Proposed Exemptions; Genito Urinary Surgeons, Inc. Profit Sharing Plan (GUS Plan); Michael J. Rosenberg Money Purchase Pension Plan (Rosenberg Plan); Robert Savage Qualified Retirement Plan (Savage Plan) (Collectively, the Plans)

SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restrictions of the Employee

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

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

Unless otherwise stated in the Notice of Proposed Exemption, all

interested persons are invited to submit written comments, and with

respect to exemptions involving the fiduciary prohibitions of section

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

publication of this Federal Register Notice. Comments and 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.

Genito-Urinary Surgeons, Inc. Profit Sharing Plan (GUS Plan); Michael

J. Rosenberg Money Purchase Pension Plan (Rosenberg Plan); Robert

Savage Qualified Retirement Plan (Savage Plan) (collectively, the

Plans) Located in Toledo, Ohio

[Application Nos. D-10630, D-10631 and D-10632, respectively]

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 C.F.R. Part

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

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

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

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

Code, shall not apply to: (1) the cash sale of certain shares of

preferred stock (the Preferred Stock) issued by TTC Holdings Inc. (TTC)

to TTC, by the individually-directed account of Dr. Gregor Emmert in

the GUS Plan (the Emmert Account), by the individually-directed account

of Mr. Michael J. Rosenberg in the Rosenberg Plan (the Rosenberg

Account), and by the individually-directed account of Mr. Robert Savage

in the Savage Plan (the Savage Account) (collectively, the Accounts);

and (2) the subsequent purchase of certain shares of common stock (the

Common Stock) issued by TTC by Messrs. Emmert, Rosenberg and Savage

(collectively; the Participants), in their own name, from TTC pursuant

to an agreement with TTC that the purchase of the Common Stock was to

occur immediately after the sale of the Preferred Stock by the Plans;

provided that the following conditions were met:

(a) The sale of the Preferred Stock to TTC by the Accounts and the

purchase of the Common Stock from TTC by the Participants, acting in

their individual capacity, were one-time transactions for cash;

(b) The transactions described in (a) above took place on the same

business day;

(c) The amount paid to the Accounts by TTC was the fair market

value of the Preferred Stock, as determined by a qualified independent

appraiser at the time of the sale;

(d) The Participants, in their individual capacity, purchased from

TTC shares of the Common Stock which were equal in number and value to

the shares of Preferred Stock sold by the Accounts to TTC;

(e) A qualified independent fiduciary (the Independent Fiduciary)

determined that the transactions described herein were in the best

interests and protective of the Accounts at the time of the

transactions; and

(f) The Independent Fiduciary supervised the transactions; assured

that the conditions of this proposed exemption were met; and took

whatever actions necessary to protect the interests of the Accounts,

including reviewing amounts paid by TTC for the Preferred Stock.

EFFECTIVE DATE: This exemption, if granted, will be effective as of

December 1, 1998.

Summary of Facts and Representations

1. The applicants describe the Plans and the Accounts as follows:

a. The GUS Plan is an individual account, defined contribution plan

sponsored by Genito-Urinary Surgeons, Inc., a medical practice located

in Toledo, Ohio. The trustee of the GUS Plan is the Fifth-Third Bank.

Currently, the GUS Plan has 45 participants and holds assets valued at

approximately $19,900,000. As of August 12, 1998 the Emmert Account

held assets valued at $1,480,734.07.

[[Page 3343]]

b. The Rosenberg Plan is an individual account, defined

contribution plan sponsored and trusteed by Michael J. Rosenberg.

Currently, the Rosenberg Plan has two participants and holds assets

valued at approximately $266,000. As of December 31, 1997, the

Rosenberg Account held assets valued at $231,380.

c. The Savage Plan is an individual account, defined contribution

plan sponsored and trusteed by Robert Savage. Currently, the Savage

Plan has 45 participants and holds assets valued at $2,200,000. As of

December 31, 1997, the Savage Account held assets valued at

$1,174,488.15.

2. TTC, the issuer of the Preferred Stock, is an Ohio corporation

that was incorporated in April 1990. The Trust Company of Toledo

(TTCOT) is a wholly-owned subsidiary of TTC. The applicant represents

that TTCOT is a ``Bank'' as that term is defined in Section 202(a)(2)

of the Investment Advisers Act of 1940.1

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\1\ The applicant represents that under Section 202(a)(2) of the

Investment Advisers Act of 1940, a ``Bank'' means (A) banking

institution organized under the laws of the United States, (B) a

member bank of the Federal Reserve System, (C) any other institution

or trust company, whether incorporated or not, doing business under

the laws of any State of the United States, a substantial portion of

the business of which consists of receiving deposits or exercising

fiduciary powers similar to those permitted to national banks under

the authority of the U.S. Comptroller of the Currency, and which is

supervised and examined by State or Federal authority having

supervision over banks, and which is not operated for the purpose of

evading the provisions of this subchapter, and (D) a receiver,

conservator, or other liquidating agent of any institution or firm

included in clauses (A), (B), or (C) of this paragraph.

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3. TTC was capitalized with one class of common stock (the Common

Stock), one class of Preferred Stock and $1,000,000 of 9% debentures

(the Debentures). Originally, 3,531 shares of Common Stock were

outstanding prior to the subject transactions. These shares were owned

in equal amounts by Theodore T. Hahn, Julie B. Higgins and David A.

Snavely. These individuals are the three founders, principals and

partners of TTC.

Prior to the subject transactions, there were 20,000 shares of the

Preferred Stock outstanding that were held by 65 different

shareholders. The Preferred Stock was issued by TTC through a private

offering that took place in 1990. The offering provided investors with

the opportunity to acquire units comprised of 200 shares of Preferred

Stock and one $10,000 Debenture, which had a maturity date of December

31, 2000.2 The price for each unit was $30,000. Of this

amount, $20,000 was allocated to the Preferred Stock and $10,000 was

allocated to the Debenture.3

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\2\ The outstanding principal amount of the Debentures held by

the Accounts and other investors was prepaid by TTC in December

1998, prior to the subject transactions, in accordance with terms of

the Debentures.

\3\ Pursuant to the Memorandum, dividends were not expected to

be paid on the Preferred Stock, and no dividends were paid on such

shares.

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The following table outlines the percentage of each Participant's

Account assets invested in the units of Preferred Stock and Debentures

at the time of acquisition and at the time of the subject trans

action:4

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\4\ The Department notes that the Internal Revenue Service has

taken the position that a lack of diversification of investments may

raise questions in regard to the exclusive benefit rule under

section 401(a) of the Code. See, e.g. Rev. Rul. 73-5332, 1973-2 C.B.

128. However, it is not within the purview of the Department's

jurisdiction to express an opinion in this proposed exemption

regarding whether violations of the Code have taken place with

respect to the purchase and subsequent retention of the Stock by Mr.

Rosenberg.

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Shares of

Plan preferred Cost Debenture % Assets % Assets

stock then now

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Emmert......................................... 200 $20,000 $10,000 7.5 5.3

Rosenberg...................................... 200 20,000 10,000 48 23.4

Savage......................................... 200 20,000 10,000 16.5 6.5

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4. While owning shares of the Preferred Stock, each Account had

been a minority shareholder of TTC. However, the applicants represent

that the Participants did not, in their individual capacity, own shares

of the Preferred Stock prior to the subject transactions. As such, the

applicants state that the purchase of shares of the Common Stock by the

Participants pursuant to the subject transaction did not cause any of

the Participants to become majority shareholders of TTC. The applicants

further represent that none of the Participants was, or currently is,

an officer, director, principal or employee of TTC or TTCOT. Finally,

the applicants represent that, at the time of original acquisition of

the Preferred Stock by the Accounts, neither TTC nor TTCOT was a party

in interest with respect to the Plans.

5. TTC recently obtained authority from its shareholders to amend,

by total restatement, its Amended and Restated Articles of

Incorporation. Due to business and income tax considerations, TTC

adopted the Second Amended and Restated Articles of Incorporation to

change its corporate tax status, in accordance with section 1362 of the

Code,5 from a Subchapter C corporation to a Subchapter S

corporation for the taxable years commencing January 1, 1999. As part

of the change, the amendment called for the full conversion of the

Preferred Stock into Common Stock.

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\5\ Section 1362 of the Code contains provisions which allow a

small business corporation to elect and terminate Subchapter-S

corporate status.

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6. On May 1, 1998, TTC sent certain documents to its shareholders,

including the Participants. These documents stated that TTC planned to

redeem, via cancellation, all of the shares of the Preferred Stock held

by those shareholders who would have adverse tax consequences from

continued ownership of shares in a Subchapter S corporation or who were

ineligible to hold shares in a Subchapter S corporation pursuant to the

Code.

TTC provided a mechanism whereby eligible shareholders, including

employee benefit plans, could designate a related party to purchase

shares of TTC Common Stock equal to the number of shares sold by the

Accounts. Such purchase was to be for a cash amount equal to the price

paid per share by TTC for redemption of the Preferred Stock.

7. The applicants request exemptive relief for the sale of the

Preferred Stock by each Account to its respective Participant. The

applicants represent that the Accounts benefitted from significant

appreciation since purchasing the Preferred Stock as demonstrated by

the fact that the value of the Preferred Stock increased from $100 per

share in 1990 to $291.70 as of December 31, 1997.6 The

applicants believe that at the time of the subject transactions, price

levels were such that an excellent opportunity for the sale of the

Preferred Stock existed. Accordingly, they wished to sell the

[[Page 3344]]

Preferred Stock from their respective Accounts to ensure that each

Account realized a substantial profit.

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\6\ As for the Debentures, which were redeemed in annual

installments of $200,000, the outstanding principal amount was

$400,000 as of March 31, 1998.

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In addition, the applicants represented that the continued holding

of the newly issued Common Stock would have caused the Accounts to

incur unrelated business income tax pursuant to section 512 of the

Code.

Due to the aforementioned reasons, the applicants seek relief for

the following transactions: (1) the cash sale of shares of the

Preferred Stock to TTC by the Emmert Account, the Rosenberg Account,

and the Savage Account; and (2) the subsequent purchase under the above

described agreement with TTC of an equal number and value of shares of

the Common Stock by Messrs. Emmert, Rosenberg and Savage, in their own

name, from TTC immediately after the sale by the Accounts.

8. The sales price for the Preferred Stock was obtained through a

written valuation of the shares dated May 6, 1998 prepared by Austin

Financial Services, Inc. (Austin), a qualified, independent consulting

firm with substantial experience in the financial services industry.

Austin was retained by the TTC Board of Directors for the purpose of

valuing TTC and its shares of Preferred Stock and Common Stock. In

determining fair market value of the Preferred and Common Stock, Austin

relied on the discounted cash flow method and the capitalization of

earnings method. After weighing the two methods, Austin determined that

the fair market value of all the outstanding shares of the Preferred

and Common Stock was approximately $7,263,035, or $308.66 per share for

each outstanding share of Preferred and Common Stock. Austin updated

this valuation at the time of the transaction, and reached the same

conclusion regarding the fair market value. Accordingly, each Account

received a total of $61,732 for its shares of Preferred Stock, as of

the date of Conversion.

9. TTC also engaged the law firm of Callister Nebeker & McCullough

of Salt Lake City, Utah (CNM) to serve as the Independent Fiduciary for

the Plans. CNM, which represented that it had experience serving as

independent fiduciary for employee benefit plans, was hired to review

the offer of redemption of the Preferred Stock, to render an opinion as

to the prudence of the investment decisions relating thereto, and to

direct the sale of shares as appropriate. In a report dated April 29,

1998 (the Report), CNM acknowledged its appointment as the Independent

Fiduciary for the Accounts regarding the subject transactions.

As the Independent Fiduciary, CNM determined whether the subject

transactions, and the actions taken by the Accounts in connection

therewith, were in the best interests of such Accounts and in

accordance with the requirements of the Act. Before doing so, each

Participant made a separate determination that the proposed

transactions would be in the best interests of their Accounts.

Subsequent to arriving at this conclusion, a determination was made to

retain CNM as Independent Fiduciary for the Accounts to ensure that the

terms of such transactions, including the appraisal made of the fair

market value of the Preferred Stock, would be protective of the

Accounts.

In a letter dated August 25, 1998 that was submitted to the

Department, CNM acknowledged that, as an independent fiduciary, it

understood the duties and responsibilities imposed by the Act. Further,

CNM concluded that the subject transactions would be prudent and in the

best interest of each of the Accounts. Finally, CNM stated that it

would ensure, among other things, that the fair market value of the

Preferred Stock would be updated on the date of the transactions, and

that each Account would receive the correct amount of cash for the

Preferred Stock.

10. The Independent Fiduciary appointed Houlihan Valuation Advisors

(HVA), an independent appraisal firm maintaining offices in Salt Lake

City, Utah, to provide an opinion as to the fairness (the Fairness

Opinion) of the proposed sale transaction from a financial standpoint.

In the Fairness Opinion, HVA stated that the Preferred Stock was

essentially equivalent to the Common Stock because the Preferred Stock:

(a) was convertible at the option of the holder into Common Stock; (b)

had voting privileges identical to the Common Stock; and (c) paid no

preferred dividends. The Preferred Stock did have a $100 per share

liquidation presence; however, according to HVA, the fair market value

of TTC is significantly higher than its liquidation value, rendering

this liquidation preference virtually meaningless.

Based on the foregoing, HVA concluded that the sale of the

Preferred Stock by the Accounts to TTC would be fair to the Accounts

because the Accounts would receive adequate consideration for their

shares.

11. In summary, the applicant represents that the subject

transactions satisfied the statutory criteria of section 408(a) of the

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

(a) The sale of the Preferred Stock to TTC by the Accounts and the

purchase of the Common Stock from TTC by the Participants, in their

individual capacity, were one-time transactions for cash;

(b) The transactions described in (a) above took place on the same

business day;

(c) The amount paid to the Accounts by TTC was the fair market

value of the Preferred Stock, as determined by a qualified independent

appraiser at the time of the sale;

(d) The Participants, in their individual capacity, purchased from

TTC shares of the Common Stock which were equal in number and value to

the shares of Preferred Stock sold by the Accounts to TTC;

(e) The Independent Fiduciary determined that the transactions

described herein were in the best interests and protective of the

Accounts at the time of the transactions; and

(f) The Independent Fiduciary supervised the transactions; assured

that the conditions of this proposed exemption were met; and took

whatever actions necessary to protect the interests of the Accounts,

including reviewing amounts paid by TTC for the Preferred Stock.

Notice to Interested Persons: Because the only assets of the Plans

involved in the subject transactions are those held in the Accounts,

and no other participants in the Plans are affected by the

transactions, it has been determined that there is no need to

distribute this notice of proposed exemption to any interested persons

other than the Participants. Comments and requests for a hearing on the

proposed exemption are due 30 days after the date of publication of

this notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: James Scott Frazier of the Department,

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

Mellon Financial Markets, Inc. (Mellon) Located in Pittsburgh,

Pennsylvania

[Application No. D-10695]

Proposed Exemption

I. Transactions

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

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

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

following transactions involving trusts and certificates evidencing

interests therein:

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

certificates in the initial issuance of certificates between

[[Page 3345]]

the sponsor or underwriter and an employee benefit plan when the

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

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

is a party in interest with respect to such plan;

(2) The direct or indirect acquisition or disposition of

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

and

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

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

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

exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and

407 for the acquisition or holding of a certificate on behalf of an

Excluded Plan by any person who has discretionary authority or renders

investment advice with respect to the assets of that Excluded

Plan.7

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\7\ Section I.A. provides no relief from sections 406(a)(1)(E),

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

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

regulation 29 CFR 2510.3-21(c).

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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act,

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

of section 4975(c)(1)(E) of the Code, shall not apply to:

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

certificates in the initial issuance of certificates between the

sponsor or underwriter and a plan when the person who has discretionary

authority or renders investment advice with respect to the investment

of plan assets in the certificates is (a) an obligor with respect to 5

percent or less of the fair market value of obligations or receivables

contained in the trust, or (b) an affiliate of a person described in

(a); if:

(i) The plan is not an Excluded Plan;

(ii) Solely in the case of an acquisition of certificates in

connection with the initial issuance of the certificates, at least 50

percent of each class of certificates in which plans have invested is

acquired by persons independent of the members of the Restricted Group

and at least 50 percent of the aggregate interest in the trust is

acquired by persons independent of the Restricted Group;

(iii) A plan's investment in each class of certificates does not

exceed 25 percent of all of the certificates of that class outstanding

at the time of the acquisition; and

(iv) Immediately after the acquisition of the certificates, no more

than 25 percent of the assets of a plan with respect to which the

person has discretionary authority or renders investment advice are

invested in certificates representing an interest in a trust containing

assets sold or serviced by the same entity.8 For purposes of

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

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

that trust;

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\8\ For purposes of this proposed exemption, each plan

participating in a commingled fund (such as a bank collective trust

fund or insurance company pooled separate account) shall be

considered to own the same proportionate undivided interest in each

asset of the commingled fund as its proportionate interest in the

total assets of the commingled fund as calculated on the most recent

preceding valuation date of the fund.

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(2) The direct or indirect acquisition or disposition of

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

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

and (iv) are met; and

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

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

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

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

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

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

provided:

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

of a binding pooling and servicing arrangement; and

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

described in all material respects in, the prospectus or private

placement memorandum provided to investing plans before they purchase

certificates issued by the trust.9

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\9\ In the case of a private placement memorandum, such

memorandum must contain substantially the same information that

would be disclosed in a prospectus if the offering of the

certificates were made in a registered public offering under the

Securities Act of 1933. In the Department's view, the private

placement memorandum must contain sufficient information to permit

plan fiduciaries to make informed investment decisions.

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

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

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

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

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

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

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

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

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

transactions to which those restrictions or taxes would otherwise apply

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

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

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

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

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

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

II. General Conditions

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

following conditions are met:

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

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

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

party;

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

subordinated to the rights and interests evidenced by other

certificates of the same trust;

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

from a rating agency (as defined in section III.W.) at the time of such

acquisition that is in one of the three highest generic rating

categories;

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

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

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

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

pooling and servicing agreement providing for such succession upon the

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

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

underwriters in connection with the distribution or placement of

certificates represents not more than reasonable compensation for

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

to and retained by the sponsor pursuant to the assignment of

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

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

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

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

pooling and servicing agreement and reimbursement of the servicer's

reasonable expenses in connection therewith;

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

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

Securities and

[[Page 3346]]

Exchange Commission under the Securities Act of 1933; and

(7) In the event that the obligations used to fund a trust have not

all been transferred to the trust on the closing date, additional

obligations as specified in subsection III.B.(1) may be transferred to

the trust during the pre-funding period (as defined in section III.BB.)

in exchange for amounts credited to the pre-funding account (as defined

in section III.Z.), provided that:

(a) The pre-funding limit (as defined in section III.AA.) is not

exceeded;

(b) All such additional obligations meet the same terms and

conditions for eligibility as those of the original obligations used to

create the trust corpus (as described in the prospectus or private

placement memorandum and/or pooling and servicing agreement for such

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

rating agency. Notwithstanding the foregoing, the terms and conditions

for determining the eligibility of an obligation may be changed if such

changes receive prior approval either by a majority of the outstanding

certificateholders or by a rating agency;

(c) The transfer of such additional obligations to the trust during

the pre-funding period does not result in the certificates receiving a

lower credit rating from a rating agency upon termination of the pre-

funding period than the rating that was obtained at the time of the

initial issuance of the certificates by the trust;

(d) The weighted average annual percentage interest rate (the

average interest rate) for all of the obligations in the trust at the

end of the pre-funding period will not be more than 100 basis points

lower than the average interest rate for the obligations which were

transferred to the trust on the closing date;

(e) In order to ensure that the characteristics of the receivables

actually acquired during the pre-funding period are substantially

similar to those which were acquired as of the closing date, the

characteristics of the additional obligations will either be monitored

by a credit support provider or other insurance provider which is

independent of the sponsor, or an independent accountant retained by

the sponsor will provide the sponsor with a letter (with copies

provided to the rating agency, the underwriter and the trustees)

stating whether or not the characteristics of the additional

obligations conform to the characteristics of such obligations

described in the prospectus, private placement memorandum and/or

pooling and servicing agreement. In preparing such letter, the

independent accountant will use the same type of procedures as were

applicable to the obligations which were transferred as of the closing

date;

(f) The pre-funding period shall be described in the prospectus or

private placement memorandum provided to investing plans; and

(g) The trustee of the trust (or any agent with which the trustee

contracts to provide trust services) will be a substantial financial

institution or trust company experienced in trust activities and

familiar with its duties, responsibilities and liabilities as a

fiduciary under the Act. The trustee, as the legal owner of the

obligations in the trust, will enforce all the rights created in favor

of certificateholders of such trust, including employee benefit plans

subject to the Act.

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

nor any obligor, unless it or any of its affiliates has discretionary

authority or renders investment advice with respect to the plan assets

used by a plan to acquire certificates, shall be denied the relief

provided under Part I, if the provision of subsection II.A.(6) above is

not satisfied with respect to acquisition or holding by a plan of such

certificates, provided that (1) such condition is disclosed in the

prospectus or private placement memorandum; and (2) in the case of a

private placement of certificates, the trustee obtains a representation

from each initial purchaser which is a plan that it is in compliance

with such condition, and obtains a covenant from each initial purchaser

to the effect that, so long as such initial purchaser (or any

transferee of such initial purchaser's certificates) is required to

obtain from its transferee a representation regarding compliance with

the Securities Act of 1933, any such transferees will be required to

make a written representation regarding compliance with the condition

set forth in subsection II.A.(6) above.

III. Definitions

For purposes of this 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,

interest, and/or other payments made with respect to the assets of such

trust; or

(2) A certificate denominated as a debt instrument--

(a) That represents an interest in a Real Estate Mortgage

Investment Conduit (REMIC) or a Financial Asset Securitization

Investment Trust (FASIT) within the meaning of section 860D(a) or

section 860L, respectively, of the Internal Revenue Code of 1986; and

(b) That is issued by, and is an obligation of, a trust; with

respect to certificates defined in (1) and (2) above for which Mellon

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

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

or placement agent.

For purposes of this 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) (a) Secured consumer receivables that bear interest or are

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

loans and obligations secured by shares issued by a cooperative housing

association); and/or

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

at a discount in transactions by or between business entities

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

leases, as defined in section III.T); and/or

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

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

residential and commercial real property (including obligations secured

by leasehold interests on commercial real property); and/or

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

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

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

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

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

(f) Fractional undivided interests in any of the obligations

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

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

subsection B.(1);

(3) (a) Undistributed cash or temporary investments made therewith

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

made to certificateholders; and/or

(b) Cash or investments made therewith which are credited to an

account to provide payments to certificateholders pursuant to any yield

supplement agreement or similar yield maintenance arrangement to

supplement the interest rates otherwise payable on obligations

described in

[[Page 3347]]

subsection III.B.(1) held in the trust, provided that such arrangements

do not involve swap agreements or other notional principal contracts;

and/or

(c) Cash transferred to the trust on the closing date and permitted

investments made therewith which:

(i) Are credited to a pre-funding account established to purchase

additional obligations with respect to which the conditions set forth

in clauses (a)-(g) of subsection II.A.(7) are met and/or;

(ii) Are credited to a capitalized interest account (as defined in

section III.X.); and

(iii) Are held in the trust for a period ending no later than the

first distribution date to certificateholders occurring after the end

of the pre-funding period.

For purposes of this clause (c) of subsection III.B.(3), the term

``permitted investments'' means investments which are either: (i)

Direct obligations of, or obligations fully guaranteed as to timely

payment of principal and interest by the United States, or any agency

or instrumentality thereof, provided that such obligations are backed

by the full faith and credit of the United States or (ii) have been

rated (or the obligor has been rated) in one of the three highest

generic rating categories by a rating agency; are described in the

pooling and servicing agreement; and are permitted by the rating

agency; and

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

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

guarantees, contracts of suretyship, yield supplement agreements

described in clause (b) of subsection III.B.(3) and other credit

support arrangements with respect to any obligations described in

subsection III.B.(1).

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

any investment pool unless: (i) the investment pool consists only of

assets of the type described in clauses (a) through (f) of subsection

III.B.(1) which have been included in other investment pools, (ii)

certificates evidencing interests in such other investment pools have

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

rating agency for at least one year prior to the plan's acquisition of

certificates pursuant to this proposed 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

proposed exemption.

C. ``Underwriter'' means:

(1) Mellon;

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

intermediaries, controlling, controlled by or under common control with

Mellon; or

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

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

with respect to the certificates.

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

depositing obligations therein in exchange for certificates.

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

pooling and servicing agreement relating to trust assets and is fully

responsible for servicing, directly or through subservicers, the assets

of the trust.

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

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

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

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

the trust, including the master servicer and any subservicer.

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

certificates which are denominated as debt instruments, also means the

trustee of the indenture trust.

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

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

person is not an insurer solely because it holds securities

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

to certificates representing an interest in the same trust.

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

obligated to make payments with respect to any obligation or receivable

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

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

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

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

in the trust.

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

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

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

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

means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

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

in the trust constituting more than 5 percent of the aggregate

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

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

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

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

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

intermediaries, controlling, controlled by, or under common control

with such other person;

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

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

brother or sister of such other person; and

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

officer, director or partner.

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

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

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

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

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

who has investment management authority or renders investment advice

with respect to any assets of such person.

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

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

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

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

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

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

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

delivery commitment; and

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

exemption (if granted) applicable to sales are met.

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

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

agreed future settlement date. The term includes both mandatory

contracts (which contemplate obligatory delivery and acceptance of the

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

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

of certificates from, the other party).

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

defined in 29 CFR 2550.408c-2.

[[Page 3348]]

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

following criteria:

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

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

obligations;

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

to act referred to in (1);

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

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

set forth in the pooling and servicing agreement; and

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

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

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

equipment note:

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

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

under the equipment lease; and

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

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

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

and not the lease.

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

vehicle where:

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

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

vehicle; and

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

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

trust consisted of motor vehicle installment loan contracts.

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

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

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

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

indenture entered into by the trustee of the trust issuing such

certificates and the indenture trustee.

W. ``Rating Agency'' means Standard & Poor's Structured Rating

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

Credit Rating Co. (D & P) or Fitch IBCA, Inc. (Fitch), or their

successors.

X. ``Capitalized Interest Account'' means a trust account: (i)

which is established to compensate certificateholders for shortfalls,

if any, between investment earnings on the pre-funding account and the

pass-through rate payable under the certificates; and (ii) which meets

the requirements of clause (c) of subsection III.B.(3).

Y. ``Closing Date'' means the date the trust is formed, the

certificates are first issued and the trust's assets (other than those

additional obligations which are to be funded from the pre-funding

account pursuant to subsection II.A.(7)) are transferred to the trust.

Z. ``Pre-Funding Account'' means a trust account: (i) which is

established to purchase additional obligations, which obligations meet

the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and

(ii) which meets the requirements of clause (c) of subsection

III.B.(3).

AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount

allocated to the pre-funding account, as compared to the total

principal amount of the certificates being offered which is less than

or equal to 25 percent.

BB. ``Pre-Funding Period'' means the period commencing on the

closing date and ending no later than the earliest to occur of: (i) the

date the amount on deposit in the pre-funding account is less than the

minimum dollar amount specified in the pooling and servicing agreement;

(ii) the date on which an event of default occurs under the pooling and

servicing agreement; or (iii) the date which is the later of three

months or 90 days after the closing date.

CC. ``Mellon'' means Mellon Financial Markets, Inc. and its

affiliates.

The Department notes that this proposed exemption is included

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

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

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

Involving Insurance Company General Accounts (see 60 FR at 35932).

Summary of Facts and Representations

1. Mellon is a broker-dealer registered with the Securities and

Exchange Commission and is a member of the National Association of

Securities Dealers, Inc. As of December 31, 1997, it had total assets

of $78.8 million.

Mellon is a wholly-owned subsidiary of Mellon Bank Corporation

(MBC), a bank holding with its principal offices located in Pittsburgh,

Pennsylvania. Mellon was established as a broker-dealer subsidiary of

MBC pursuant to an order of the U.S. Federal Reserve Board effective

April 17, 1995, as modified by a release adopted December 20, 1996 (as

modified, the Order). The Federal Reserve Board regulates MBC as a bank

holding company and restricts non-banking activities of MBC and its

affiliates under the Glass-Steagall Act.

Under the Order, Mellon is authorized to engage, to a limited

extent, in underwriting and dealing in certain mortgage-related

securities, municipal revenue bonds, commercial paper and consumer

receivables-related securities. In addition, Mellon is authorized to

act as agent in the private placement of all types of securities,

including providing related advisory services, and to buy and sell

securities on the order of investors. The Order is subject to the

condition that Mellon does not derive more than a limited percentage of

its total gross revenues over any two-year period from underwriting and

dealing in certain categories of securities, including asset-backed

securities of the type described herein.

Several other broker-dealer subsidiaries of bank holding companies

have been authorized by the Federal Reserve Board to engage in so-

called ``Tier 2'' activities (in addition to the ``Tier 1'' activities

described in the Order), including the ability to underwrite and deal

in all types of debt and equity securities. Mellon intends to apply for

the additional authorization and hopes to obtain an approving order

from the Federal Reserve Board in the near future.

Mellon has been involved in the structuring and placement of asset-

backed securities transactions since November 1995. Mellon has served

as co-lead underwriter in public offerings of certificates backed by

insurance premium finance loans, home equity revolving line of credit

loans, residential mortgage loans and credit card receivables,

involving amounts ranging from $200 million up to $869 million. In

March, 1997, Mellon instituted a program to securitize mortgage-related

assets.

MBC, the parent of Mellon, is one of the largest commercial banking

organizations in the United States, with total assets of approximately

$45 billion as of the end of 1997 (and approximately $1.5 trillion in

assets under management and administration). MBC's subsidiaries include

Mellon Bank, N.A., a leading national bank that provides a full range

of corporate and consumer banking, trust, custody and investment

management services, and The Dreyfus Corporation, a sponsor of

investment companies (i.e., mutual funds) registered under the

Investment Company Act of 1940.

Trust Assets

2. Mellon seeks exemptive relief to permit plans to invest in pass-

through certificates representing undivided interests in the following

categories of trusts: (1) single and multi-family

[[Page 3349]]

residential or commercial mortgage investment trusts; 10 (2)

motor vehicle receivable investment trusts; (3) consumer or commercial

receivables investment trusts; and (4) guaranteed governmental mortgage

pool certificate investment trusts.11

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\10\ The Department notes that PTE 83-1 [48 FR 895, January 7,

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

generally apply to trusts containing single-family residential

mortgages, provided that the applicable conditions of PTE 83-1 are

met. Mellon requests relief for single-family residential mortgages

in this exemption because it would prefer one exemption for all

trusts of similar structure. However, Mellon has stated that it may

still avail itself of the exemptive relief provided by PTE 83-1.

\11\ Guaranteed governmental mortgage pool certificates are

mortgage-backed securities with respect to which interest and

principal payable is guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan Mortgage Corporation

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

Department's regulation relating to the definition of ``plan

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

a guaranteed governmental mortgage pool certificate, the plan's

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

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

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

mortgages underlying such certificate. The applicant is requesting

exemptive relief for trusts containing guaranteed governmental

mortgage pool certificates because the certificates in the trusts

may be plan assets.

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3. Commercial mortgage investment trusts may include mortgages on

ground leases of real property. Commercial mortgages are frequently

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

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

ground lease interest is generally done for tax reasons. Properly

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

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

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

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

least ten years longer than the term of such mortgages.12

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\12\ Trust assets may also include obligations that are secured

by leasehold interests on residential real property. See PTE 90-32

involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,

1990 at 23150).

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Trust Structure

4. Each trust is established under a pooling and servicing

agreement between a sponsor, a servicer and a trustee.13 The

sponsor or servicer of a trust selects assets to be included in the

trust.14 These assets are receivables which may have been

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

sponsor or servicer, or by an unrelated lender and subsequently

acquired by the trust sponsor or servicer.15

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\13\ The Department is of the view that the term ``trust''

includes a trust: (a) the assets of which, although all specifically

identified by the sponsor or the originator as of the closing date,

are not all transferred to the trust on the closing date for

administrative or other reasons but will be transferred to the trust

shortly after the closing date, or (b) with respect to which

certificates are not purchased by plans until after the end of the

pre-funding period at which time all receivables are contained in

the trust.

\14\ It is the Department's view that the definition of

``trust'' contained in section III.B. includes a two-tier structure

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

pool of receivables described above, are transferred to a second

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

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

relief for the direct or indirect acquisition or disposition of

certificates that are not subordinated, no relief would be available

if the certificates held by the second trust were subordinated to

the rights and interests evidenced by other certificates issued by

the first trust.

\15\ It is the view of the Department that section III.B.(4)

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

any yield supplement or similar arrangement which obligates the

sponsor or master servicer, or another party specified in the

relevant pooling and servicing agreement, to supplement the interest

rates otherwise payable on the obligations described in section

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

arrangement described in the pooling and servicing agreement,

provided that such arrangements do not involve swap agreements or

other notional principal contracts.

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Typically, on or prior to the closing date, the sponsor acquires

legal title to all assets selected for the trust, establishes the trust

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

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

trustee issues certificates representing fractional undivided interests

in the trust assets. Typically, all receivables to be held in the trust

are transferred as of the closing date, but in some transactions, as

described more fully below, a limited percentage of the receivables to

be held in the trust may be transferred during a limited period of time

following the closing date, through the use of a pre-funding account.

Mellon, alone or together with other broker-dealers, acts as

underwriter or placement agent with respect to the sale of the

certificates. All of the public offerings of certificates presently

contemplated are to be underwritten by Mellon on a firm commitment

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

certificates on both a firm commitment and an agency basis. Mellon may

also act as the lead underwriter for a syndicate of securities

underwriters.

Certificateholders will be entitled to receive distributions of

principal and/or interest, or lease payments due on the receivables,

adjusted, in the case of payments of interest, to a specified rate--the

pass-through rate--which may be fixed or variable. These distributions

will be made monthly, quarterly, semi-annually, or at such other

intervals and dates as specified in the related prospectus or private

placement memorandum.

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

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

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

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

certificateholders) to hold funds received between distribution dates.

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

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

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

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

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

received from obligors by the servicer may be commingled with the

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

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

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

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

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

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

delivered to the trustee, it will be made available to

certificateholders and delivered to or made available to each rating

agency that has rated the certificates.

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

Mellon requests exemptive relief for two types of multi-class

certificates: ``strip'' certificates and ``fast-pay/slow-pay''

certificates. Strip certificates are a type of security in which the

stream of interest payments on receivables is split from the flow of

principal payments and separate classes of certificates are

established, each representing rights to disproportionate payments of

principal and interest.16

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\16\ It is the Department's understanding that where a plan

invests in REMIC ``residual'' interest certificates to which this

exemption applies, some of the income received by the plan as a

result of such investment may be considered unrelated business

taxable income to the plan, which is subject to income tax under the

Code. The Department emphasizes that the prudence requirement of

section 404(a)(l)(B) of the Act would require plan fiduciaries to

carefully consider this and other tax consequences prior to causing

plan assets to be invested in certificates pursuant to this proposed

exemption.

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

of certificates having different stated maturities or the same

maturities with

[[Page 3350]]

different payment schedules. Interest and/or principal payments

received on the underlying receivables are distributed first to the

class of certificates having the earliest stated maturity of principal,

and/or earlier payment schedule, and only when that class of

certificates has been paid in full (or has received a specified amount)

will distributions be made with respect to the second class of

certificates. Distributions on certificates having later stated

maturities will proceed in like manner until all the certificateholders

have been paid in full. The only difference between this multi-class

pass-through arrangement and a single-class pass-through arrangement is

the order in which distributions are made to certificateholders. In

each case, certificateholders will have a beneficial ownership interest

in the underlying assets. In neither case will the rights of a plan

purchasing a certificate be subordinated to the rights of another

certificateholder in the event of default on any of the underlying

obligations. In particular, if the amount available for distribution to

certificateholders is less than the amount required to be so

distributed, all senior certificateholders then entitled to receive

distributions will share in the amount distributed on a pro rata

basis.17

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\17\ If a trust issues subordinated certificates, holders of

such subordinated certificates may not share in the amount

distributed on a pro rata basis with the senior certificateholders.

The Department notes that the proposed exemption does not provide

relief for plan investment in such subordinated certificates.

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6. The trust will be maintained as an essentially passive entity.

Therefore, both the sponsor's discretion and the servicer's discretion

with respect to assets included in a trust are severely limited.

Pooling and servicing agreements provide for the substitution of

receivables by the sponsor only in the event of defects in

documentation discovered within a short time after the issuance of

trust certificates (within 120 days, except in the case of obligations

having an original term of 30 years, in which case the period will not

exceed two years). Any receivable so substituted is required to have

characteristics substantially similar to the replaced receivable and

will be at least as creditworthy as the replaced receivable.

In some cases, the affected receivable would be repurchased, with

the purchase price applied as a payment on the affected receivable and

passed through to certificateholders.

In some cases the trust will be maintained as a Financial Asset

Securitization Investment Trust (``FASIT''), a statutory entity created

by the Small Business Job Protection Act of 1996, adding sections 860H,

860J, 860K and 860L to the Code. In general, a FASIT is designed to

facilitate the securitization of debt obligations, such as credit card

receivables, home equity loans, and auto loans, and thus, allows

certain features such as revolving pools of assets, trusts containing

unsecured receivables and certain hedging types of investments. A FASIT

is not a taxable entity and debt instruments issued by such trusts,

which might otherwise be recharacterized as equity, will be treated as

debt in the hands of the holder for tax purposes. However, a trust

which is the subject of the proposed exemption will be maintained as a

FASIT only where the assets held by the FASIT will be comprised of

secured debt; revolving pools of assets or hedging investments will not

be allowed unless specifically authorized by the exemption, if granted,

so that a trust maintained as a FASIT will be maintained as an

essentially passive entity.

Trust Structure With Pre-Funding Account

Pre-Funding Accounts

7. As described briefly above, some transactions may be structured

using a pre-funding account or a capitalized interest account. If pre-

funding is used, cash sufficient to purchase the receivables to be

transferred after the closing date will be transferred to the trust by

the sponsor or originator on the closing date. During the pre-funding

period, such cash and temporary investments, if any, made therewith

will be held in a pre-funding account and used to purchase the

additional receivables, the characteristics of which will be

substantially similar to the characteristics of the receivables

transferred to the trust on the closing date. The pre-funding period

for any trust will be defined as the period beginning on the closing

date and ending on the earliest to occur of (i) the date on which the

amount on deposit in the pre-funding account is less than a specified

dollar amount, (ii) the date on which an event of default occurs under

the related pooling and servicing agreement or (iii) the date which is

the later of three months or ninety (90) days after the closing date.

Certain specificity and monitoring requirements described below will be

met and will be disclosed in the pooling and servicing agreement and/or

the prospectus or private placement memorandum.

For transactions involving a trust using pre-funding, on the

closing date, a portion of the offering proceeds will be allocated to

the pre-funding account generally in an amount equal to the excess of

(i) the principal amount of certificates being issued over (ii) the

principal balance of the receivables being transferred to the trust on

such closing date. In certain transactions, the aggregate principal

balance of the receivables intended to be transferred to the trust may

be larger than the total principal balance of the certificates being

issued. In these cases, the cash deposited in the pre-funding account

will equal the excess of the principal balance of the total receivables

intended to be transferred to the trust over the principal balance of

the receivables being transferred on the closing date.

On the closing date, the sponsor transfers the assets to the trust

in exchange for the certificates. The certificates are then sold to an

underwriter for cash or to the certificateholders directly if the

certificates are sold through a placement agent. The cash received by

the sponsor from the certificateholders (or the underwriter) from the

sale of the certificates issued by the trust in excess of the purchase

price for the receivables and certain other trust expenses, such as

underwriting or placement agent fees and legal and accounting fees,

constitutes the cash to be deposited in the pre-funding account. Such

funds are either held in the trust and accounted for separately, or are

held in a sub-trust. In either event, these funds are not part of

assets of the sponsor.

Generally, the receivables are transferred at par value, unless the

interest rate payable on the receivables is not sufficient to service

both the interest rates to be paid on the certificates and the

transaction fees (i.e., servicing fees, trustee fees and fees to credit

support providers). In such cases, the receivables are sold to the

trust at a discount, based on an objective, written, mechanical formula

which is set forth in the pooling and servicing agreement and agreed

upon in advance between the sponsor, the rating agency and any credit

support provider or other insurer. The proceeds payable to the sponsor

from the sale of the receivables transferred to the trust may also be

reduced to the extent they are used to pay transaction costs (which

typically include underwriting or placement agent fees and legal and

accounting fees). In addition, in certain cases, the sponsor may be

required by the rating agencies or credit support providers to set up

trust reserve accounts to protect the certificateholders against credit

losses.

The pre-funding account of any trust will be limited so that the

percentage or

[[Page 3351]]

ratio of the amount allocated to the pre-funding account, as compared

to the total principal amount of the certificates being offered (the

pre-funding limit) will not exceed 25%. The pre-funding limit (which

may be expressed as a ratio or as a stated percentage or a combination

thereof) will be specified in the prospectus or the private placement

memorandum.

Any amounts paid out of the pre-funding account are used solely to

purchase receivables and to support the certificate pass-through rate

(as explained below). Amounts used to support the pass-through rate are

payable only from investment earnings and are not payable from

principal. However, in the event that, after all of the requisite

receivables have been transferred into the trust, any funds remain in

the pre-funding account, such funds will be paid to the

certificateholders as principal prepayments. Upon termination of the

trust, if no receivables remain in the trust and all amounts payable to

certificateholders have been distributed, any amounts remaining in the

trust would be returned to the sponsor.

A dramatic change in interest rates on the receivables held in a

trust using a pre-funding account would be handled as follows. If the

receivables (other than those with adjustable or variable rates) had

already been originated prior to the closing date, no action would be

required as the fluctuations in the market interest rates would not

affect the receivables transferred to the trust after the closing date.

In contrast, if interest rates fall after the closing date, loans

originated after the closing date will tend to be originated at lower

rates, with the possible result that the receivables will not support

the certificate pass-through rate. In such situations, the sponsor

could sell the receivables into the trust at a discount, and more

receivables would be used to fund the trust in order to support the

pass-through rate. In a situation where interest rates drop

dramatically and the sponsor is unable to provide sufficient

receivables at the requisite interest rates, the pool of receivables

would be closed. In this latter event, under the terms of the pooling

and servicing agreement, the certificateholders would receive a

repayment of principal from the unused cash held in the pre-funding

account. In transactions where the certificate pass-through rates are

variable or adjustable, the effects of market interest rate

fluctuations are mitigated. In no event will fluctuations in interest

rates payable on the receivable affect the pass-through rate for fixed

rate certificates.

The cash deposited into the trust and allocated to the pre-funding

account is invested in certain permitted investments (see below), which

may be commingled with other accounts of the trust. The allocation of

investment earnings to each trust account is made periodically as

earned in proportion to each account's allocable share of the

investment returns. As pre-funding account investment earnings are

required to be used to support (to the extent authorized in the

particular transaction) the pass-through amounts payable to the

certificateholders with respect to a periodic distribution date, the

trustee is necessarily required to make periodic, separate allocations

of the trust's earning to each trust account, thus ensuring that all

allocable commingled investment earnings are properly credited to the

pre-funding account on a timely basis.

The Capitalized Interest Account

8. In certain transactions where a pre-funding account is used, the

sponsor and/or originator may also transfer to the trust additional

cash on the closing date, which is deposited in a capitalized interest

account and used during the pre-funding period to compensate the

certificateholders for any shortfall between the investment earnings on

the pre-funding account and the pass-through interest rate payable

under the certificates.

The capitalized interest account is needed in certain transactions

since the certificates are supported by the receivables and the

earnings on the pre-funding account, and it is unlikely that the

investment earnings on the pre-funding account will equal the interest

rates on the certificates (although such investment earnings will be

available to pay interest on the certificates). The capitalized

interest account funds are paid out periodically to the

certificateholders as needed on distribution dates to support the pass-

through rate. In addition, a portion of such funds may be returned to

the sponsor from time to time as the receivables are transferred into

the trust and the need for the capitalized interest account diminishes.

Any amounts held in the capitalized interest account generally will be

returned to the sponsor and/or originator either at the end of the pre-

funding period or periodically as receivables are transferred and the

proportionate amount of funds in the capitalized interest account can

be reduced. Generally, the capitalized interest account terminates no

later than the end of the pre-funding period. However, there may be

some cases where the capitalized interest account remains open until

the first date distributions are made to certificateholders following

the end of the pre-funding period.

In other transactions, a capitalized interest account is not

necessary because the interest paid on the receivables exceeds the

interest payable on the certificates at the applicable pass-through

rate and the fees of the trust. Such excess is sufficient to make up

any shortfall resulting from the pre-funding account earning less than

the certificate pass-through rate. In certain of these transactions,

this occurs because the aggregate principal amount of receivables

exceeds the aggregate principal amount of certificates.

Pre-Funding Account and Capitalized Interest Account Payments and

Investments

9. Pending the acquisition of additional receivables during the

pre-funding period, it is expected that amounts in the pre-funding

account and the capitalized interest account will be invested in

certain permitted investments or will be held uninvested. Pursuant to

the pooling and servicing agreement, all permitted investments must

mature prior to the date the actual funds are needed. The permitted

types of investments in the pre-funding account and capitalized

interest account are investments which are either: (i) direct

obligations of, or obligations fully guaranteed as to timely payment of

principal and interest by, the United States or any agency or

instrumentality thereof, provided that such obligations are backed by

the full faith and credit of the United States or (ii) have been rated

(or the obligor has been rated) in one of the three highest generic

rating categories by a rating agency, as set forth in the pooling and

servicing agreement and as required by the rating agencies. The credit

grade quality of the permitted investments is generally no lower than

that of the certificates. The types of permitted investments will be

described in the pooling and servicing agreement.

The ordering of interest payments to be made from the pre-funding

and capitalized interest accounts is pre-established and set forth in

the pooling and servicing agreement. The only principal payments which

will be made from the pre-funding account are those made to acquire the

receivables during the pre-funding period and those distributed to the

certificateholders in the event that the entire amount in the pre-

funding account is not used to acquire receivables. The only principal

payments which will be made from the capitalized interest account are

those made to certificateholders if necessary

[[Page 3352]]

to support the certificate pass-through rate or those made to the

sponsor either periodically as they are no longer needed or at the end

of the pre-funding period when the capitalized interest account is no

longer necessary.

The Characteristics of the Receivables Transferred During the Pre-

Funding Period

10. In order to ensure that there is sufficient specificity as to

the representations and warranties of the sponsor regarding the

characteristics of the receivables to be transferred after the closing

date:

(i) All such receivables will meet the same terms and conditions

for eligibility as those of the original receivables used to create the

trust corpus (as described in the prospectus or private placement

memorandum and/or pooling and servicing agreement for such

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

rating agency. However, the terms and conditions for determining the

eligibility of a receivable may be changed if such changes receive

prior approval either by a majority vote of the outstanding

certificateholders or by a rating agency;

(ii) The transfer to the trust of the receivables acquired during

the pre-funding period will not result in the certificates receiving a

lower credit rating from the rating agency upon termination of the pre-

funding period than the rating that was obtained at the time of the

initial issuance of the certificates by the trust;

(iii) The weighted average annual percentage interest rate (the

average interest rate) for all of the obligations in the trust at the

end of the pre-funding period will not be more than 100 basis points

lower than the average interest rate for the obligations which were

transferred to the trust on the closing date;

(iv) The trustee of the trust (or any agency with which the trustee

contracts to provide trust services) will be a substantial financial

institution or trust company experienced in trust activities and

familiar with its duties, responsibilities, and liabilities as a

fiduciary under the Act. The trustee, as the legal owner of the

obligations in the trust, will enforce all the rights created in favor

of certificateholders of such trust, including employee benefit plans

subject to the Act.

In order to ensure that the characteristics of the receivables

actually acquired during the pre-funding period are substantially

similar to receivables that were acquired as of the closing date, the

characteristics of the additional obligations subsequently acquired

will either be: (i) monitored by a credit support provider or other

insurance provider which is independent of the sponsor; or (ii) an

independent accountant retained by the sponsor will provide the sponsor

with a letter (with copies provided to the rating agency, Mellon and

the trustee) stating whether or not the characteristics of the

additional obligations acquired after the closing date conform to the

characteristics of such obligations described in the prospectus,

private placement memorandum and/or pooling and servicing agreement. In

preparing such letter, the independent accountant will use the same

type of procedures as were applicable to the obligations which were

transferred as of the closing date.

Each prospectus, private placement memorandum and/or pooling and

servicing agreement will set forth the terms and conditions for

eligibility of the receivables to be included in the trust as of the

related closing date, as well as those to be acquired during the pre-

funding period, which terms and conditions will have been agreed to by

the rating agencies which are rating the applicable certificates as of

the closing date. Also included among these conditions is the

requirement that the trustee be given prior notice of the receivables

to be transferred, along with such information concerning those

receivables as may be requested. Each prospectus or private placement

memorandum will describe the amount to be deposited in, and the

mechanics of, the pre-funding account and will describe the pre-funding

period for the trust.

Parties to Transactions

11. The originator of a receivable is the entity that initially

lends money to a borrower (obligor), such as a home-owner or automobile

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

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

a trust sponsor.

Originators of receivables included in the trusts will be entities

that originate receivables in the ordinary course of their businesses,

including finance companies for whom such origination constitutes the

bulk of their operations, financial institutions for whom such

origination constitutes a substantial part of their operations, and any

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

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

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

receivables may also function as the trust sponsor or servicer.

12. The sponsor will be one of three entities: (i) a special-

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

special-purpose or other corporation affiliated with the servicer, or

(iii) the servicer itself. Where the sponsor is not also the servicer,

the sponsor's role will generally be limited to acquiring the

receivables to be included in the trust, establishing the trust,

designating the trustee, and assigning the receivables to the trust.

13. The trustee of a trust is the legal owner of the obligations in

the trust. The trustee is also a party to or beneficiary of all the

documents and instruments deposited in the trust, and as such is

responsible for enforcing all the rights created thereby in favor of

certificateholders.

The trustee will be an independent entity, and therefore will be

unrelated to Mellon, the trust sponsor, the servicer or any other

member of the Restricted Group (as defined in section III.L.). Mellon

represents that the trustee will be a substantial financial institution

or trust company experienced in trust activities. The trustee receives

a fee for its services, which will be paid by the servicer or sponsor

or out of the trust assets. The method of compensating the trustee

which is specified in the pooling and servicing agreement will be

disclosed in the prospectus or private placement memorandum relating to

the offering of the certificates.

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

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

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

maintaining records of payments received on receivables and instituting

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

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

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

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

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

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

a receivable continues to be serviced from the perspective of the

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

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

master servicer who collects payments from the local subservicers and

passes them through to certificateholders.

Receivables of the type suitable for inclusion in a trust

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

sale, the servicer

[[Page 3353]]

keeps the sold receivables on the computer system in order to continue

monitoring the accounts. Although the records relating to sold

receivables are kept in the same master file as receivables retained by

the originator, the sold receivables are flagged as having been sold.

To protect the investor's interest, the servicer ordinarily covenants

that this ``sold flag'' will be included in all records relating to the

sold receivables, including the master file, archives, tape extracts

and printouts.

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

manner in which the servicer performs the billing, posting and

collection procedures related to the sold receivables. However, the

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

of reporting all activity on those receivables after their sale to

investors.

Depending on the type of receivable and the details of the

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

reports can be adapted for investor reporting with little or no

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

calculations to fulfill the investor reporting responsibilities. These

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

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

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

books and reviewed by public accountants.

The underwriter (i.e., Mellon, its affiliate, or a member of an

underwriting syndicate or selling group of which Mellon or its

affiliate is a manager or co-manager) will be a registered broker-

dealer that acts as underwriter or placement agent with respect to the

sale of the certificates. Public offerings of certificates are

generally made on a firm commitment basis. Private placement of

certificates may be made on a firm commitment or agency basis. It is

anticipated that the lead and co-managing underwriters will make a

market in certificates offered to the public.

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

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

themselves be related) will be unrelated to Mellon. In other cases,

however, affiliates of Mellon may originate or service receivables

included in a trust or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

15. In some cases, the sponsor will obtain the receivables from

various originators pursuant to existing contracts with such

originators under which the sponsor continually buys receivables. In

other cases, the sponsor will purchase the receivables at fair market

value from the originator or a third party pursuant to a purchase and

sale agreement related to the specific offering of certificates. In

other cases, the sponsor will originate the receivables itself.

As compensation for the receivables transferred to the trust, the

sponsor receives certificates representing the entire beneficial

interest in the trust, or the cash proceeds of the sale of such

certificates. If the sponsor receives certificates from the trust, the

sponsor sells all or a portion of these certificates for cash to

investors or securities underwriters.

16. The price of the certificates, both in the initial offering and

in the secondary market, is affected by market forces, including

investor demand, the pass-through interest rate on the certificates in

relation to the rate payable on investments of similar types and

quality, expectations as to the effect on yield resulting from

prepayment of underlying receivables, and expectations as to the

likelihood of timely payment.

The pass-through rate for certificates is equal to the interest

rate on receivables included in the trust minus a specified servicing

fee.18 This rate is generally determined by the same market

forces that determine the price of a certificate. The price of a

certificate and its pass-through, or coupon, rate together determine

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

than par, that discount augments the stated pass-through rate;

conversely, a certificate purchased at a premium yields less than the

stated coupon.

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

\18\ The pass-through rate on certificates representing

interests in trusts holding leases is determined by breaking down

lease payments into ``principal'' and ``interest'' components based

on an implicit interest rate.

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

17. As compensation for performing its servicing duties, the

servicer (who may also be the sponsor or an affiliate thereof, and

receive fees for acting in that capacity) will retain the difference

between payments received on the receivables in the trust and payments

payable (at the pass-through rate) to certificateholders, except that

in some cases a portion of the payments on receivables may be paid to a

third party, such as a fee paid to a provider of credit support. The

servicer may receive additional compensation by having the use of the

amounts paid on the receivables between the time they are received by

the servicer and the time they are due to the trust (which time is set

forth in the pooling and servicing agreement). The servicer typically

will be required to pay the administrative expenses of servicing the

trust, including in some cases the trustee's fee, out of its servicing

compensation.

The servicer is also compensated to the extent it may provide

credit enhancement to the trust or otherwise arrange to obtain credit

support from another party. This ``credit support fee'' may be

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

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

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

established.

18. The servicer may be entitled to retain certain administrative

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

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

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

associated with foreclosure or repossession, or other conversion of a

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

Compensation payable to the servicer will be set forth or referred

to in the pooling and servicing agreement and described in reasonable

detail in the prospectus or private placement memorandum relating to

the certificates.

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

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

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

servicing agreement may permit the servicer to place these payments in

non-interest bearing accounts maintained with itself or to commingle

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

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

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

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

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

or receivership. In those instances when payments on receivables are

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

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

payments by a date specified in the pooling and servicing agreement

into an account from which the trustee makes payments to

certificateholders.

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

securities underwriting or private placement of certificates. In a firm

commitment underwriting, this fee would consist of

[[Page 3354]]

the difference between what the underwriter receives for the

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

certificates. In a private placement, the fee normally takes the form

of an agency commission paid by the sponsor. In a best efforts

underwriting in which the underwriter would sell certificates in a

public offering on an agency basis, the underwriter would receive an

agency commission rather than a fee based on the difference between the

price at which the certificates are sold to the public and what it pays

the sponsor. In some private placements, the underwriter may buy

certificates as principal, in which case its compensation would be the

difference between what it receives for the certificates that it sells

and what it pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

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

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

administering the trust generally increases, making the servicing of

the trust prohibitively expensive at some point. Consequently, the

pooling and servicing agreement generally provides that the servicer

may purchase the receivables remaining in the trust when the aggregate

unpaid balance payable on the receivables is reduced to a specified

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

balance.

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

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

principal balance on the receivable plus accrued interest, less any

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

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

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

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

Certificate Ratings

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

ratings available from a rating agency. Insurance or other credit

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

overcollateralization) will be obtained by the trust sponsor to the

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

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

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

for the type of obligations included in the issuing trust.

Provision of Credit Support

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

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

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

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

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

payments by the obligors, (b) from the credit support provider (which

may be the master servicer or an affiliate thereof) or, (c) in the case

of a trust that issues subordinated certificates, from amounts

otherwise distributable to holders of subordinated certificates, and

the master servicer will advance such funds in a timely manner. When

the servicer is the provider of the credit support and provides its own

funds to cover defaulted payments, it will do so either on the

initiative of the trustee, or on its own initiative on behalf of the

trustee, but in either event it will provide such funds to cover

payments to the full extent of its obligations under the credit support

mechanism. In some cases, however, the master servicer may not be

obligated to advance funds but instead would be called upon to provide

funds to cover defaulted payments to the full extent of its obligations

as insurer. Moreover, a master servicer typically can recover advances

either from the provider of credit support or from future payments on

the affected assets.

If the master servicer fails to advance funds, fails to call upon

the credit support mechanism to provide funds to cover delinquent

payments, or otherwise fails in its duties, the trustee would be

required and would be able to enforce the certificateholders' rights,

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

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

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

the ultimate right to enforce the credit support arrangement.

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

recoverable by the master servicer out of future payments on

receivables held by the trust to the extent not covered by credit

support. However, where the master servicer provides credit support to

the trust, there are protections in place to guard against a delay in

calling upon the credit support to take advantage of the fact that the

credit support declines proportionally with the decrease in the

principal amount of the obligations in the trust as payments on

receivables are passed through to investors. These safeguards include:

(a) There is often a disincentive to postponing credit losses

because the sooner repossession or foreclosure activities are

commenced, the more value that can be realized on the security for the

obligation;

(b) The master servicer has servicing guidelines which include a

general policy as to the allowable delinquency period after which an

obligation ordinarily will be deemed uncollectible. The pooling and

servicing agreement will require the master servicer to follow its

normal servicing guidelines and will set forth the master servicer's

general policy as to the period of time after which delinquent

obligations ordinarily will be considered uncollectible;

(c) As frequently as payments are due on the receivables included

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

pooling and servicing agreement), the master servicer is required to

report to the independent trustee the amount of all past-due payments

and the amount of all servicer advances, along with other current

information as to collections on the receivables and draws upon the

credit support. Further, the master servicer is required to deliver to

the trustee annually a certificate of an executive officer of the

master servicer stating that a review of the servicing activities has

been made under such officer's supervision, and either stating that the

master servicer has fulfilled all of its obligations under the pooling

and servicing agreement or, if the master servicer has defaulted under

any of its obligations, specifying any such default. The master

servicer's reports are reviewed at least annually by independent

accountants to ensure that the master servicer is following its normal

servicing standards and that the master servicer's reports conform to

the master servicer's internal accounting records. The results of the

independent accountants' review are delivered to the trustee; and

(d) The credit support has a ``floor'' dollar amount that protects

investors against the possibility that a large number of credit losses

might occur towards the end of the life of the trust, whether due to

servicer advances or any other cause. Once the floor amount has been

reached, the servicer lacks an incentive to postpone the recognition of

credit losses because the credit support amount thereafter is subject

to reduction only for actual draws. From the time that the floor amount

is effective until the end of the life of the trust, there are no

proportionate reductions in the credit support amount caused by

reductions in the pool principal

[[Page 3355]]

balance. Indeed, since the floor is a fixed dollar amount, the amount

of credit support ordinarily increases as a percentage of the pool

principal balance during the period that the floor is in effect.

Disclosure

24. In connection with the original issuance of certificates, the

prospectus or private placement memorandum will be furnished to

investing plans. The prospectus or private placement memorandum will

contain information material to a fiduciary's decision to invest in the

certificates, including:

(a) Information concerning the payment terms of the certificates,

the rating of the certificates, and any material risk factors with

respect to the certificates;

(b) A description of the trust as a legal entity and a description

of how the trust was formed by the seller/servicer or other sponsor of

the transaction;

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

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

including the types of receivables, the diversification of the

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

(e) A description of the sponsor and servicer;

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

a description of the seller's principal representations and warranties

as to the trust assets, including the terms and conditions for

eligibility of any receivables transferred during the pre-funding

period and the trustee's remedy for any breach thereof; a description

of the procedures for collection of payments on receivables and for

making distributions to investors, and a description of the accounts

into which such payments are deposited and from which such

distributions are made; a description of permitted investments for any

pre-funding account or capitalized interest account; identification of

the servicing compensation and any fees for credit enhancement that are

deducted from payments on receivables before distributions are made to

investors; a description of periodic statements provided to the

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

and a description of the events that constitute events of default under

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

and the investors' remedies incident thereto;

(g) A description of the credit support;

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

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

through securities by a typical investor;

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

pass-through securities to investors;

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

if any, for the certificates; and

(k) A statement as to the duration of any pre-funding period and

the pre-funding limit for the trust.

25. Reports indicating the amount of payments of principal and

interest are provided to certificateholders at least as frequently as

distributions are made to certificateholders. Certificateholders will

also be provided with periodic information statements setting forth

material information concerning the underlying assets, including, where

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

defaulted loans or receivables.

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

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

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

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

certificates in a public offering will file quarterly reports on Form

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

application to the Securities and Exchange Commission (SEC), a complete

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

and a modification of the disclosure requirements for annual reports on

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

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

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

certificates and copies of the statements sent to certificateholders.

While the SEC's interpretation of the periodic reporting requirements

is subject to change, periodic reports concerning a trust will be filed

to the extent required under the Securities Exchange Act of 1934.

27. At or about the time distributions are made to

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

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

Such report will typically contain information regarding the trust's

assets (including those purchased by the trust from any pre-funding

account), payments received or collected by the servicer, the amount of

prepayments, delinquencies, servicer advances, defaults and

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

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

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

or agencies that have rated the trust's certificates.

In addition, promptly after each distribution date,

certificateholders will receive a statement prepared by the servicer or

trustee summarizing information regarding the trust and its assets.

Such statement will include information regarding the trust and its

assets, including underlying receivables. Such statement will typically

contain information regarding payments and prepayments, delinquencies,

the remaining amount of the guaranty or other credit support and a

breakdown of payments between principal and interest.

Forward Delivery Commitments

28. Mellon may contemplate entering into forward delivery

commitments in connection with the offering of pass-through

certificates. The utility of forward delivery commitments has been

recognized with respect to offering similar certificates backed by

pools of residential mortgages, and Mellon may find it desirable in the

future to enter into such commitments for the purchase of certificates.

Secondary Market Transactions

29. Mellon's normal policy would be to attempt to make a market for

securities for which it is lead or co-managing underwriter, and it is

Mellon's intention to make a market for any certificates for which it

is lead or co-managing underwriter, although it is under no obligation

to do so. At times, Mellon will facilitate sales by investors who

purchase certificates if Mellon has acted as agent or principal in the

original private placement of the certificates and if such investors

request Mellon's assistance.

Summary

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

which exemptive relief is requested satisfy the statutory criteria of

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

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

discretion on the part of the trust sponsor to substitute receivables

contained in the trust once the trust has been formed;

(b) In the case where a pre-funding account is used, the

characteristics of the receivables to be transferred to the trust

during the pre-funding period will be substantially similar to the

characteristics of those transferred to the trust on the closing date,

thereby giving the sponsor and/or originator little discretion over the

selection process,

[[Page 3356]]

and compliance with this requirement will be assured by the specificity

of the characteristics and the monitoring mechanisms contemplated under

the proposed exemption. In addition, certain cash accounts will be

established to support the certificate pass-through rate and such cash

accounts will be invested in short-term, conservative investments; the

pre-funding period will be of a reasonably short duration; a pre-

funding period limit will be imposed; and any Internal Revenue Service

requirements with respect to pre-funding intended to preserve the

passive income character of the trust will be met. The fiduciary of the

plans making the decision to invest in certificates is thus fully

apprised of the nature of the receivables which will be held in the

trust and has sufficient information to make a prudent investment

decision.

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

of the three highest rating categories by a rating agency. Credit

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

rating;

(d) All transactions for which Mellon seeks exemptive relief will

be governed by the pooling and servicing agreement, which is made

available to plan fiduciaries for their review prior to the plan's

investment in certificates;

(e) Exemptive relief from sections 406(b) and 407 for sales to

plans is substantially limited; and

(f) Mellon anticipates that it will make a secondary market in

certificates (although it is under no obligation to do so).

Notice to Interested Persons

The applicant represents that because those potentially interested

participants and beneficiaries cannot all be identified, the only

practical means of notifying such participants and beneficiaries of

this proposed exemption is by the publication of this notice in the

Federal Register. Comments and requests for a hearing must be received

by the Department not later than 30 days from the date of publication

of this notice of proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,

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

Operating Engineers Local 324 Journeyman and Apprentice Training

Fund (the Plan), located in Howell, Michigan (Application No. L-

10645).

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 32826, 32847, August 10, 1990). If the exemption

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

the Act shall not apply to: (1) The proposed loan of $1,500,000 (the

Loan) to the Plan by the International Union of Operating Engineers

Local 324, AFL-CIO (the Union), a party in interest with respect to the

Plan, for the repayment of certain outstanding loans (the Original

Loans) made to the Plan by the Michigan National Bank (the Bank), an

unrelated party; and (2) as of March 12, 1998, the pledging of

certificates of deposit by the Union as security for the Original

Loans; provided that the following conditions are met:

(a) The terms and conditions of the Loan are at least as favorable

to the Plan as those which the Plan could have obtained in an arm's-

length transaction with an unrelated party;

(b) The Plan's trustees determine that the Loan is appropriate for

the Plan and in the best interests of the Plan's participants and

beneficiaries;

(c) An independent fiduciary acting on behalf of the Plan (the

Independent Fiduciary) reviews the terms of the Loan and determines

that the Loan is protective of and in the best interests of the Plan;

(d) The Independent Fiduciary monitors the Loan, as well as the

conditions of this proposed exemption (if granted), and takes whatever

actions are necessary to safeguard the interests of the Plan under the

Loan;

(e) The Loan is repaid by the Plan solely with funds the Plan

retains after paying all of its operational expenses; and

(f) The terms and conditions relating to the pledging of the

certificates of deposit by the Union as security for the Original Loans

were in the best interest of the Plan and its participants and

beneficiaries.

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

as of March 12, 1998.

Summary of Facts and Representations

1. The Union is located in Livonia, Michigan and represents workers

who are engaged primarily in heavy construction projects throughout the

state of Michigan. The Plan was established by the Union in 1964 as a

training program for individuals who are members of the Union and are

employed by contributing employers with regard to the Plan. The purpose

of the Plan is to provide eligible participants (the Participants) with

the skills necessary to operate and repair construction equipment. The

Plan had approximately 11,500 participants and $12,664,604 in total

assets, as of August 31, 1998.

2. Among the Plan's assets is an indoor training facility (the

Facility) located in Howell, Michigan. The Facility is comprised mainly

of classrooms and an indoor work area, and is used by the Participants

to acquire additional construction training. The Facility is situated

on 365 acres of real property (the Property) which is also owned by the

Plan. The Property is used by the Participants as an outdoor

construction training area.

3. The trustees of the Plan (the Trustees) represent that, in the

spring of 1997, they anticipated a significant increase in the amount

of training hours the Participants would be spending in the Facility

during the upcoming years. The Trustees state that this potential

increase was due to a growing demand for construction workers

throughout Michigan, stricter training requirements for workers who

handle hazardous waste, and increasingly sophisticated construction

equipment. In this regard, the Participants trained a total of

approximately 32,000 hours in the Facility in 1997, and will train a

total of approximately 43,200 hours in the Facility in 1998. The

Trustees believe that there will be additional increases in Participant

usage of the Facility in future years.

4. The Trustees determined that the Facility was inadequate to

handle the anticipated increase in use by the Participants. As a

result, in March 1998, the Trustees decided to expand the Facility (the

Expansion) at a projected cost of $1,500,000. The Expansion consisted

of the addition of three classrooms to the Facility and an enlargement

of the Facility's indoor repair area. The Expansion also included

maintenance repairs on the Facility. The Expansion was completed on

September 26, 1998.

5. To finance the Expansion, the Trustees caused the Plan to

receive two loans (i.e. the Original Loans) from the Bank. The first

loan (the First Loan) was entered into on May 12, 1998 for $1,000,000

and was secured with a certificate of deposit (CD) pledged by the Union

in the amount of $1,000,000. The second loan (the Second Loan) was

entered into on July 28, 1998 for $500,000 and was secured with a CD

pledged by the Union in the amount of $500,000.

6. The Original Loans each had a term of 12 months and required

that the Plan pay a fixed rate of interest. At the time the First Loan

and the Second Loan

[[Page 3357]]

were made, the interest rates for each were set at two percentage

points above the interest rate the Bank currently paid on its 12 month

CDs. At the time the First Loan was made, the Bank was paying 5.25% on

its 12 month CDs. As a result, the interest rate the Plan pays on the

First Loan is 7.25%. At the time the Second Loan was made, the Bank was

paying 5.17% on its 12 month CDs. As a result, the interest rate the

Plan pays on the Second Loan is 7.17%.

7. The Union proposes to lend the Plan, under the terms of the

Loan, an amount equal to the entire principal amount of the Original

Loans (i.e. $1,500,000). The Union represents that the Loan will be

used by the Plan to repay the Original Loans. The Union also represents

that the Plan will not pay any fees associated with the Loan. The Loan

will have a term of seven years and will be unsecured. Additionally,

the Loan will have a seven year amortization schedule (the Schedule)

and monthly payments of principal and interest until maturity.

The Trustees of the Plan represent that the Schedule is beneficial

to the Plan since it allows the Plan to gradually pay down the

principal amount of the Loan. The Trustees represent that the terms of

the Original Loans do not provide for amortization of the Original

Loans' principal amounts. Thus, absent any renewals of the Original

Loans by the Bank, the Plan must repay the entire principal amount of

the Original Loans at maturity. In this regard, the Trustees represent

that the terms of the Original Loans cause a liquidity problem for the

Plan in that the Plan is required to reserve funds for the repayment of

the principal amounts of the Original Loans. The Trustees represent

that the Schedule allows for a more efficient allocation of Plan

resources.

8. The Union represents that the terms of the Loan are more

favorable to the Plan than the terms of the Original Loans. The Union

represents that the Plan will repay the Loan solely with funds retained

by the Plan after paying for all of its operational expenses (the

Excess Funds).19 In the event that the Plan has no Excess

Funds at the time a payment by the Plan is due, the Union represents

that the Loan will be suspended (the Suspension Period).20

The Union represents that during any Suspension Period, the Plan will

not be required to make any principal or interest payments on the

Loan.21 In addition, the Union represents that no interest

on the Loan will accrue during the Suspension Period.

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

\19 \The Union represents that the Plan's operational expenses

are funded by contributions made to the Plan by contributing

employers. These contributions are based on a portion of each

Participant's hourly wage that is paid by such employers. The Union

represents that the Participants' hourly wage rate is negotiated

between the Union and the contributing employers each year. Thus,

the Union represents that the Particicants' wage deduction amount

for contributions made by the employers to the Plan is determined by

the parties each year.

\20\ The Union represents that computation of the amount of

Excess Funds available for the repayment on the Loan will be done

according to generally accepted accounting principles by a certified

public accountant representing the Plan.

\21\ The Union represents that if the Suspension Period causes

there to be an outstanding principal balance on the Loan at the end

of the seven-year term, the duration of the Loan will be extended

and the Plan will be obligated to continue making monthly payments

of principal and interest until the Loan is paid in full. In this

regard, the Plan will not be required to make any lump-sum payment

for the outstanding principal balance at any time.

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

The Trustees represent that the interest rate paid by the Plan to

the Union on the Loan will be less than the interest rates paid by the

Plan on the Original Loans. The interest rate the Plan will pay on the

Loan (the New Rate) will be a floating rate based on the Wall Street

Journal Jumbo CD Rate (the WSJ CD Rate) for CDs with a duration of 12

months. The New Rate will be initially set at the lesser of (i) 6.02%

(the WSJ CD Rate as of November 9, 1998, plus 1%), or (ii) a rate which

is 1% above the WSJ CD Rate at the time the Loan is consummated. The

New Rate will be reset on the first day of January, April, July, and

October to equal the rate which is 1% above the WSJ CD Rate at that

time. However, in no event will the New Rate exceed 7.25% per annum,

the rate the Plan currently pays the Bank under the First Loan.

In addition, the New Rate will be more favorable to the Plan than

the interest rate the Plan would have paid on a renewal of the Original

Loans from the Bank. The New Rate will only be 1% above the WSJ CD Rate

for 12-month CDs which will be significantly less than a rate which is

2% above the Bank's 12-month CD rate. The Trustees estimate that

setting the interest rate on the Loan at the New Rate will result in a

savings to the Plan in excess of $61,000 during the term of the Loan.

9. The terms of the Loan will be monitored by Richard Czapski (Mr.

Czapski) of Plante and Moran, LLP (Plante and Moran), who will act as

the Plan's Independent Fiduciary. Plante and Moran is a public

accounting firm having offices in Michigan and Ohio. Mr. Czapski is a

partner with Plante and Moran. Mr. Czapski represents that he is

qualified to act as the Independent Fiduciary because he is experienced

in matters concerning pension plans and bank loans. Mr. Czapski states

that he will rely on the advice of an experienced ERISA counsel, if

necessary, to determine what actions are appropriate to safeguard the

interests of the Plan throughout the duration of the Loan.

Mr. Czapski represents that he has evaluated the terms of the Loan

and has determined that the Loan would be in the best interests and

protective of the Plan and its participants and beneficiaries. Mr.

Czapski states that he will monitor the Plan's repayment of the Loan.

Mr. Czapski will represent the Plan, as the Independent Fiduciary, to

enforce the Plan's rights under the terms and conditions of the Loan

and will take whatever actions are necessary to protect the interests

of the Plan.

10. In summary, the applicant represents that the transactions

satisfy the statutory criteria contained in section 408(a) of the Act

for the following reasons:

(a) The terms of the Loan are at least as favorable to the Plan as

those obtainable in an arm's-length transaction with an unrelated

party;

(b) The Trustees have determined that the Loan is appropriate for

the Plan and in the best interests of the Plan's participants and

beneficiaries;

(c) Mr. Czapski, as the Plan's Independent Fiduciary, has reviewed

the terms and conditions of the Loan and determined that the Loan would

be appropriate for, and in the best interests of, the Plan;

(d) Mr. Czapski, as the Plan's Independent Fiduciary, will monitor

the Loan, as well as the conditions of this proposed exemption (if

granted), and will take whatever actions are necessary to safeguard the

interests of the Plan;

(e) The New Rate initially will be the lesser of 6.02% or 1% above

the WSJ CD Rate as of the date of the Loan, an interest rate which will

be significantly less than the rates currently paid by the Plan under

the Original Loans (i.e. 7.25% and 7.17%, respectively); and

(f) The Loan will be repaid by the Plan solely with funds retained

by the Plan after paying for all of its operational expenses.

FOR FURTHER INFORMATION CONTACT: Christopher J. Motta of the

Department, telephone (202) 219-8883 (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

[[Page 3358]]

provisions to which the exemption does not apply and the general

fiduciary responsibility provisions of section 404 of the Act, which

among other things require a fiduciary to discharge his duties

respecting the plan solely in the interest of the participants and

beneficiaries of the plan and in a prudent fashion in accordance with

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

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

benefit of the employees of the employer maintaining the plan and their

beneficiaries;

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

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

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

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

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

Code, including statutory or administrative exemptions and transitional

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

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

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

express condition that the material facts and representations contained

in each application are true and complete and accurately describe all

material terms of the transaction which is the subject of the

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

the material facts or representations described in the application

change after the exemption is granted, the exemption will cease to

apply as of the date of such change. In the event of any such change,

application for a new exemption may be made to the Department.

Signed at Washington, DC, this 14th day of January 1999.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 99-1271 Filed 1-20-99; 8:45 am]

BILLING CODE 4510-29-P