pay/slow-pay'' certificates.

``Strip'' certificates are a type of security in which the stream

of interest payments on the underlying 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.

``Fast-pay/slow-pay'' certificates involve the issuance of classes

of certificates having different stated maturities or the same

maturities with different payment schedules. The only difference

between these multi-class certificates and the single-class

certificates is the order in which distributions are made to

certificateholders.

The Applicant represents that any ``strip'' or ``fast-pay/slow-

pay'' certificates issued by a trust will be the same as the type

described in the Underwriter Exemptions previously granted by the

Department. TMCC emphasizes that the rights of a plan purchasing such

certificates will not be subordinated to the rights of another

certificateholder in the event of default on any payment obligations

for the certificates. With respect to ``fast-pay/slow-pay''

certificates, TMCC states that 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 would share in the amount distributed on a pro rata

basis. Thus, if a trust issues subordinate certificates, holders of

such subordinate certificates would not be able to share in the amount

distributed on a pro rata basis.10

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\10\ In this regard, the Department notes that although it

believes that either the ``strip'' or the ``fast-pay/slow-pay''

certificates described above are included within the scope of the

proposed exemption, it further notes that no relief is provided

under the exemption for plan investments in subordinate certificates

(other than as permitted herein for certain insurance company

general accounts). In addition, the Department notes that the

conditions of the exemption would require that any ``strip'' or

``fast-pay/slow-pay'' certificates receive one of the three highest

ratings available from the Rating Agencies and that such

certificates not receive a lower credit rating upon termination of

the period during which additional leases may be added to the SUBI

portfolio.

The Department cautions plan fiduciaries to fully understand the

risks involved with either ``strip'' or ``fast-pay/slow-pay''

certificates prior to any acquisitions of such certificates, and to

make prudent determinations as to whether such certificates would

adequately meet the investment objectives and liquidity needs of the

plan.

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8. TMCC enters into arrangements with certain dealers allowing it

to cause the assignment of leases and related vehicles originated by

those dealers either directly to TMCC or to any other specified entity,

including the Origination Trust. Once such leases and related vehicles

are assigned to the Origination Trust for ultimate inclusion in a

portfolio of SUBI assets for securitization as described above, TMCC is

able to go to the capital markets directly for financing through the

sale of certificates.

TMCC and/or one or more wholly-owned subsidiaries of TMCC, or

limited liability companies or partnerships in which such a wholly-

owned subsidiary is a member, are responsible for creating each SUBI,

creating the Origination Trust and each Securitization Trust, and

designating the Trust Agent and the Securitization Trustee.

The Trust Agent, its subsidiary the Origination Trustee, and the

Securitization Trustee, are each independent entities, unrelated to

TMCC, the underwriter or placement agent. The Origination Trustee is

the legal owner of the motor vehicle leases and related leased motor

vehicles allocated to a SUBI. The Securitization Trustee is the legal

owner of the obligations in the Securitization Trust and is responsible

for enforcing all the rights created thereby in favor of

certificateholders, whether independently or through the Origination

Trustee. The Applicant represents that each Securitization Trustee and

Trust Agent are substantial financial institutions or trust companies

experienced in trust activities. The Trust Agent and Securitization

Trustee will receive a fee for their services, which will be paid out

of assets of the Origination Trust or the Securitization Trust, as

applicable. The method of compensating each for its service related to

a SUBI is specified in the Servicing Agreement or Securitization Trust

Agreement, as applicable, and disclosed in the prospectus or private

placement memorandum relating to the offering of the investor

certificates.

9. The Servicer administers the leases on behalf of the beneficial

owners of the Origination Trust, including the holders of SUBI

certificates and, indirectly, the holders of the investor certificates.

The Servicer's functions involve monitoring of leases, maintenance of

records, institution of proceedings in the event of default, and sale

of vehicles after lease maturity, as well as certain functions relating

to the qualifications and permits required to be obtained by the

Origination Trustee.11 The Servicer, the sponsor of the

Origination Trust, and the sponsor of the Securitization Trust are

unrelated to the underwriter and to DTC. DTC has public senior investor

certificates registered in its name (or that of its nominee) and

maintains procedures for the distribution of notices, reports,

distributions and statements to certificateholders.

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\11\ TMCC states that these functions are necessary since, as

noted in Paragraph 4 above, the Origination Trust is the owner of,

and holds title to, the vehicle unless the lessee chooses to

purchase such vehicle under the terms of the lease.

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As compensation for performing its servicing duties for the

Origination Trust, the Servicer is paid a fee equal to a specified

percentage (usually no more than one percent) of the balance of the

leases it services, including those leases allocated to the SUBI. The

Servicer may receive additional compensation related to the SUBI in the

form of interest on various accounts of the Origination Trust and/or

the Securitization Trust containing proceeds of the leases and related

leased motor vehicles allocated to each SUBI as well as interest on

certain cash deposits. The Servicer is required to pay the

administrative expenses of servicing the Origination Trust out of its

servicing compensation.

The Servicer is also compensated to the extent it may provide

credit enhancement to the Securitization Trust or otherwise arranges to

obtain credit support from another party. This ``credit support fee''

may be aggregated with

[[Page 36954]]

other servicing fees, and may be either paid out of the income received

on the leases in excess of the certificate rate or paid in a lump sum

at the time the Securitization Trust is established. The Servicer may

be entitled to retain certain administrative fees paid by a third

party, usually the obligor under a lease, provided that such fees are

``qualified administrative fees'' as defined under Section III.S. These

administrative fees fall into four categories: (a) late payment fees;

(b) acquisition fees; (c) deferral fees; and (d) other administrative

fees or similar charges under the leases.

Payments on leases may be made by lessees to the Servicer at

various times during the period preceding any date on which payments to

the Origination Trust are due. In some cases, the Servicing Agreement

may permit the Servicer to place these payments in non-interest bearing

accounts in 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 lease and the date payment is due to the

Origination Trust. 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 leases are held in

non-interest bearing accounts or are commingled with the Servicer's own

funds, the Servicer is required to deposit these payments into an

Origination Trust account by a date specified in the Servicing

Agreement. TMCC states that the Servicing Agreement will require that

payments into an Origination Trust account will be made monthly, even

in cases where the certificates provide for distributions to be made

quarterly, semi-annually or annually. Once funds are deposited in the

Origination Trust account, such funds are required to be invested in

highly rated debt instruments of the type described in the governing

documents as ``permitted investments''.

TMCC represents that the Pooling and Servicing Agreement used in

the transactions described herein will require that in the event that

the rating for TMCC's short-term debt is reduced below a level

specified by the Rating Agencies after the sale of the certificates,

TMCC (as servicer) will be required to commence depositing collections

with respect to trust assets in a trust account on a daily basis within

two business days after collection, unless the applicable Rating

Agencies have agreed in writing to an alternative arrangement to

protect the interests of certificateholders.12

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\12\ TMCC states that its short-term unsecured debt is currently

rated P-1 by Moody's Investors Service and A-1 by Standard and

Poor's Ratings Services.

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All compensation payable to the Servicer with regard to the leases

allocated to a SUBI is set forth or referred to in the Servicing

Agreement, and described in reasonable detail in the prospectus or

private placement memorandum relating to the investor certificates.

10. Participating underwriters or placement agents receive a fee in

connection with the securities underwriting or private placement of

investor certificates. In a firm commitment underwriting, this fee

would consist of the difference between what such underwriter receives

for the certificates that it distributes and what it pays the sponsor

of the Securitization Trust for those certificates.13 In a

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

commission paid by the sponsor of the Securitization Trust.

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\13\ TMCC represents that a ``best efforts'' underwriting would

not ordinarily be used for the investor certificates.

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The arrangements among underwriters typically are set forth in an

``Agreement Among Underwriters'', which gives the managing underwriter,

as lead manager of the offer, the authority to act on behalf of all the

underwriters. This agreement also imposes customary restrictions on the

underwriters' dealings in the offered securities as are necessary to

comply with securities laws and to ensure the orderly distribution of

the offered securities.

11. TMCC represents that as the principal amount of the leases

allocated to a SUBI is reduced by payments thereon and recoveries on

the disposition of leased vehicles, the cost of separately

administering the assets allocated to that SUBI generally increases,

making the servicing of those assets prohibitively expensive at some

point. Consequently, the Securitization Trust Agreement generally

provides that the sponsor of the Securitization Trust may repurchase

the SUBI when the aggregate principal balance of the investor

certificates is reduced to a specified percentage (usually between 5

and 10 percent) of the initial aggregate investor certificate balance.

The terms of such repurchase are specified therein and are at least

equal to the unpaid principal balance on the investor certificates plus

accrued interest. The supplement to the Origination Trust Agreement

generally provides that upon such a repurchase of the Securitization

Trust's interest in the SUBI by its sponsor, the Origination Trust may

repurchase the entire SUBI from the sponsor and thereby terminate the

SUBI. The terms of such repurchase are specified therein and generally

are at least equal to the value of the pool of leases and leased

vehicles allocated to the SUBI.

12. The senior class of investor certificates must receive a rating

that is in one of the three highest generic rating categories available

from one of the Rating Agencies. To attain the desired rating, the

sponsor or its affiliates may establish a reserve fund for the benefit

of certificateholders; retain or sell to third parties one or more

classes of subordinated certificates; retain another subordinated

interest in the trust; and/or obtain other forms of credit support from

third parties. The amount of this credit support is set by the Rating

Agencies at a level expected to be a multiple of the worst historical

net credit loss experience for leases of automobiles and light-duty

trucks such as those allocated to the SUBI.

TMCC states that the Rating Agencies, before granting AAA/Aaa

ratings for the publicly issued securitization certificates, review the

underlying portfolio of assets securing payment to the investors to

determine, among other things, if (a) the principal value of the assets

is sufficiently greater than the aggregate face amount of the investor

certificates as to provide protection against defaults or losses, and

(b) there is a sufficient ``spread'' between the overall yield, based

on the Average Lease Rate (as adjusted by the discounting procedure

described below), being earned on the portfolio and the certificate

rate to cover servicing costs, expenses and losses. In the case of its

public offerings of certificates, TMCC currently anticipates that (i)

the face value of public investor senior certificates will not exceed a

specified percentage (e.g. 92.5 percent) of the principal value of the

underlying assets, and (ii) the ``spread'' between the overall yield,

based on the Average Lease Rate (as adjusted by the discounting

procedure described below), of the SUBI portfolio and the certificate

rate will be approximately 100 to 300 basis points. Thus, for example,

if the targeted ``spread'' were 200 basis points, a SUBI portfolio with

a principal value of $100,000,000 would support the issuance of

certificates with a face value of only $92,500,000, and a certificate

rate of 6 percent per annum would require an overall yield, based on

the Average Lease Rate (as adjusted by the discounting procedure

described below), for that SUBI portfolio of approximately 8 percent

per annum.

[[Page 36955]]

TMCC states that the Rating Agencies will always require a specific

``spread'' between the certificate rate and the overall yield for

leases in the particular SUBI portfolio before providing their initial

credit ratings for the certificates. TMCC must maintain this ``spread''

when leases are added to the SUBI portfolio during the ``revolving

period'' or risk a lower credit rating for the certificates (see

Section II.A.(7)(b) above).

For purposes of the securitization described above, TMCC represents

that each individual lease should yield a rate of return, based on the

Lease Rate (as defined in Section III.V. above), which is at least

equal to the certificate rate plus the targeted spread. However, where

the targeted spread is not met as to any lease based solely on the

Lease Rate, the principal value of that lease will be discounted so

that such lease is treated as having a ``net investment value'' less

than its actual outstanding principal balance. In such instances, the

lease is discounted to a level at which the actual lease charges to be

collected under the lease (including expected principal payments) would

yield, on a percentage basis, an overall rate of return which exceeds

the certificate rate by the targeted spread. Thus, for each individual

lease included in a securitization, its principal value is either: (a)

its outstanding principal balance, if its Lease Rate is equal to or

greater than the targeted spread; or (b) its discounted net investment

value, if its Lease Rate is less than the targeted

``spread''.14 TMCC states that the use of discounted

aggregate net investment values in measuring the ratio of certificate

face values to the discounted principal balance of the SUBI portfolio

can only further assure that investors are paid interest and principal

on their certificates on a timely basis.

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\14\ For example, if the certificate rate for a transaction were

8 percent and the targeted spread were 200 basis points, then, in

determining the aggregate face value amount of certificates that

could be issued with respect to a given SUBI portfolio, TMCC could

include each lease with a Lease Rate of 10 percent or more at its

current outstanding principal balance without any discounting.

However, if the portfolio included individual leases each with

outstanding principal balances of $20,000 and Lease Rates of only 5

percent, then TMCC would have to ``discount'' the value of each such

lease for purposes of the securitization to a low enough net

investment value (approximately $18,000) so that the same overall

monthly lease payment for each lease would now yield a Lease Rate of

10 percent. TMCC notes that any ``discounting'' of leases added to

the SUBI portfolio during the ``revolving period'' will result in

more leases being added to the portfolio in order to maintain a

constant outstanding principal balance during such period. Thus,

when interest rates used to determine the Lease Rate for leases

added to a SUBI portfolio are declining, the ``discounting'' of

leases adds more ``collateral'' to secure payments of the

certificate rate.

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13. In many cases, the Servicer may provide cash flow support to

the trust pursuant to a contractual obligation to advance funds to the

trust to the full extent that it determines that such advances are

recoverable (a) out of late payments by the lessees, (b) from a

permanent credit support provider (which may be itself) or, (c) in the

case of a trust that issues subordinated certificates, from amounts

otherwise distributable to holders of subordinated certificates. The

Servicer would advance such funds in a timely manner. When the Servicer

temporarily advances funds, the amount so advanced is recoverable by

the Servicer out of future payments on or for leases or leased vehicles

allocated to the SUBI to the extent that such amounts are not covered

by the other sources described above, including payments from a

permanent credit support provider.

If the Servicer fails to advance funds to the extent required by

the applicable agreements, fails to call upon a credit support

mechanism to provide funds to cover defaulted payments, or otherwise

fails in its duties, the Securitization Trustee would be required to

enforce the investor certificateholders' rights, in its capacity as a

third-party beneficiary of the Servicing Agreement, as owner of the

estate of the Securitization Trust, and as an indirect beneficial owner

of the Origination Trust assets allocated to a SUBI (including rights

under any credit support mechanism). Therefore, the Securitization

Trustee, who is independent of the Servicer, ultimately has the right

to enforce any credit support arrangement.

14. TMCC represents that 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 leases allocated to a SUBI as

payments for these leases and the related vehicles are used to make

payments to the Securitization Trust, as holder of an interest in the

SUBI, and then to investors. These safeguards include the following:

(a) There is a disincentive to postponing credit losses because the

sooner repossession or sale activities are commenced, the more value

generally will be realized on the leased vehicle.

(b) The Servicer has servicing guidelines which include a general

policy as to the allowable delinquency period after which a lessee's

obligations ordinarily are deemed uncollectible. The Servicing

Agreement requires the Servicer to follow its normal servicing

guidelines. In addition, the Servicing Agreement sets forth the

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 investor certificates

(monthly, quarterly, semi-annually, or annually, as set forth in the

Securitization Trust Agreement), the Servicer is required to report to

the Securitization 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 leases, recoveries on the related leased

vehicles, and draws upon the credit support. Further, the Servicer is

required to deliver to the trustee annually a certificate from an

executive officer of the Servicer stating that a review of the

servicing activities has been made under such officer's supervision,

and either stating that the Servicer has fulfilled all of its

obligations under the Servicing Agreement or, if the Servicer has

defaulted under any of its obligations, specifying any such default.

The Servicer's reports are reviewed at least annually by independent

accountants to ensure that the Servicer is following its normal

servicing standards and that the reports conform to the Servicer's

internal account records. The results of the independent accountants'

review are delivered to the Securitization Trustee.

(d) In cases where the Servicer and an insurer providing credit

support are affiliated or are the same entity, 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 SUBI, whether due to Servicer advances or any other cause.

The floor amount may be a fixed dollar amount or a specified formula

amount. Once the floor amount has been reached, the Servicer lacks an

incentive to postpone the recognition of credit losses because the

credit support amount becomes a fixed dollar amount, subject to

reduction only for actual draws on such amount. 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 principal balance of the leases allocated to the

SUBI. The Applicant states that where the floor is a fixed dollar

amount, the amount of credit support ordinarily would increase as a

percentage of the declining principal balance during the period that

the floor is in effect.

15. In connection with the original issuance of investor

certificates, a

[[Page 36956]]

prospectus or private placement memorandum is furnished to all

investors including investing plans. The prospectus or private

placement memorandum contains information material to a plan

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 Origination Trust and Securitization Trust

as legal entities and a description of how they were formed by their

respective sponsors;

(c) Identification of the Trust Agent, Origination Trustee and

Securitization Trustee;

(d) A description of the leases and related leased vehicles

allocated to each SUBI, including the diversification of the leases and

vehicles, the principal terms of the leases, and their material legal

aspects;

(e) A description of the sponsors of the Origination Trust and the

Securitization Trust, and of the Servicer;

(f) A description of the servicing arrangements set forth in the

Servicing Agreement, and the agreements governing the Origination Trust

and the Securitization Trust, including a description of the Servicer's

principal representations and warranties as to the leases and leased

vehicles allocated to each SUBI and the remedies for any breach

thereof;

(g) A description of the procedures for collection of payments on

or for leases and related leased vehicles and for making distributions

to the Securitization Trust, as holder of an interest in the SUBI, and

then to investor certificateholders, and a description of the accounts

into which such payments are deposited and from which such

distributions are made;

(h) Identification of the servicing compensation and any fees for

credit support that are deducted from payments on or for leases or

related leased vehicles before distributions are made to investors;

(i) A description of periodic statements provided to the

Securitization Trustee, and such statements that are provided or made

available to investors by the Securitization Trustee;

(j) A description of the events that constitute events of default

under the Servicing Agreement and a description of the Securitization

Trustee's and the investors' remedies incident thereto;

(k) A description of any credit support;

(l) A general discussion of the principal Federal income tax

consequences of the purchase, ownership and disposition of the investor

certificates by a typical investor;

(m) A description of the underwriters' or placement agents' plan

for distributing the certificates to investors; and

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

if any, for the certificates.

Reports indicating the amount of payments of principal and interest

are provided to investors as frequently as distributions are made to

investors. Investors are also provided with periodic information

statements setting forth material information concerning the leases and

related vehicles allocated to each SUBI, including information as to

the amount and number of delinquent and defaulted leases.

16. In the case of the offer and sale of investor certificates in a

registered public offering, the Securitization Trustee, the Servicer or

the sponsor of the Securitization Trust will file periodic reports as

required by the Securities Exchange Act of 1934 (the 1934 Act). A

Securitization Trust and its sponsor may, in some cases, discontinue

making filings under the 1934 Act if permitted to do so under the

provisions of that Act by exemptions contained therein.

At the time distributions are made to certificateholders, a report

is delivered to the trustee as to the status of the Securitization

Trust and each SUBI, including the assets allocated to the SUBI. Such

report contains information regarding, among other things, the leases

and related vehicles allocated to the SUBI, 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 is also delivered to

or made available to the Rating Agency or Agencies that have rated the

investor certificates. A statement based on this report is also

provided to certificateholders either by the Securitization Trustee,

the Servicer, or DTC as depository of the investor certificates,

including a summary statement regarding the Securitization Trust and

the assets allocated to the SUBI. The statement contains information

regarding payments and prepayments, delinquencies, the remaining amount

of credit support, a breakdown of payments between principal and

interest and other information concerning the leases and leased

vehicles allocated to the SUBI.

With respect to payments on the certificates, TMCC states that such

payments are legally obligated to be made by the Securitization Trustee

to DTC, the record owner of the certificates. TMCC represents that DTC

makes payments to the beneficial owners of the certificates as required

by New York Stock Exchange Regulations, SEC Regulations and the rules

of the U.S. Federal Reserve Board.

17. In general, it is the policy of many underwriters to make a

market for securities for which they are the lead or co-managing

underwriter. It is also the policy of many placement agents to

facilitate sales by investors who purchase certificates if the

placement agent has acted as a principal or agent in the original

private placement of the certificates and if the investors request the

placement agent's assistance. In this regard, TMCC anticipates that

underwriters will make a secondary market in investor certificates of

trusts that are sponsored by TMCC and its Subsidiaries.

18. TMCC and its Subsidiaries represent that they will abide by all

securities and other laws applicable to any offering of interests in

securitized assets, such as certificates in a trust as described

herein, including those laws relating to disclosure of material

litigation, investigations and contingent liabilities.

TMCC has requested the relief proposed herein because, under the

Department's regulation defining ``plan assets'' for investment

purposes (see 29 CFR 2510.3-101), there could be a ``look-through'' to

the underlying assets of the trust issuing certificates purchased by

employee benefit plans when there is significant participation by

benefit plan investors in a particular offering and the certificates

are not considered to be ``publicly-offered'' securities. In this

regard, TMCC states that many certificates are held by investors in

street or nominee name. Thus, TMCC states that it is not always

possible to identify whether the percentage interest in a trust held by

benefit plan investors is or is not ``significant'' (29 CFR 2510.3-

101(f)). TMCC states further that these problems are compounded as

transactions occur in the secondary market. In addition, with respect

to the ``publicly-offered security'' exception contained in the

Department's regulation (29 CFR 2510.3-101(b)), TMCC states that it is

difficult to determine whether each purchaser of a certificate is

independent of all other purchasers or whether there are at least 100

independent investors

[[Page 36957]]

which would make the certificates a ``widely-held'' class of securities

(as required therein).

TMCC has requested that the proposed exemption be effective as of

September 1, 1997, in order to cover any securitizations of motor

vehicle leases and related vehicles since that time which may have

involved significant participation by benefit plan investors.

19. 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 because:

(a) The Securitization Trust holds an interest in a SUBI, which

generally represents beneficial interests in a ``fixed pool'' of leases

and related leased vehicles, other than the obligation to reinvest

principal collections on the leases and leased vehicles in additional

qualifying leases and leased vehicles during a fixed ``revolving

period'' of no more than 15 months.

(b) The Average Lease Rate for the leases in the portfolio used to

create a trust, after accounting for all leases added to such portfolio

during the ``revolving period'', will not exceed by more than 200 basis

points the Average Lease Rate for the original portfolio of leases used

to create the trust.

(c) Certificates in which employee benefit plans invest have been

rated in one of the three highest rating categories by the Rating

Agencies. To achieve the desired rating, one or more types of credit

support are provided by the sponsor or its affiliates or are obtained

from third parties. In addition, leases added to a trust portfolio

during the ``revolving period'' will not result in the certificates

receiving a lower credit rating from the Rating Agencies, at the end of

the ``revolving period'', than the rating that was obtained at the time

of the initial issuance of the certificates by the trust.

(d) All transactions for which TMCC seeks exemptive relief are

governed by the Origination Trust Agreement, the SUBI Supplement, the

Servicing Agreement and the Securitization Trust Agreement. These

agreements as well as the prospectus or private placement memorandum

are made available to plan fiduciaries for their review prior to the

plan's investment in the certificates.

(e) The Pooling and Servicing Agreement expressly provides that

funds collected by TMCC, as the servicer for trust assets, are required

to be deposited in a trust account within two business days after such

collection, if TMCC's short-term unsecured debt no longer continues to

be rated P-1 by Moody's Investors Service and A-1 by Standard & Poor's

Ratings Services (or successors thereto), unless such Rating Agencies

accept an alternative arrangement.

(f) Exemptive relief from sections 406(b) and 407(a) of the Act for

sales to employee benefit plans is substantially limited.

(g) The Applicant anticipates that underwriters will make a

secondary market in investor certificates sponsored by TMCC and its

Subsidiaries.

For Further Information Contact: Mr. E. F. Williams of the

Department, telephone (202) 219-8194. (This is not a toll-free number.)

Kilpatrick Investment Company Employee's Pension Plan (the Plan);

Located in Oklahoma City, Oklahoma

[Application No.: D-10607]

Proposed Exemption

The Department is considering granting an exemption under the

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

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

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

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

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

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

shall not apply to the past sale (the Sale) of improved real property

(the Property) by the Plan to the Kilpatrick Investment Company (the

Company), a party in interest with respect to the Plan provided the

following conditions were met at the time of the Sale: (1) the terms of

the Sale were at least as favorable as those the Plan could have

obtained in an arm's length transaction with an unrelated party; (2)

the fair market value of the Property was determined by an independent

and qualified real estate appraiser; (3) the Sale price was equal to

the greater of the fair market value of the Property at the time of the

Sale or $134,600 which represents the price the Plan originally paid

for the Property plus the holding costs incurred by the Plan during the

Plan's ownership of the Property; and (4) the Plan paid no commissions

or expenses associated with the Sale.

Effective Date: If granted, this proposed exemption will be

effective as of April 15, 1998.

Summary of Facts and Representations

1. The Plan is a defined benefit plan having six participants and

beneficiaries as of February 19, 1998. The aggregate fair market value

of the Plan's assets is $884,543 which is based upon the 1996 Plan's

actuarial report. John Kilpatrick is the Plan trustee and owner of the

Company.

2. The Property is a sixty year old industrial facility located on

a 476,725 square foot site located at 800 N.W. 3rd Street, Moore,

Oklahoma. The Plan purchased the Property from an unrelated third party

on January 31, 1978 for $95,000 representing land cost of $15,000 and

building cost $80,000. Since this time, the Plan has paid approximately

$7,000 in land repairs, $15,900 in improvements and $16,555 ad valorem

taxes. The warehouse portion of the Property has been leased to Show

Productions, an unrelated third party for an annual rent of $6,000.

3. On February 4, 1998, the Property was appraised by Stephen V.

Greer Company, Real Estate Appraisers and Consultants. The fair market

value of the Property was calculated to be $78,500. In his appraisal

report, Mr. Greer defined market value as the probable price which a

property should bring in a competitive and open market under all

conditions requisite to a fair sale, the buyer and seller, each acting

prudently, knowledgeably and assuming the price is not affected by

undue stimulus. Mr. Greer noted that the overall quality of the

building improvements of the Property is fair and the general condition

of the Property is fair to poor. The useful economic life of these

improvements is nearing its end. Redevelopment will be required to

maximize the value of the site.

4. The Plan proposed to sell the Property in order to diversify its

assets and invest in more liquid investments.15 In February

1998, the Company applied for an exemption to permit a proposed sale of

the Property by the Plan to the Company at the fair market value of the

Property. However, during the Department's consideration of the

exemption request, it became apparent to the Plan trustee that the Plan

had invested significantly more in the Property than its appraised

value. Thus, the Company proposed to purchase the Property at a price

greater than the fair market value of the Property which represented an

amount equal to the Plan's acquisition cost plus the holding costs of

the Property totaling $134,600.

[[Page 36958]]

The Company stated that it would be in the position to purchase the

Property at this price due to the fact that the Company had recently

sold another piece of property for $150,000 with respect to which the

Company was trying to complete a Code section 1031 like-kind exchange.

The Company further states that based upon the section 1031

requirements, the like-kind exchange had to be completed by April 15,

1998, and the Company determined that due to the notice requirements of

the exemption process, the exemption would not be granted before this

date. Accordingly, the Company purchased the Property from the Plan on

April 15, 1998. The applicant represents that the Sale was in the

interest of the Plan because it permitted the Plan to fully recover the

money it invested in the Property, and it appeared highly unlikely that

the Plan could sell the Property to a third party in its current

condition at such a price. In addition, the Plan incurred no expenses

as a result of the Sale.

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\15\ As of February 1998, the Plan's total investment in real

estate accounted for 93% of the value of plan assets. The Department

is expressing no opinion in this proposed exemption as to whether

plan fiduciaries violated any of the fiduciary responsibility

provisions of Part 4 of Title I of the Act in acquiring and holding

such real estate. Section 404(a)(1)(C) states that a fiduciary shall

discharge his duties with respect to a plan solely in the interest

of the participants and beneficiaries by diversifying the

investments of the plan so as to minimize the risk of large losses,

unless under the circumstances it is clearly prudent not to do so.

---------------------------------------------------------------------------

5. In summary, the applicant represents that the transaction

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

section 4975(c)(2) of the Code because: (1) the Sale was a one-time

transaction for cash; (2) the Plan paid no expenses associated with the

Sale; and (3) the Plan received the greater of the fair market value as

determined by an independent, qualified appraiser of the Property or

$134,600 which represents the Plan's total investment in the Property.

For Further Information Contact: Allison Padams Lavigne of the

Department, telephone (202)219-8971. (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 1st day of July, 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 98-18012 Filed 7-7-98; 8:45 am]

BILLING CODE 4510-29-P