Proposed Exemptions; Massachusetts Mutual Life Insurance Company (MM)
Federal RegisterAug 11, 1999
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10244, et al.]
Proposed Exemptions; Massachusetts Mutual Life Insurance Company
(MM)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and 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, US
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 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, US Department of Labor, Room N-
5507, 200 Constitution Avenue, NW, Washington, DC 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.
Massachusetts Mutual Life Insurance Company (MM) Located in
Springfield, Massachusetts
[Application No. D-10244]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Covered Transactions
If the exemption is granted, the restrictions of sections 406(a),
406(b)(1) and (b)(2) and 407(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to: the sale
and/or exchange by MM of a partial or complete interest in certain
properties (the Properties) from its general investment account assets
to one or more separate investment accounts, for which MM shall receive
as consideration cash and/or a corresponding interest in such separate
account or separate accounts (the Separate Account Transaction),
provided the conditions set forth in section II are satisfied.
Section II. Conditions
(A) The sale and exchange of the Properties is a one-time
transaction with respect to each separate account of MM which will be
established for the Properties; i.e., all Properties transferred in
that transaction will be conveyed at the same time, and no further
properties will be transferred from MM to such separate account;
(B) In no event shall MM provide any financing with respect to any
sale or exchange transaction which is the subject of the exemption
proposed herein;
(C) Before the subject transaction is consummated, (i) An
independent appraisal firm will have valued each Property to be
transferred by MM to one or more separate accounts; (ii) the value of
each Property so appraised will be confirmed by the appraiser as of a
date not more than two weeks prior to the issuance of interests to
third party investors in the separate accounts, and if a material
change has occurred the appraiser will revise its appraisal to reflect
that new value; (iii) an independent fiduciary for each employee
benefit plan subject to the Act (collectively, the Plans) will, prior
to agreeing to invest in the separate account, be provided with all
information regarding the Properties to
[[Page 43739]]
be sold to the separate account, including third party appraisals and a
private placement memorandum or other offering document, which will
describe the legal structure and include risk disclosures, a summary of
principal terms and a schedule of fees; and (iv) such independent
fiduciary will have reviewed all pertinent terms of the sale and
exchange of the properties to the separate accounts and will have
concluded that the transaction is in the best interest of the Plan; and
(D) Only Plans with total assets having an aggregate fair market
value of at least $50 million are permitted to engage in the Covered
Transactions, provided, however, that--
(1) In the case of two or more Plans which are maintained by the
same employer, controlled group of corporations or employee
organization, whose assets are commingled for investment purposes in a
single master trust or any other entity the assets of which are ``plan
assets'' under 29 CFR section 2510.3-101 (the Plan Asset Regulation),
which entity engages in a Covered Transaction, the foregoing $50
million requirement shall be deemed satisfied if such trust or other
entity has aggregate assets which are in excess of $50 million;
provided that if the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity is not the
employer or an affiliate of the employer, such fiduciary has total
assets under its management and control, exclusive of the $50 million
threshold amount attributable to plan investment in the commingled
entity, which are in excess of $100 million.
(2) In the case of two or more Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization, whose assets are commingled for investment purposes in a
group trust or any other form of entity the assets of which are ``plan
assets'' under the Plan Asset Regulation, which engages in a Covered
Transaction, the foregoing $50 million requirement is satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(i) Has full investment responsibility with respect to Plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to Plan investment in
the commingled entity, which are in excess of $100 million. (In
addition, none of the entities described above are formed for the sole
purpose of engaging in the Covered Transactions.)
Summary of Facts and Representations
1. MM is a mutual life insurance company organized under the laws
of the Commonwealth of Massachusetts and subject to supervision and
regulation by the Insurance Commissioner of Massachusetts. On February
29, 1996, Connecticut Mutual Life Insurance Company (CM), a mutual life
insurance company organized under the laws of the State of Connecticut,
was merged with and into MM.
2. MM conducts business in all 50 states, as well as in the
District of Columbia and Puerto Rico. Presently, MM has more than 2
million policyholders. MM, either directly or through its affiliates,
offers a complete portfolio of life and health insurance, asset
accumulation products, and health and pension employee benefits to its
employees (including former employees of CM) and investment management
services. As of December 31, 1998, MM had $67 billion in assets, and
the assets under its management as of that date approximate $176
billion.
3. MM performs a wide variety of services for Plans. As part of
these activities, MM enters into arrangements with other employers for
the administration of their Plans and the investment of their Plan
assets. In addition, MM sponsors retirement plans for its own
employees, including the MassMutual Employee Pension Plan (the MM
Plan), a defined benefit plan adopted in 1948. MM also sponsors the
retirement plan for the benefit of CM employees prior to the merger and
to which MM succeeded as a result of the merger.
4. MM has been involved in real estate mortgage investing for more
than 50 years and in equity real estate investing for more than 30
years. As of December 31, 1998, MM estimates that it had commercial
mortgage loan assets of approximately $4.7 billion, residential
mortgage loan pool investments of $1.4 billion and commercial real
estate equity investments of approximately $1.9 billion.
5. In 1994, MM created a wholly-owned subsidiary, Cornerstone Real
Estate Advisors, Inc. (Cornerstone), to offer investment management
services for MM's real estate equity portfolio, as well as to third
parties. Cornerstone is registered as an investment adviser under the
Investment Adviser's Act of 1940, as amended.
6. The exemption proposed herein involves a transaction relating to
the sale for cash and/or exchange for units of one or more separate
accounts maintained by MM of certain real estate, i.e. the Properties,
from the general account of MM to those separate accounts. The
transaction, the Separate Account Transaction, relates to certain
Properties which MM proposes to transfer to one or more separate
investment accounts of MM and in exchange for which MM shall receive
cash and an interest in such separate investment account or accounts.
For the Separate Account Transaction, no financing will be provided by
MM's general account. Moreover, no commissions or similar payment will
be paid in connection with the sale or exchange of the Properties.
7. The Separate Account Transaction--The transfer of the Properties
will be structured in one of two ways: (1) The separate account(s) will
acquire the entire interest of MM's general account in the Properties,
and, in return, MM's general account will receive cash and/or units in
the separate account(s); or (2) the separate account(s) will purchase a
partial interest in the Properties for cash from the general account,
and the general account will retain the remaining interest in the
Properties. In each instance, the consideration received by MM will
equal the fair market value of the interest of the Properties
transferred. The transaction will occur simultaneously with or prior to
the investment in the separate account(s) by third party investors.
8. The fair market value of each of the Properties will be
determined by an independent appraiser as of the date of the sale or
exchange. The independent appraiser will be a recognized real estate
expert in the type and geographic area of the Properties.
9. Units or interests in such separate accounts will also be
marketed to tax-exempt entities, including Plans. The minimum
investment in such separate accounts has not been determined, but in no
event will be less than $1 million. The determination of any Plan or
other entity to make an investment in such separate accounts will be in
the sole discretion of that Plan or entity and neither MM nor any
affiliate of MM shall serve in any fiduciary capacity to any such Plan
or entity in determining
[[Page 43740]]
whether an investment in such separate account shall be made. Prior to
agreeing to invest in the separate account, an independent fiduciary
for each Plan will have before it all the information regarding the
properties to be sold to the separate account, including third party
appraisals and a private placement memorandum or other offering
document which will describe the legal structure and include risk
disclosures, a summary of principal terms and a schedule of fees. The
applicant represents that independent fiduciaries for the Plans will
have all information necessary to make their decisions prior to their
agreement to invest in the separate account. The applicant further
represents that Plans investing in the separate accounts will be large,
sophisticated Plans that will equal or exceed $50 million in assets (or
be part of a group trust of that size which also meets other tests).
10. In any particular Covered Transaction, the real estate
Properties in the portfolio to be sold to the separate account will be
determined and disclosed to an independent fiduciary for each Plan
before the transaction occurs. Appraisals of the Properties to be
included in the portfolio, performed by appraisers independent of MM,
will be available to each such fiduciary. The value of each Property so
appraised will be confirmed by the appraiser as of a date not more than
two weeks prior to the issuance of interests to third party investors
in the separate accounts, and if a material change has occurred the
appraiser will revise its appraisal to reflect that new value. Each
Covered Transaction will be a one-time transaction (i.e., all
Properties transferred in that transaction will be conveyed at the same
time, and no other Properties will be transferred by MM to that
separate account) with respect to a portfolio of Properties and a
particular ``start-up'' separate account of MM which will invest in
such Properties. Any purchase, sale, or exchange of property between
MM's general account and any MM separate account will independently
meet the conditions of the exemption proposed herein.
11. In summary, the applicant represents that the subject
transactions satisfy the criteria contained in section 408(a) of the
Act for the following reasons: (a) The sale and exchange of the
Properties is contemplated as a one-time transaction with respect to
each separate account of MM which will be established for the Property
group (i.e., all Properties transferred in that transaction will be
conveyed at the same time, and no other Properties will be transferred
by MM to that separate account); (b) in no event shall MM provide any
financing with respect to any sale or exchange transaction which is the
subject of the exemption proposed herein; (c) before the subject
transactions are consummated, (i) An independent appraisal firm will
have valued each Property to be transferred by MM to one or more
separate accounts; (ii) the value of each Property so appraised will be
confirmed by the appraiser as of a date not more than two weeks prior
to the issuance of interests to third party investors in the separate
accounts, and if a material change has occurred the appraiser will
revise its appraisal to reflect that new value; (iii) an independent
fiduciary for each Plan will, prior to agreeing to invest in the
separate account, be provided with all information regarding the
Properties to be sold to the separate account, including third party
appraisals and a private placement memorandum or other offering
document, which will describe the legal structure and include risk
disclosures, a summary of principal terms and a schedule of fees; and
(iv) such independent fiduciary will have reviewed all pertinent terms
of the sale and exchange of the properties to the separate accounts and
will have concluded that the transaction is in the best interest of the
Plan; and (d) Plans investing in the separate accounts will be large,
sophisticated Plans that will equal or exceed $50 million in assets (or
be part of a group trust of that size which also meets other tests).
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Modern Woodmen of America Employees' Savings Plan (the Plan)
Located in Rock Island, Illinois
[Application No. D-10518]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the past sale, on March 23, 1998, by the Plan
of certain commercial mortgages and bonds (the Securities) to Modern
Woodmen of America (the Employer), a party in interest with respect to
the Plan, provided that the following conditions were satisfied: (1)
The sale was a one-time transaction for cash; (2) the Plan paid no
commissions nor other expenses relating to the sale; (3) for each
Security, the Plan received an amount equal to the highest, as of the
date of the sale, of (a) the par value, (b) the book value, or (c) the
fair market value of the Security, as determined by a qualified,
independent appraiser; and (4) the Plan received the accrued but unpaid
interest that was due on each Security at the time of the transaction.
Effective date: The proposed exemption, if granted, will be
effective as of March 23, 1998.
Summary of Facts and Representations
1. The Plan was a defined contribution plan sponsored by the
Employer, a fraternal life insurance society. As of June 30, 1997, the
Plan had approximately 1,141 participants and beneficiaries. As of that
same date, the Plan had total assets of approximately $37,541,533.40.
Until April 1, 1998, the trustee of the Plan was the Savings Plan
Investment Committee (the Committee), comprised of five employees of
the Employer having responsibility for investment of the Plan's assets.
Effective April 1, 1998, the Plan was merged into a new 401(k) Plan
providing for individually directed accounts that is being administered
by Vanguard Funds.
2. Among the assets of the Plan were the Securities, which
consisted of 21 privately placed commercial mortgages and bonds. Each
of the Securities was purchased by the Plan at various times between
1989 and 1996 from various unrelated brokers. The amount paid by the
Plan for the Securities in each case was either the par value or the
book value. The Committee believed that the Plan's acquisition of these
Securities was consistent with the Plan's investment objectives at the
time. Since the Securities were not publicly traded, there was no ready
market for the Securities.1 As a result of the need to
liquidate the Securities quickly, in order to implement the merger of
the Plan into a new 401(k) Plan on April 1, 1998, the Employer filed an
exemption application with the Department seeking to purchase the
Securities from the Plan. On March 23, 1998, the
[[Page 43741]]
Employer purchased the Securities from the Plan for a total of
$5,685,534.46.
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\1\ The Department expresses no opinion herein as to whether the
acquisition and holding of the Securities by the Plan violated any
of the provisions of Part 4 of Title I in the Act. However, the
Department notes that section 404(a) of the Act requires, among
other things, that a plan fiduciary act prudently and solely in the
interest of the plan and its participants and beneficiaries when
making investment decisions on behalf of the plan.
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3. The applicant represents that the terms of the sale were at
least as favorable to the Plan as terms the Plan could have obtained in
an arm's length transaction with an unrelated party. For each Security,
the Employer paid the Plan an amount equal to the highest, as of March
23, 1998, of (a) the par value,2 (b) the book
value,3 or (c) the fair market value of the Security, as
determined by a qualified, independent appraiser.
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\2\ The par value of each Security was the face value of the
Security at the time of the transaction. For example, a bond selling
at par is worth the same dollar amount for which it was issued or at
which it will be redeemed at maturity, typically $1,000 per bond.
\3\ The book value of each Security was the value at which it
was carried on the Plan's balance sheet. For example, a bond is
typically considered to have a book value equal to its outstanding
principal balance plus accrued but unpaid interest.
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With respect to the fair market value of the Security, the highest
quotation obtained from three reputable independent mortgage banking
firms was used. The appraisals of the mortgages were conducted by (i)
Cauble & Company, located in Charlotte, North Carolina, (ii) Rob Wolf &
Associates, located in San Francisco, California, and (iii) Venture
Mortgage, located in Edina, Minnesota. The appraisals of the bonds were
conducted by (i) Piper Jaffray, located in Minneapolis, Minnesota, and
(ii) John G. Kinnard & Co., located in Minneapolis, Minnesota. Each of
the entities which appraised the value of the Securities was a dealer
who would have bought or sold such Securities in the ordinary course of
its business. The appraised value amounts assume that there is a
willing third party buyer to purchase the security, although there is
no active market for the Securities.
The sale of the Securities by the Plan to the Employer was a one-
time transaction for cash. The Plan paid no commissions nor other
expenses relating to the sale of the Securities, which represented a
significant savings to the Plan in transaction costs.
4. The assets purchased by the Employer from the Plan, which
included 10 mortgages and 11 bonds, are individually listed below.
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Net rate Accured
Description (percent) Maturity Par Book value FMV interest Purchase price
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Mortgages
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Butler Family Partnership, Walgreen's 7.375 01/10/16 $607,021.21 $576,670.15 $623,410.78 $1,616.62 $625,027.40
(Lessee), Missouri City, TX.................. 95.00 102.70
Ervin & Susanne Bard, K-Mart (Lessee), 8.75 07/01/12 486,562.87 486,562.87 531,472.62 2,601.76 534,074.38
Huntington, IN............................... 100.00 109.23
The Byrd Companies, Inc., First Alabama Bank 9.375 03/01/11 362,572.72 362,572.72 412,498.98 1,227.46 413,726.44
(Lessee), Vestavia Hills, AL................. 100.00 113.77
JRL Amerivest, Ameritech Michigan (Lessee), 7.75 03/10/01 461,784.70 461,784.70 481,410.55 1,292.36 482,702.91
Auburn, MI................................... 100.00 104.25
Stockbridge Property Co., (Jonathan P. Rosen), 9.75 02/10/07 279,470.04 279,470.04 308,702.61 983.97 309,686.58
Good Year Tire & Rubber (Lessee), 100.00 110.46
Stockbridge, GA..............................
Bogel Investments, Inc., The City of Irving, 7.75 07/10/06 770,194.00 770,194.00 802,696.19 2,155.47 804,851.66
TX, Irving, TX............................... 100.00 104.22
Argonne Forest Partnership, (Al Payne & Joel 8.00 01/01/05 478,512.11 478,512.11 494,207.31 2,339.39 496,546.70
O'Connor), ALCO Standard (Lessee), Spokane, 100.00 103.28
WA...........................................
Dr. Fred Wurlitzer, (Rezan, L.P.), May Dept. 8.625 01/10/03 250,547.01 250,547.01 260,368.45 780.35 261,149.80
Stores (Lessee), Plano, TX................... 100.00 103.92
Morro Palmes Shopping Ctr., Winn-Dixie 8.125 04/10/01 385,577.12 385,577.12 397,915.59 1,131.29 399,046.88
(Lessee), Abbeville, SC...................... 100.00 103.20
Audrey Weedn, Toys ``R'' Us (Lessee), Houston, 9.00 05/01/99 110,143.11 108,469.57 112,103.66 605.79 112,709.45
TX........................................... 98.50 101.78
Total..................................... ........... .......... 4,192,384.89 4,160,360.29 4,424,786.74 14,734.46 4,439,521.20
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[[Page 43742]]
Corporate Issues
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Railroads:
Baltimore & Ohio.......................... 8.75 10/15/99 $100,826.94 $101,661.28 103,473.65 $3,872.03 107,345.68
100.90 102.625
Chesapeake & Ohio......................... 8.75 10/15/99 50,597.13 51,002.52 51,925.30 1,943.07 53,868.37
100.90 102.625
Chicago & Northwestern Transportation..... 6.65 06/15/99 25,862.20 25,862.20 25,862.20 468.18 26,330.38
100.00 100.00
Denver & Rio Grande....................... 6.65 06/15/99 19,216.34 19,216.34 19,216.34 347.87 19,564.21
100.00 100.00
Kansas City Southern...................... 6.65 06/15/98 2,358.07 2,358.07 2,358.07 42.69 2,400.76
100.00 100.00
Railbox................................... 9.357 01/10/99 56,255.48 54,526.84 57,380.59 190.08 57,570.67
96.90 102.00
Seaboard Systems.......................... 8.75 11/15/99 50,800.74 51,371.18 52,578.77 1,580.47 54,159.24
101.20 103.50
Industrials, Utilities & Governments:
Shelby Funding Corp....................... 8.00 10/01/05 259,877.99 259,877.99 263,334.37 9,933.11 273,267.48
100.00 101.33
Third Sixth Mont.......................... 8.00 07/01/05 275,786.99 231,661.07 275,786.99 5,025.45 280.812.44
100.00 100.00
Maine Public Service...................... 7.12 05/01/98 178,000.00 177,303.53 178,000.00 5,002.54 183,002.54
100.00 100.00
Fairchild Farms (FmHA).................... 8.75 04/15/07 181,218.51 181,218.51 181,218.51 6,472.98 187,691.49
100.00 99.40
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Total................................. ........... .......... 1,200,800.39 1,200,185.45 1,211,134.79 34,878.47 1,246,013.26
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Grand Totals.......................... ........... .......... 5,393,185.28 5,360,545.74 5,635,921.53 49,612.93 5,685,534.46
(Mortgages & Bonds)...................
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As indicated by the chart above, the Plan received a price for each
Security equalling the Security's current fair market value. However,
with respect to four of the 11 bonds sold by the Plan, the fair market
value was determined to be equal to both the bond's par value and book
value. In addition, with respect to two of the bonds, the fair market
value was equal to the bond's par value. All of the other bonds and all
10 of the mortgages had a fair market value which exceeded either their
par value or their book value at the time of the transaction.
The Plan also received the accrued but unpaid interest that was due
on the Security at the time of the transaction.
The applicant represents that the sale was in the best interests of
the Plan and of its participants and beneficiaries because it enabled
the Plan to divest itself of illiquid assets at the best possible
price. In addition, the sale permitted Plan participants to timely
direct the investment of the full value of their individual accounts,
as of the effective date of the reconstituted Plan (i.e., April 1,
1998).
5. In summary, the applicant represents that the subject
transaction satisfied the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) The sale of
the Securities by the Plan to the Employer was a one-time transaction
for cash; (2) the Plan paid no commissions nor other expenses relating
to the sale of the Securities; (3) for each Security, the Plan received
an amount equal to the highest, as of March 23, 1998, of (a) par value,
(b) book value, or (c) the fair market value of the Security, as
determined by a qualified, independent appraiser; (4) the Plan received
the accrued but unpaid interest that was due on each Security at the
time of the transaction; and (5) the Plan divested itself of illiquid
assets, thus permitting Plan participants to timely direct the
investment of the full value of their individual accounts in the new
401(k) Plan.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by personal delivery or by first-class mail within five days of
the date of publication of the notice of pendency 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/or request a hearing
with respect to the proposed exemption. Comments and requests for a
hearing are due within 35 days of the date of publication of this
notice in the Federal Register.
For Further Information Contact: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Fleet Bank (RI), National Association (Fleet) Located in
Providence, Rhode Island
[Exemption Application No. D-10643]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
A. Effective as of the date this proposed exemption is published in
the Federal Register, the restrictions of
[[Page 43743]]
sections 406(a) and 407(a) of the Act and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through
(D) of the Code, shall not apply to the following transactions
involving trusts and certificates evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the trust,
the sponsor or an underwriter and an employee benefit plan subject to
the Act or section 4975 of the Code (a plan) when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of the Excluded Plan that are invested in certificates.
4
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\4\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective as of the date this proposed exemption is published in
the Federal Register, 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 trust,
the sponsor or an 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 receivables contained in the trust constituting 0.5
percent or less of the fair market value of the aggregate undivided
interest in the trust allocated to the certificates of the relevant
series, or (b) an affiliate of a person described in (a); if
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group,
as defined in Section III.L., and at least 50 percent of the aggregate
undivided interest in the trust allocated to the certificates of a
series is acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates of a series
does not exceed 25 percent of all of the certificates of that class
outstanding at the time of the acquisition;
(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 is
invested in certificates representing the aggregate undivided interest
in a trust allocated to the certificates of a series and containing
receivables sold or serviced by the same entity; \5\ and
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\5\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(v) 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 is
invested in certificates representing an interest in the trust, or
trusts containing receivables sold or serviced by the same entity. For
purposes of paragraphs B.(1)(iv) and B.(1)(v) only, an entity shall not
be considered to service receivables contained in a trust if it is
merely a subservicer of that trust;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that conditions set forth in Section I. B.(1)(i) and (iii)
through (v) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.B.(1) or (2).
C. Effective as of the date this proposed exemption is published in
the Federal Register, 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, including reassigning receivables to the sponsor, removing
from the trust receivables in accounts previously designated to the
trust, changing the underlying terms of accounts designated to the
trust, adding new receivables to the trust, designating new accounts to
the trust, the retention of a retained interest by the sponsor in the
receivables, the exercise of the right to cause the commencement of
amortization of the principal amount of the certificates, or the use of
any eligible swap transactions, provided that:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing agreement;
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust; 6
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\6\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions. For purposes
of this exemption, all references to ``prospectus'' include any
related supplement thereto, and any documents incorporated by
reference therein, pursuant to which certificates are offered to
investors.
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(3) The addition of new receivables or designation of new accounts,
or the removal of receivables in previously-designated accounts, meets
the terms and conditions for such additions, designations or removals
as are described in the prospectus or private placement memorandum for
such certificates, which terms and conditions have been approved by
Standard & Poor's Ratings Services, Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co., or Fitch IBCA, Inc., or their
successors (collectively, the Rating Agencies), and does not result in
the certificates receiving a lower credit rating from the Rating
Agencies than the then current rating of the certificates; and
(4) The series of which the certificates are a part will be subject
to an ``Economic Pay Out Event'' (as defined in Section III.BB.), which
is set forth in the pooling and servicing agreement and described in
the prospectus or private placement memorandum associated with the
series, the occurrence of which will cause any revolving period,
scheduled amortization period or scheduled accumulation period
[[Page 43744]]
applicable to the certificates to end, and principal collections to be
applied to monthly payments of principal to, or the accumulation of
principal for the benefit of, the certificateholders of such series
until the earlier of payment in full of the outstanding principal
amount of the certificates of such series or the series termination
date specified in the prospectus or private placement memorandum.
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 under section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(E) or (F) of the Code, for the receipt of a fee
by the servicer of the trust, in connection with the servicing of the
receivables and the operation 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.U. below.
D. Effective as of the date this proposed exemption is published in
the Federal Register, 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 transaction to which those restrictions or taxes would
otherwise apply merely because a person is deemed to be a party in
interest or disqualified person (including a fiduciary) with respect to
a plan by virtue of providing services to the plan (or by virtue of
having a relationship to such service provider as described in section
3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H)
or (I) of the Code), solely because of the plan's ownership of
certificates.
Section II--General Conditions
A. The relief provided under Section I will be available only if
the following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as such terms would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is either: (i) In one of the two
highest generic rating categories from any one of the Rating Agencies;
or (ii) for certificates with a duration of one year or less, the
highest short-term generic rating category from any one of the Rating
Agencies; provided that, notwithstanding such ratings, this exemption
shall apply to a particular class of certificates only if such class
(an Exempt Class) is at the time of such acquisition part of a series
in which credit support is provided to the Exempt Class through a
senior-subordinated series structure or other form of third-party
credit support which, at a minimum, represents five (5) percent of the
outstanding principal balance of certificates issued for the Exempt
Class, so that an investor in the Exempt Class will not bear the
initial risk of loss;
(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 consideration received by
the sponsor as a consequence of the assignment of receivables (or
interests therein) to the trust, to the extent allocable to the class
of certificates purchased by a plan, represents not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the servicer, to the extent allocable
to the class of certificates purchased by a plan, represents not more
than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission (SEC) under the Securities Act of
1933;
(7) The trustee of the trust is a substantial financial institution
or trust company experienced in trust activities and is familiar with
its duties, responsibilities, and liabilities as a fiduciary under the
Act (i.e. ERISA). The trustee, as the legal owner of, or holder of a
perfected security interest in, the receivables in the trust, enforces
all the rights created in favor of certificateholders of such trust,
including plans;
(8) Prior to the issuance by the trust of any new series,
confirmation is received from the Rating Agencies that such issuance
will not result in the reduction or withdrawal of the then current
rating of the certificates held by any plan pursuant to this exemption;
(9) To protect against fraud, chargebacks or other dilution of the
receivables in the trust, the pooling and servicing agreement and the
Rating Agencies require the sponsor to maintain a seller interest of
not less than two (2) percent of the principal balance of the
receivables contained in the trust;
(10) Each receivable added to a trust is an eligible receivable,
based on criteria of the relevant Rating Agency(ies) and as specified
in the pooling and servicing agreement. The pooling and servicing
agreement requires that any change in the terms of the cardholder
agreements must be made applicable to the comparable segment of
accounts owned or serviced by the sponsor which are part of the same
program or have the same or substantially similar characteristics;
(11) The pooling and servicing agreement limits the number of the
sponsor's newly originated accounts to be designated to the trust,
unless the Rating Agencies otherwise consent in writing, to the
following: (i) With respect to any consecutive three-month period
commencing in January, April, July and October of each calendar year,
15 percent of the number of existing accounts designated to the trust
as of the first day of the calendar year during which such monthly
period commenced, and (ii) with respect to any calendar year, 20
percent of the number of existing accounts designated to the trust as
of the first day of such calendar year;
(12) The pooling and servicing agreement requires the sponsor to
deliver an opinion of counsel confirming the validity and perfection of
each transfer of receivables in newly originated accounts to the trust
for each interim addition;
(13) The pooling and servicing agreement requires the sponsor and
the trustee to receive confirmation from a Rating Agency that no
Ratings Effect will result from (i) a Required Addition (as defined in
Section III.MM.) in excess of the limits in paragraph B.(11) above, or
(ii) any Restricted Additions (as defined in Section III.NN.);
(14) If a particular class of certificates held by any plan
involves a Ratings Dependent or Non-Ratings Dependent Swap entered into
by the trust, then each particular swap transaction relating to such
certificates:
(a) Shall be an Eligible Swap;
[[Page 43745]]
(b) Shall be with an Eligible Swap Counterparty;
(c) In the case of a Ratings Dependent Swap, shall include as an
early payout event, as specified in the pooling and servicing
agreement, the withdrawal or reduction by any Rating Agency of the swap
counterparty's credit rating below a level specified by the Rating
Agency where the servicer (as agent for the trustee) has failed, for a
specified period after such rating withdrawal or reduction, to meet its
obligation under the pooling and servicing agreement to:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty which is acceptable to the Rating Agency and the terms of
which are substantially the same as the current swap agreement (at
which time the earlier swap agreement shall terminate); or
(ii) Cause the swap counterparty to establish any collateralization
or other arrangement satisfactory to the Rating Agency such that the
then current rating by the Rating Agency of the particular class of
certificates will not be withdrawn or reduced;
(d) In the case of a Non-Ratings Dependent Swap, shall provide
that, if the credit rating of the swap counterparty is withdrawn or
reduced below the lowest level specified in Section III.II. hereof, the
servicer, as agent for the trustee, shall within a specified period
after such rating withdrawal or reduction:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement shall
terminate); or
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms;
and
(e) Shall not require the trust to make any termination payments to
the swap counterparty (other than a currently scheduled payment under
the swap agreement) except from ``Excess Finance Charge Collections''
(as defined below in Section III.LL.) or other amounts that would
otherwise be payable to the servicer or the sponsor;
(15) Any class of certificates, to which one or more swap
agreements entered into by the trust applies, may be acquired or held
in reliance upon this exemption only by Qualified Plan Investors.
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 Section I, if the provision in Section II.A.(6) above is
not satisfied for the acquisition or holding by a plan of such
certificates, provided that:
(1) Such condition is disclosed in the prospectus or private
placement memorandum; and
(2) In the case of a private placement of certificates, the trustee
obtains a representation from each initial purchaser which is a plan
that it is in compliance with such condition, and obtains a covenant
from each initial purchaser to the effect that, so long as such initial
purchaser (or any transferee of such initial purchaser's certificates)
is required to obtain from its transferee a representation regarding
compliance with the Securities Act of 1933, any such transferees shall
be required to make a written representation regarding compliance with
the condition set forth in Section II.A.(6).
Section III--Definitions
For purposes of this proposed exemption:
A. ``Certificate'' means a certificate:
(1) That (i) represents a beneficial ownership interest in the
assets of a trust and entitles the holder to payments denominated as
principal, interest and/or other payments made as described in the
applicable prospectus or private placement memorandum and in accordance
with the pooling and servicing agreement in connection with the assets
of such trust, to the extent allocable to the series of certificates
purchased by a plan, either currently or after a revolving period
during which principal payments on assets of the trust are reinvested
in new assets, or (ii) is denominated as a debt instrument that
represents a regular interest in a financial asset securitization
investment trust (FASIT), within the meaning of section 860L(a) of the
Code, and is issued by and is an obligation of the trust.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust; and
(2) With respect to which (a) Fleet or any of its affiliates is the
sponsor, and (b) Fleet, any of its affiliates, or an ``underwriter''
(as defined in Section III.C.) is the sole underwriter or the manager
or co-manager of the underwriting syndicate or a selling or placement
agent.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either:
(a) Receivables (as defined in Section III.V.); or
(b) Participations in a pool of receivables (as defined in Section
III.V.) where such beneficial ownership interests are not subordinated
to any other interest in the same pool of receivables; 7
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\7\ The Department notes that no relief would be available under
the exemption if the participation interests held by the trust were
subordinated to the rights and interests evidenced by other
participation interests in the same pool of receivables.
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(2) Property which has secured any of the assets described in
paragraph B.(1) above; 8
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\8\ Fleet states that it is possible for credit card receivables
to be secured by bank account balances or security interests in
merchandise purchased with credit cards. Thus, the exemption should
permit foreclosed property to be an eligible trust asset.
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(3) Undistributed cash or permitted investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders, except during a Revolving Period (as
defined herein) when permitted investments are made until such cash can
be reinvested in additional receivables described in paragraph B.(1)(a)
above;
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any cash collateral accounts, insurance
policies, third-party guarantees, contracts of suretyship and other
credit support arrangements for any certificates, swap transactions, or
under any yield supplement agreements,9 yield maintenance
agreements or similar arrangements; and
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\9\ In a series involving an accumulation period (as defined in
Section III.Z.), a yield supplement agreement may be used by the
Trust to make up the difference between (i) the reinvestment yield
on permitted investments, and (ii) the interest rate on the
certificates of that series.
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(5) Rights to receive interchange fees received by the sponsor as
partial compensation for the sponsor's taking credit risk, absorbing
fraud losses and funding receivables for a limited period prior to
initial billing with respect to accounts designated to the trust.
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) The investment pool consists only of
receivables of the type which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment
pools have been rated in one of the two highest generic rating
categories by at least one of the Rating Agencies for at least one year
prior to the plan's acquisition of certificates
[[Page 43746]]
pursuant to this exemption; and (iii) certificates evidencing an
interest in such other investment pools have been purchased by
investors other than plans for at least one year prior to the plan's
acquisition of certificates pursuant to this exemption.
C. ``Underwriter'' means an entity which has received from the
Department an individual prohibited transaction exemption which
provides relief for the operation of asset pool investment trusts that
issue asset-backed pass-through securities to plans that is similar in
format and substance to this exemption (each, an Underwriter
Exemption); 10 any person directly or indirectly, through
one or more intermediaries, controlling, controlled by or under common
control with such entity; and any member of an underwriting syndicate
or selling group of which such firm or affiliated person described
above is a manager or co-manager with respect to the certificates.
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\10\ For a listing of Underwriter Exemptions, see the
description provided in the text of the operative language of
Prohibited Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21,
1997).
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D. ``Sponsor'' means Fleet, or an affiliate of Fleet that organizes
a trust by transferring credit card receivables or interests therein to
the trust in exchange for certificates.
E. ``Master Servicer'' means Fleet or an affiliate 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
receivables in the trust pursuant to the pooling and servicing
agreement.
F. ``Subservicer'' means Fleet or an affiliate of Fleet, or an
entity unaffiliated with Fleet which, under the supervision of and on
behalf of the master servicer, services receivables contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means Fleet or an affiliate which services
receivables contained in the trust, including the master servicer and
any subservicer or their successors pursuant to the pooling and
servicing agreement.
H. ``Trustee'' means an entity which is independent of Fleet and
its affiliates and is the trustee of the trust. In the case of
certificates which are denominated as debt instruments, ``trustee''
also means the trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, provider of other
credit support for, or other contractual counterparty of, a trust.
Notwithstanding the foregoing, a swap counterparty is not an insurer,
and 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 receivable 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) Each swap counterparty;
(7) Any obligor with respect to receivables contained in the trust
constituting more than 0.5 percent of the fair market value of the
aggregate undivided interest in the trust allocated to the certificates
of a series, determined on the date of the initial issuance of such
series of certificates by the trust; or
(8) Any affiliate of a person described in paragraphs L.(1) through
(7) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in Section III.Q. below), provided that:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward Delivery Commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable Compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust and any supplement thereto pertaining to a particular series of
certificates. 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.
T. ``Series'' means an issuance of a class or various classes of
certificates by the trust all on the same date pursuant to the same
pooling and servicing agreement, and any supplement thereto and
restrictions therein.
U. ``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 with respect to
the receivables;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in paragraph U.(1) above;
(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 or described in all
material respects in the prospectus or private placement memorandum
provided to the plan before it purchases certificates issued by the
trust; and
(4) The amount paid to investors in the trust is not reduced by the
amount of any such fee waived by the servicer.
V. ``Receivables'' means secured or unsecured obligations of credit
card holders which have arisen or arise in Accounts designated to a
trust. Such obligations represent amounts charged
[[Page 43747]]
by cardholders for merchandise and services and amounts advanced as
cash advances, as well as periodic finance charges, annual membership
fees, cash advance fees, late charges on amounts charged for
merchandise and services and certain other fees (such as bad check
fees, cash advance fees, and other fees specified in the cardholder
agreements) designated by card issuers (other than a qualified
administrative fee as defined in Section III.U.).
W. ``Accounts'' are revolving credit card accounts serviced by
Fleet or an affiliate, which were originated or purchased by Fleet or
an affiliate, and are designated to a trust such that receivables
arising in such accounts become assets of the trust.
X. ``Revolving Period'' means a period of time, as specified in the
pooling and servicing agreement, during which principal collections
allocated to a series are reinvested in newly generated receivables
arising in the accounts.
Y. ``Amortization Period'' means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will commence to be paid to the
certificateholders of such series in installments.
Z. ``Accumulation Period'' means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will be deposited in an account to be
distributed to certificateholders in a lump sum on the expected
maturity date.
AA. ``Pay Out Event'' means any of the events specified in the
pooling and servicing agreement or supplement thereto that results (in
some instances without further affirmative action by any party) in the
early commencement of either an amortization period or an accumulation
period, including (1) The failure of the sponsor or the servicer,
whichever is subject to the relevant obligation under the pooling and
servicing agreement, (i) To make any payment or deposit required under
the pooling and servicing agreement within five (5) business days after
such payment or deposit was required to be made, or (ii) to observe or
perform any of its other covenants or agreements set forth in the
pooling and servicing agreement, which failure has a material adverse
effect on holders of investor certificates of the relevant series and
continues unremedied for 60 days; (2) a breach of any representation or
warranty made by the sponsor or the servicer in the pooling and
servicing agreement that continues to be incorrect in any material
respect for 60 days; (3) the occurrence of certain bankruptcy events
relating to the sponsor or the servicer; (4) the failure by the sponsor
to convey to the trust additional receivables to maintain the minimum
seller interest that is required by the pooling and servicing agreement
and the Rating Agencies; (5) the failure to pay in full amounts owing
to investors on the expected maturity date; and (6) the Economic Pay
Out Event.
BB. An ``Economic Pay Out Event'' occurs automatically when the
portfolio yield for any series of certificates, averaged over three
consecutive months (or such other period approved by one of the Rating
Agencies) is less than the base rate of the series averaged over the
same period. Portfolio yield for a series of certificates for any
period is equal to the sum of the finance charge collections and other
amounts treated as finance charge collections less total defaults for
the series divided by the outstanding principal balance of the investor
certificates of the series, or such other measure approved by one of
the Rating Agencies. The base rate for a series of certificates for any
period is the sum of (i) Amounts payable to certificateholders of the
series with respect to interest, (ii) servicing fees allocable to the
series payable to the servicer, and (iii) any credit enhancement fee
allocable to the series payable to a third party credit enhancer,
divided by the outstanding principal balance of the investor
certificates of the series, or such other measure approved by one of
the Rating Agencies.
CC. ``CCA'' or ``Cash Collateral Account'' means that certain
account established in the name of the trustee that serves as credit
enhancement with respect to the investor certificates and holds cash
and/or permitted investments (as defined below in Section III.KK.)
which conform to applicable provisions of the pooling and servicing
agreement.
DD. ``Group'' means a group of any number of series offered by the
trust that share finance charge and/or principal collections in the
manner described in the applicable prospectus or private placement
memorandum.
EE. ``Ratings Effect'' means the reduction or withdrawal by a
Rating Agency of its then current rating of the certificates held by
any plan pursuant to this exemption.
FF. ``Principal Receivables Discount'' means, with respect to any
account designated by the sponsor, the portion of the related principal
receivables that represents a discount from the face value thereof and
that is treated under the pooling and servicing agreement as finance
charge receivables.
GG. ``Ratings Dependent Swap'' means an interest rate swap, or (if
purchased by or on behalf of the trust) an interest rate cap contract,
that is part of the structure of a series of certificates where the
rating assigned by the Rating Agency to any senior class of
certificates held by any plan is dependent on the terms and conditions
of the swap and the rating of the swap counterparty, and if such
certificate rating is not dependent on the existence of the swap and
rating of the swap counterparty, such swap or cap shall be referred to
as a ``Non-Ratings Dependent Swap''. With respect to a Non-Ratings
Dependent Swap, each Rating Agency rating the certificates must
confirm, as of the date of issuance of the certificates by the trust,
that entering into an Eligible Swap with such counterparty will not
affect the rating of the certificates.
HH. ``Eligible Swap'' means a Ratings Dependent or Non-Ratings
Dependent Swap:
(1) Which is denominated in U.S. Dollars;
(2) Pursuant to which the trust pays or receives, on or immediately
prior to the respective payment or distribution date for the senior
class of certificates, a fixed rate of interest, or a floating rate of
interest based on a publicly available index (e.g. LIBOR or the U.S.
Federal Reserve's Cost of Funds Index (COFI)), with the trust receiving
such payments on at least a quarterly basis and obligated to make
separate payments no more frequently than the swap counterparty, with
all simultaneous payments being netted;
(3) Which has a notional amount that does not exceed either: (i)
The certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(4) Which is not leveraged (i.e., payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in paragraph HH.(2) above, and the difference
between the products thereof, calculated on a one to one ratio and not
on a multiplier of such difference);
(5) Which has a final termination date that is the earlier of the
date on which the trust terminates or the related class of certificates
is fully repaid; and
(6) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in paragraphs HH.(1)
through (4) above without the consent of the trustee.
II. ``Eligible Swap Counterparty'' means a bank or other financial
institution which has a rating, at the
[[Page 43748]]
date of issuance of the certificates by the trust, which is in one of
the three highest long-term credit rating categories, or one of the two
highest short-term credit rating categories, utilized by at least one
of the Rating Agencies rating the certificates; provided that, if a
swap counterparty is relying on its short-term rating to establish
eligibility hereunder, such counterparty must either have a long-term
rating in one of the three highest long-term rating categories or not
have a long-term rating from the applicable Rating Agency, and provided
further that if the senior class of certificates with which the swap is
associated has a final maturity date of more than one year from the
date of issuance of the certificates, and such swap is a Ratings
Dependent Swap, the swap counterparty is required by the terms of the
swap agreement to establish any collateralization or other arrangement
satisfactory to the Rating Agencies in the event of a ratings downgrade
of the swap counterparty.
JJ. ``Qualified Plan Investor'' means a plan investor or group of
plan investors on whose behalf the decision to purchase certificates is
made by an appropriate independent fiduciary that is qualified to
analyze and understand the terms and conditions of any swap transaction
used by the trust and the effect such swap would have upon the credit
ratings of the certificates. For purposes of the exemption, such a
fiduciary is either:
(1) A ``qualified professional asset manager'' (QPAM),11
as defined under Part V(a) of PTE 84-14 (49 FR 9494, 9506, March 13,
1984);
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\11\ PTE 84-14 provides a class exemption for transactions
between a party in interest with respect to an employee benefit plan
and an investment fund (including either a single customer or pooled
separate account) in which the plan has an interest, and which is
managed by a QPAM, provided certain conditions are met. QPAMs (e.g.,
banks, insurance companies, registered investment advisers with
total client assets under management in excess of $50 million) are
considered to be experienced investment managers for plan investors
that are aware of their fiduciary duties under ERISA.
---------------------------------------------------------------------------
(2) An ``in-house asset manager'' (INHAM),12 as defined
under Part IV(a) of PTE 96-23 (61 FR 15975, 15982, April 10, 1996); or
---------------------------------------------------------------------------
\12\ PTE 96-23 permits various transactions involving employee
benefit plans whose assets are managed by an INHAM, an entity which
is generally a subsidiary of an employer sponsoring the plan which
is a registered investment adviser with management and control of
total assets attributable to plans maintained by the employer and
its affiliates which are in excess of $50 million.
---------------------------------------------------------------------------
(3) A plan fiduciary with total assets under management of at least
$100 million at the time of the acquisition of such certificates.
KK. ``Permitted Investments'' means investments that either (i) are
direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided that such obligation is backed by
the full faith and credit of the United States, or (ii) have been rated
(or the obligor thereof 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 relevant
Rating Agency(ies).
LL. ``Excess Finance Charge Collections'' means, as of any day
funds are distributed from the trust, the amount by which the finance
charge collections allocated to certificates of a series exceed the
amount necessary to pay certificate interest, servicing fees and
expenses, to satisfy cardholder defaults or charge-offs, and to
reinstate credit support.
MM. ``Required Additions'' means accounts which are required to be
added to the trust when either the seller amount is less than the
minimum required seller amount or the principal amount is less than the
required principal amount.
NN. ``Restricted Additions'' means accounts which may be added to
the trust at the discretion of the sponsor only upon confirmation from
a Rating Agency that no Ratings Effect will result from the addition.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
for transactions described herein and occurring on or after the date
this proposed exemption is published in the Federal Register.
Summary of Facts and Representations
1. The applicant is Fleet Bank (RI), National Association (Fleet),
a national banking association located in Providence, Rhode Island.
Fleet conducts nationwide consumer lending programs principally
comprised of credit card related activities. Fleet is a wholly-owned
indirect subsidiary of Fleet Financial Group, Inc. On February 20,
1998, through a series of transactions, Advanta National Bank (Advanta)
transferred substantially all of its consumer credit card business to
affiliates of Fleet Financial Group, Inc., including Fleet. As a
result, the rights and obligations of Advanta, as Seller and Servicer,
under the relevant Pooling and Servicing Agreements (each, a PSA), were
assigned, transferred to and assumed by Fleet.
2. The transactions for which an exemption is requested are
investments by employee benefit plans in certain certificates
(Certificates) representing the right to receive principal and interest
payments from the assets of various Trusts which hold credit card
receivables. Each Trust will issue, from time to time, a particular
series of Certificates (i.e., a Series) which will be secured by the
Trust's assets. A Series may include one or more classes of
Certificates, some of which may be subordinate to others. However, only
senior certificates issued by such Trusts, which meet the restrictive
criteria designed to ensure investor safety discussed herein would be
eligible for the exemptive relief to be provided under this proposed
exemption.
The Trusts
3. Each Trust is created under a PSA between Fleet, as Seller and
Servicer, and an independent and unaffiliated Trustee. Upon creation of
a Trust, the Seller transfers to the Trust a pool of interest-bearing
credit card receivables which are selected under strict criteria
approved by one or more of certain nationally recognized rating
agencies,13 from the portfolio of revolving credit card
accounts owned by Fleet. The PSA establishes the general parameters for
the Trust, such as the requirements for eligible receivables to be
transferred to the Trust, the manner of transferring and administering
and servicing the receivables, Seller representations and covenants as
to receivable eligibility, Servicer and Trustee duties and eligibility,
and other matters.
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\13\ As noted in Section I.C.(3) above, these rating agencies
are: (i) Standard & Poors Ratings Services, a division of McGraw-
Hill Companies Inc.; (ii) Moody's Investors Service, Inc.; (iii)
Duff & Phelps Credit Rating Co.; and (iv) Fitch IBCA, Inc., or their
successors (collectively, the Rating Agencies).
---------------------------------------------------------------------------
The applicant represents that any Trust that issues a class of
Certificates to be covered by the proposed exemption would include the
following investor safeguards:
(a) Restricted selection of receivables;
(b) Periodic reporting and monitoring of accounts;
(c) Minimum receivable requirements;
(d) Restrictions regarding addition and removal of accounts;
(e) Servicer eligibility requirements;
[[Page 43749]]
(f) Servicer reports, duties and public accounting firm review;
(g) Trustee eligibility and duties;
(h) Restrictions on investments;
(i) Protection from the consequences of unplanned events; and
(j) Limited discretion.
These investor safeguards are discussed in the following
paragraphs.
4. Restricted Selection of Receivables. In order for a receivable
to be eligible for transfer to the Trust, either on the initial closing
date or on any subsequent date, it must have arisen under an eligible
account. An eligible account is one that is in existence and owned by
and maintained with Fleet (as of the initial selection date or, with
respect to additional accounts, as of the relevant addition cut-off
date), and is payable in U.S. dollars. In addition, an eligible account
must have a United States address for its obligor, must not have been
classified as fraudulent, stolen or lost, and (except as provided
below) must not contain a defaulted receivable. However, eligible
accounts may include accounts, the receivables of which have been
written off, or which have been identified as fraudulent, stolen or
lost, provided that the balance of all receivables included in such
accounts is reflected on the books and records of the Seller (and is
treated for purposes of the PSA) as ``zero,'' and charging privileges
with respect to all such accounts have been canceled in accordance with
the relevant credit card guidelines (i.e, investors do not pay for such
accounts but receive the benefit of any payments made on such
accounts). The eligible receivable must have been created in compliance
with applicable law. All consents, licenses and other approvals
necessary for the creation of the receivable and the execution of the
credit card agreement must have been obtained and be in full force and
effect, and Fleet must have good title to the receivable, free and
clear of liens. Finally, an eligible receivable must constitute the
legal valid and binding payment obligation of the obligor, and
constitute an ``account'' or ``general intangible'' under Article 9 of
the Uniform Commercial Code (the ``UCC''), as in effect in the State of
Rhode Island, so as to grant the Trust a first priority security
interest in the event of bankruptcy. Once the pool of eligible accounts
has been identified, accounts are selected at random for the transfer
of their receivables to the Trust so as to provide a combination of
receivables that is representative of the entire pool of eligible
receivables.
Fleet represents and warrants that the receivables transferred to
the Trust, and the accounts related to those receivables, meet the
above-described standards for eligible receivables and accounts, and
that no selection procedures adverse to the Certificateholders have
been employed in selecting accounts. These restrictions on account
selection are in place to prevent the concentration of high risk
accounts. Each relevant Rating Agency requires that all of these
safeguards be in place before a superior rating is given.
5. Periodic Reporting and Monitoring of Accounts. In connection
with the transfer of the receivables to the Trust, Fleet must record
and file a UCC financing statement (including any continuation
statements, when applicable) in order to perfect the assignment of the
receivables, and must deliver a file-stamped copy of such financing or
continuation statement to the Trustee. Fleet must also indicate in its
computer system file of credit card accounts the receivables
transferred to the Trust by identifying the accounts with a unique
designation, as described in the PSA. Fleet must deliver a complete
list of all accounts in the Trust to the Trustee on or prior to the
initial closing date and thereafter on a periodic basis as required by
the PSA.
The Trustee is able to continually monitor the Trust's assets by
reviewing the monthly reports regarding pool performance which are
prepared for the Trustee and investors by Fleet, as Servicer. In
addition, Fleet provides the Trustee with a complete list of accounts
prior to each addition or removal, as required by the PSA. Each
relevant Rating Agency requires significant monitoring procedures for
the servicing of receivables to ensure investor safety as a condition
to a superior rating.
6. Minimum Receivable Requirements. The aggregate principal amount
of the receivables held by the Trust must be at least equal to the sum
of the principal amount of the Certificates (prior to the commencement
of any related amortization or accumulation) for all Series then
outstanding (other than a Series which is backed in full by accumulated
cash or permitted investments (see Paragraph 11 below) less any
accumulated excess funding amount held in the Trust for
Certificateholders. If, on the last business day of any month, the
aggregate amount of principal receivables is less than the required
minimum, Fleet must designate additional accounts or may convey
participations in other credit card receivable pools sponsored by Fleet
to be transferred to the Trust so that the aggregate principal
receivables will meet the minimum requirement.
Interests in the assets of each Trust are allocated among the
Certificateholders of each Series and the Seller (i.e., Fleet) and the
principal portion of the Seller's interest is referred to as the
``Seller Amount.'' The interest in the Trust assets allocated to the
Seller is referred to as the ``Seller Interest'' less any accumulated
excess funding amount held in the Trust for Certificateholders. To
protect against fraud, chargebacks or other dilution of receivables in
the Trust, the PSA and the Rating Agencies will require Fleet, as the
Trust's sponsor, to maintain a seller interest of not less than 2
percent of the principal balance of the receivables contained in the
Trust (referred to as the ``Required Seller Percentage''). If, on the
last business day of any month, the Seller Amount is less than the
Required Seller Percentage, Fleet must designate additional accounts or
participations in other credit card receivable pools to be transferred
by Fleet to the Trust in order to satisfy the minimum requirement. When
account payments exceed account purchases, the total pool of
receivables in the relevant Trust contracts. As a result, the Seller
Interest declines, thus providing a buffer to prevent a decline in the
principal balance of the Certificates prior to the scheduled payment of
principal. Thus, when the account balances that secure the Certificates
decline, the Seller Interest decreases, not the principal balance of
the Certificates. When the account balances again increase, the Seller
Interest is increased. The Seller Interest will also decline as a
result of dilution of the receivable portfolio resulting from noncash
reductions such as merchandise returns or servicer errors.
The minimum receivable requirement and Required Seller Percentage
requirement imposed on Fleet by the PSA (as described above) cause the
Trustee, Servicer or Seller to have limited discretion regarding the
minimum size of the Trust. Each relevant Rating Agency gains comfort
from these minimum receivable levels that the Trust will be maintained
so as not to adversely affect the ability of the Trust assets to
support the promised interest and/or principal payments to
Certificateholders.
7. Restrictions Regarding Addition and Removal of Accounts. In
addition to the limitations discussed above regarding the initial
selection of accounts and minimum receivable requirements, the
following restrictions apply to the addition of accounts subsequent to
the initial transfer of receivables to the Trust. Any transfer of
receivables from additional accounts
[[Page 43750]]
must be preceded by written notice to the Trustee, each relevant Rating
Agency and the Servicer specifying the approximate aggregate amount of
receivables to be transferred. In connection with the transfer, Fleet
will warrant that the additional accounts are eligible accounts and
that each receivable is an eligible receivable, and that no selection
procedures believed by Fleet to be materially adverse to the interest
of the Certificateholders were utilized in selecting the accounts.
Fleet must deliver an opinion of counsel with respect to the added
receivables to the Trustee, with a copy to each relevant Rating Agency,
that such addition is enforceable and that the Trust has either a valid
transfer of, or a grant of security interest in, the additional
accounts. The PSA requires that the Servicer and the Trustee receive
confirmation from a Rating Agency that no Ratings Effect (i.e., a
downgrade or withdrawal of the then current rating of any outstanding
Series of Certificates) will result from a proposed transfer of
accounts to the Trust.
Fleet may remove receivables and accounts, subject to the minimum
receivable requirements discussed above. Fleet must give the Trustee
and the Servicer and the relevant Rating Agencies written notice
stating the approximate aggregate principal balance of the removal, and
certifying that such removal must not result in a Pay Out Event. Fleet
must warrant that no selection procedures believed by it to be
materially adverse to the Certificateholders were utilized in selecting
the removed receivables. Each relevant Rating Agency must have
confirmed that such proposed removal will not result in a Ratings
Effect. Fleet states further that the amount of any receivables that
are removed must be less than 5 percent of the aggregate amount of
principal receivables or, if any Series is paid in full, the amount of
receivables removed must approximate the initial investor interest of
such Series.
Each Rating Agency has determined that the number of additional
accounts from which receivables may be added is generally limited to:
(i) with respect to any consecutive three-month period commencing in
January, April, July and October of each calendar year, 15 percent of
the number of existing accounts designated to the Trust as of the first
day of the calendar year in which such monthly period commenced, and
(ii) with respect to any calendar year, 20 percent of the number of
accounts designated to the Trust as of the first day of such calendar
year. Fleet may be able to exceed the maximum addition amount if
approval is received from each relevant Rating Agency.
By informing the relevant Rating Agencies of all details regarding
additions and removals, the Trust is effectively reexamined each time
these events occur in order to assure that the changes to the Trust
assets will not adversely affect the rating of any outstanding Series.
Each relevant Rating Agency scrutinizes the receivables in the
additional accounts, or the relative strength of the pool of
receivables designated to the Trust both before and after the addition
or removal, as the case may be, in making any such re-examinations.
8. Servicer Eligibility Requirements. The Servicer of the
receivables must be either the Seller (Fleet), an affiliate of Fleet,
or an entity unaffiliated with Fleet acting as a ``Subservicer'' which
is qualified to service a portfolio of consumer revolving credit card
accounts and meets certain requirements. Under such requirements, the
entity acting as either a Servicer or Subservicer must be legally
qualified and have the capacity to service the accounts, must be
qualified to use the software used to service the accounts, must have
demonstrated the ability to professionally and competently service a
portfolio of similar accounts in accordance with customary standards of
skill and care, and must have a certain net worth (e.g. at least
$50,000,000). These requirements are in line with the Rating Agencies'
standards for servicers.
Regardless of whether the Servicer is Fleet, an affiliate of Fleet,
or a third party meeting the eligibility requirements discussed above,
the Servicer's duties are largely ministerial and are provided in
detail in the PSA. The Servicer administers the receivables, collects
payments due thereunder, makes withdrawals from the various accounts
created under the PSA which are forwarded to the Trustee on the dates
and in the manner provided under the PSA, commences enforcement
proceedings with respect to delinquent receivables and makes filings
and other necessary reports with the SEC and any state securities
authorities as necessary to comply with the law. The Servicer must
maintain fidelity bond coverage insuring against losses through its own
wrongdoing, and is entitled to receive a reasonable servicing fee which
is specifically enumerated in each PSA supplement.
9. Servicer Daily Reports, Duties and Public Accounting Firm
Review. On each business day the Servicer, upon prior written notice by
the Trustee, must prepare and make available to the Trustee a record of
the collections processed on the second preceding business day and the
aggregate amount of receivables as of the close of business on such
day. The Servicer must prepare monthly for the Trustee, the paying
agent, any credit enhancement provider, and each relevant Rating
Agency, a certificate setting forth the aggregate collections processed
during the preceding month with respect to each Series outstanding, the
aggregate amount of the investor percentages of collections of finance
charge receivables and principal receivables processed during the
preceding month with respect to each Series outstanding, the balances
in the finance charge account, the principal account or any Series
account during the preceding month, and other detailed information.
The Servicer will provide annually a certificate from an officer
indicating that the Servicer's activities over a 12-month period were
reviewed and the officer believed such obligations were fully performed
under the PSA. Every year, a nationally recognized firm of independent
certified public accountants will review the internal accounting
controls and their relation to the servicing of the receivables as well
as the mathematical accuracy of the Servicer's monthly reports, and the
results will be provided to the Trustee, any credit enhancement
provider, and each relevant Rating Agency. These additional reviews of
the Servicer are designed to prevent Servicer fraud and limit Servicer
discretion. These safeguards protect investors and are a positive
factor in a Rating Agency's evaluation.
10. Trustee Eligibility and Duties. The Trustee must be a
corporation, bank, or other financial institution organized, doing
business and regulated under the laws of the United States, any State
or the District of Columbia and have a long-term unsecured debt rating
as specified in the PSA. The Trustee must be independent of Fleet and
its affiliates and meet the same requirements that would be necessary
for an eligible Servicer (as discussed under ``Servicer Eligibility
Requirements'' above in paragraph 8). Any successor Trustee must also
meet these requirements and be approved by each relevant Rating Agency.
The Trustee is responsible for receiving collections from
receivables as provided in the PSA, investing any moneys as directed in
the PSA, and directing payments to Certificateholders according to the
plan of allocation and payment detailed in the PSA. In performing these
functions, the Trustee has little, if any, discretion. The Trustee is
also responsible for examining any
[[Page 43751]]
resolutions, statements, certificates, opinions, reports or other
instruments in order to determine whether they substantially conform to
the requirements of the PSA. The Trustee has no power to vary the
corpus of the Trust and must perform the duties of other parties should
they fail to perform under the PSA. Like the Servicer restrictions, the
restrictions on the Trustee limit discretion, enhance investor
protection, and are a positive influence on a Rating Agency's
evaluation.
11. Restrictions on Investments. The collections of principal
receivables and finance charge receivables held in the Trust may be
invested by the Trustee only in ``permitted investments'' during the
interim periods between collection and payment to the
Certificateholders. Such permitted investments are detailed in the PSA
and represent what each relevant Rating Agency considers to be secure
investments that sufficiently protect investors. Under the proposed
exemption, permitted investments would be investments that either (i)
are direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided that such obligation is backed by
the full faith and credit of the United States, or (ii) have been rated
(or the obligor thereof has been rated) in one of the three highest
generic rating categories by a Rating Agency. In addition, all
permitted investments must be described in the PSA and permitted by the
relevant Rating Agencies.
12. Protection From the Consequences of Unplanned Events. If Fleet
should desire to merge or consolidate with, or assume the obligations
of, another entity, certain provisions of the PSA ensure that the Trust
assets remain secure. The new entity involved in the merger or
consolidation must be a national banking association, a state banking
corporation, a savings and loan association, or another entity not
subject to bankruptcy laws or a bankruptcy remote corporation and must
be organized and regulated under the laws of the United States, any
State or the District of Columbia. The new entity must expressly assume
the performance of every covenant and obligation of Fleet, and Fleet
must provide the Trustee with an opinion of counsel that such
assumption is legal, valid and binding. Finally, each relevant Rating
Agency must be notified in advance of the change. Similarly, a merger,
consolidation or assumption of the obligations of the Servicer also
requires the same protections of a full assumption of liabilities, an
opinion of counsel and Rating Agency notification.
The Certificateholders of each Series receive protection from
certain unplanned events (called ``Pay Out Events''). If a ``Pay Out
Event'' occurs with respect to a Series, either (i) a rapid
amortization period will commence during which the Certificates of such
Series will be paid down periodically, as provided in the PSA
Supplement, with the principal collections allocable to such Series or
with principal collections allocable to other Series which are shared
within the same Group (as discussed in Paragraph 15 below), or (ii) a
rapid accumulation period will commence during which the Series'
principal collections will be accumulated until a designated payment
date. Pay Out Events include ``Trust Pay Out Events,'' which apply to
all Series, and ``Series Pay Out Events,'' which apply to particular
Series. ``Trust Pay Out Events'' include: (i) Certain events of
insolvency, conservatorship or receivership relating to Fleet; (ii) the
Trust becomes an ``investment company'' within the meaning of the
Investment Company Act of 1940, as amended; and (iii) Fleet becomes
unable for any reason to transfer receivables to the Trust as required
by the PSA.
``Series Pay Out Events'' generally include:
(a) Failure of Fleet to make required payments or observe its other
covenants to the extent there is a material adverse effect on the
Certificateholders of that Series;
(b) Breach by Fleet of its representations and warranties to the
extent there is a material adverse effect on the Certificateholders of
that Series;
(c) A default by the Servicer that would have a material adverse
effect on the Certificateholders of that Series;
(d) Failure of Fleet to convey additional accounts as required to
meet the required seller percentage and principal balance requirements;
and
(e) The net portfolio yield for any three consecutive monthly
periods is less than the base rate for such period (an ``Economic Pay
Out Event'').
With respect to item (e) above, Fleet states that an ``Economic Pay
Out Event'' will occur automatically when the portfolio yield for any
series of certificates, averaged over three consecutive months (or such
other period approved by one of the Rating Agencies) is less than the
base rate of the series averaged over the same period. Portfolio yield
for a series of certificates for any period is equal to the sum of the
finance charge collections and other amounts treated as finance charge
collections less total defaults for the series divided by the
outstanding principal balance of the investor certificates of the
series, or such other measure approved by one of the Rating Agencies.
The base rate for a series of certificates for any period is the sum of
(i) amounts payable to certificateholders of the series with respect to
interest, (ii) servicing fees allocable to the series payable to the
servicer, and (iii) any credit enhancement fee allocable to the series
payable to a third party credit enhancer, divided by the outstanding
principal balance of the investor certificates of the series, or such
other measure approved by one of the Rating Agencies.
Fleet states that an ``Economic Pay Out Event'' should not occur
because the amount of receivables included within the Trust has been
designed to create ``excess spread'' between the yield on the
receivables and the certificate rates. ``Excess spread'' is the amount
by which the yield on the receivables held by the Trust exceeds, at any
point in time, the amounts necessary to pay certificate interest,
principal (if such payments are due to certificateholders), servicing
fees and expenses, and to satisfy cardholder defaults or charge-offs.
The Rating Agencies examine the expected amount of ``excess spread''
very closely before providing a high credit rating for the
certificates.
A ``Pay Out Event'' accelerates the scheduled payments or
accumulation of principal on the Certificates as specified within each
PSA Supplement, and eliminates shared allocations from such Series,
thus increasing the probability of full payment to senior
Certificateholders, including plan investors. During a rapid
amortization period, which is triggered by a ``Pay Out Event'', all
collections are distributed periodically (instead of being distributed
on the originally scheduled principal payment dates), as provided in
the PSA Supplement, until the senior Certificateholders are paid in
full. During a rapid accumulation period, also triggered by a ``Pay Out
Event'', all principal collections allocated to the senior Certificates
are accumulated and invested by the Trustee until the senior
Certificateholders' interest is backed in full by cash and/or permitted
investments which will be distributed on the originally scheduled
payment date. Payments or accumulations are then directed to the next
level of Certificates below the senior Certificates, until all
Certificates have been paid or accumulated, or the Trust terminates.
Because this accelerated pay out or accumulation schedule is triggered
as a result of poor
[[Page 43752]]
performance, senior Certificateholders are protected from a loss which
might result from long-term yield reduction, and are, to a level of
certainty necessary to support a rating of ``AA'' (or better), likely
to receive their entire investment return. The timing or amount of the
payments or accumulations is specifically defined in each PSA
Supplement, further protecting investors from mismanagement. This
automatic pay out trigger is important to each relevant Rating Agency
as well, because it strictly limits the potential losses to investors.
Investors are also protected from the negative consequences of an
event of Seller insolvency. If one or more of a number of indications
of insolvency are present, a ``Pay Out Event'' occurs and a rapid
amortization or a rapid accumulation period is triggered. As discussed
above, this event accelerates payments or accumulation of collections
to maximize the probability that senior Certificateholders will be paid
promptly and in full. In addition, the Trustee also liquidates the
receivables (unless otherwise instructed by Certificateholders
representing undivided interests aggregating more than 50 percent of
each outstanding Series) in order to further accelerate the pay out or
accumulation process. The proceeds of the liquidation are distributed
or accumulated in the tiered manner discussed above in the low-yield
scenario.
13. Limited Discretion. Inherent in all of the restrictions
surrounding creation and management of the Trust, discussed above, is
the limited ability of any party to the transaction to make
discretionary decisions that would have a major impact on the Trust
assets. The PSA addresses every possible important decision and
provides the exact course of action required. Each detail is designed
to ensure maximum investor security, and minimum Trustee and Servicer
discretion.
The Series
14. Once a Trust is established, a Series of Certificates may be
issued pursuant to a PSA Supplement. One Trust typically supports
multiple Series of Certificates over time. Each Series issued under a
Trust is secured, along with other outstanding Series, by the assets of
the issuing Trust. The PSA Supplement builds on the PSA by specifying
the parameters for the Series, such as the number and type of
Certificates, subordination and payment structuring, and other credit
enhancement features.
The life of a Series consists of a revolving period and an
amortization or accumulation period. During both periods, daily
collections are allocated to the Trust accounts in the manner specified
in the PSA Supplement. Interest payments are made periodically to the
Certificateholders as provided in the PSA Supplement, and principal is
paid in a lump sum on the date designated in the PSA Supplement (in the
case of an accumulation period), or periodically pursuant to a schedule
in the PSA Supplement (in the case of an amortization period), for each
class of Certificates. The allocation of collections and the priority
of payments differs slightly during the revolving period and the
amortization or accumulation period.
15. During a Series' revolving period, periodic interest payments
are made to Certificateholders. Principal payments, however, are not
made until the amortization period or at the end of the accumulation
period. Principal collections during the revolving period typically are
shared among the Series that are members of the same Group. If one
Series has principal receipts greater than needed to pay principal for
that period, the excess may be used to pay principal for another Series
in the Group which may have a need for such principal collections. In
such instances, the minimum principal receivable balances required by
the Rating Agencies for all Series must be maintained. The process of
sharing within the Group spreads payment risk over a broader base of
collections and effectively allows concentration of principal
collections supporting a particular Series, resulting in increased
reliability of the payment streams.
Principal collections received during the amortization or
accumulation period are also potentially shared, but are first applied
to the principal funding for the Series to which they relate. The
amortization or accumulation period ends on the earliest of: (i) When
the investor interests are paid in full; (ii) the Series termination
date provided in the PSA Supplement; or (iii) the commencement of a
rapid amortization or rapid accumulation period. Finance charges and
fees collected during the revolving period and the accumulation or
amortization period are applied to the related Series, and are not
generally shared within the Group.
16. Every Trust will have a variety of credit enhancement features,
as described in the PSA and specified in the applicable PSA Supplement.
In addition to the Group sharing of collections discussed above, other
forms of credit enhancement may include subordination and letters of
credit or other third party arrangements. The type and value of credit
enhancement for a particular Series is designed to complement the
underlying Trust receivables so that, as a whole, the Trust assets
satisfy the relevant Rating Agencies' requirements for the superior
rating desired. In this regard, Fleet represents that the particular
class of certificates for each series to which this proposed exemption
would apply (an Exempt Class) will have credit support provided to the
Exempt Class through either a senior-subordinated series structure or
other form of third party credit support which, at a minimum, will
represent five (5) percent of the outstanding principal balance of
certificates issued for the Exempt Class, so that an investor in the
Exempt Class will not bear the initial risk of loss.
Each Series with an Exempt Class covered by the proposed exemption
will include one or more of the following credit enhancing investor
safeguards (as discussed further below): (i) subordination; (ii) third
party credit enhancement; and (iii) predetermined allocation of
collections and payments to certificateholders allows no variation.
17. Subordination. Typically, a Series will have some form of
subordination incorporated within the payment schedule detailed in the
PSA Supplement. Such a Series will consist of at least one class of
senior Certificates (typically designated as ``Class A Certificates'')
which will be allocated collections in a more favorable manner than,
and/or prior to, another class (or other classes) of Certificates
(i.e., the next lower level, typically designated as ``Class B
Certificates'') and often will include an uncertificated class
subordinate to the Class B Certificates (typically designated as the
``Collateral Interest'' or ``Class C Interest''). The subordination
process generally will involve both the receipt of collections and the
effect of losses. Thus, such collections will be applied to the senior
(or Class A) Certificates first and then the second tier (or Class B)
Certificates, and will be applied last to the lowest level class of
Certificates (or the Collateral Interest). Conversely, the losses will
first reduce the lowest class of Certificates (or the Collateral
Interest), only affecting the senior (or Class A) Certificates after
all other classes have been reduced to zero. The result of this tiered
structure is that the senior (or Class A) Certificates are protected
from nonpayment by the lower classes. If the certainty of payment
provided by the subordination or other credit support mechanism is
insufficient to allow each relevant Rating Agency to bestow one of its
two highest ratings on the senior Certificates, the senior Certificates
[[Page 43753]]
would not be eligible for the relief provided under the proposed
exemption.
18. Third Party Credit Enhancement. A Series may include a form of
credit enhancement provided by an outside party, such as a letter of
credit, a cash collateral account, insurance or a guaranty or other
extension of credit. This arrangement will be documented by a separate
contract outlining the terms of the enhancement. A holder of the
Collateral Interest (described in paragraph 17) or other subordinate
interest holder may be a loan provider or an investor in the Class C
Interest, and the PSA Supplement typically requires that a minimum
Collateral Interest (or subordinate interest) be a feature of each
Series. As with all the forms of credit enhancement, the terms and the
amount of the Collateral Interest will be dependent upon an evaluation
of the other Trust assets and the additional support needed to satisfy
each relevant Rating Agency that the Certificates are sufficiently
protected from default.
19. Predetermined Allocation of Collections and Payments to
Certificateholders Allows No Variation. The PSA Supplement provides
instructions to the Servicer regarding each day's collections and the
allocation of those collections to the various accounts created by the
PSA. These instructions indicate how to make the payments and
allocations during the revolving period, the controlled amortization or
controlled accumulation period and the rapid amortization or rapid
accumulation period, if any. The instructions also cover the treatment
of other moneys from loans or other credit enhancement features, and
carefully describe how to accommodate any excess collections, or how to
compensate for any shortfalls. In following these detailed
instructions, the Servicer does not make any discretionary decisions.
The tasks are predetermined and largely ministerial. These explicit
instructions, in concert with the Servicer reporting and review
requirements, are designed to permit each relevant Rating Agency to
conclude that mismanagement risks are minimal.
The Certificates
20. Each Series may include a class or various classes of
Certificates, some of which may be subordinate to others.
Certificateholders will be entitled to receive periodic payments of
interest based upon a fixed or variable interest rate which is set
forth in the PSA Supplement and applied to the Certificateholder's
unpaid principal balance. Certificateholders will also be entitled to
receive a lump sum principal payment on the scheduled payment date, or
a series of periodic payments beginning on the scheduled payment
commencement date, as specified in the PSA Supplement, to the extent of
the Certificateholder's investor interest.
As noted earlier, only Certificates that are not subordinate to any
other class or classes of Certificates (the ``Senior Certificates'')
would be eligible for exemptive relief under the proposed exemption.
However, subordinate certificates that are part of a Series which
includes Senior Certificates eligible for the proposed exemption could
be purchased by insurance company general accounts if the conditions of
Prohibited Transaction Exemption 95-60, 60 FR 35925 (July 12, 1995)
(PTE 95-60), are satisfied.
21. Fleet represents that a plan would invest in the Certificates
for the same reasons any investor would invest in a highly secure,
``AA'' (or better) rated investment with attractive yields. The Senior
Certificates represent an investment alternative which offers all the
benefits of a highly rated fixed-income security, such as fixed payment
streams, investment diversity and market rates of return. Permitting
plans to invest in Senior Certificates in reliance on the proposed
exemption would provide plans with additional and safe investment
opportunities.
22. With respect to the credit ratings of the Certificates, Fleet
states that the rating reflects a Rating Agency's opinion as to the
relative amount of protection that investors have against loss of
principal and interest during the life of the security. A high rating
comports with a low risk of loss. In order to achieve this rating, each
relevant Rating Agency requires the credit card securitizations
effected through the Trust to include a variety of safeguards--such as
subordination or other forms of credit enhancement, limitations on the
Seller's discretion, and Rating Agency approval of certain actions
taken with respect to the Trust or a Series of Certificates. Each
relevant Rating Agency typically requires legal opinions regarding the
credit card securitization's structure and performs stress tests on the
portfolio of selected receivables in order to evaluate the
securitization's anticipated performance within a range of significant
market fluctuations. In addition, each relevant Rating Agency performs
a comprehensive review of all documents related to the credit card
securitization before the formal rating is given. Each relevant Rating
Agency must provide confirmations that additions of receivables from
accounts to a Trust, or withdrawals of existing accounts from a trust,
will not result in a Ratings Effect on the Certificates.
After its rating is assigned, the Rating Agency monitors the
performance of the credit card receivables included in a Trust in order
to assess whether the performance remains consistent with the rating.
Although variations in portfolio performance are expected during a
Certificate's duration and are factored into a Rating Agency's
analysis, extreme and unexpected performance results may result in a
revision of the rating. Fleet makes its Trust performance information
available to each relevant Rating Agency in a variety of ways, in order
to ensure that such Agency receives all the information it deems
necessary to make its evaluation. For example, Fleet provides
information on portfolio performance broken down by account balance,
credit limit, account age, delinquency period and geographic
distribution.
Fleet states that the receipt of one of the two highest generic
ratings from a Rating Agency represents the result of an exhaustive
analysis of the many risk factors involved with a Series of
Certificates, and provides a comfort level to investors that the
potential reduction in yield as a result of credit losses is
minimal.14
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\14\ In this regard, the Department was advised by
representatives from two of the Rating Agencies (RA Reps) of certain
issues concerning the ratings of certificates issued by trusts
holding credit card receivables. The RA Reps discussed, among other
things, the fact that different banks use different underwriting
standards and may offer cardholders different terms on their
accounts. Some banks may be willing to accept cardholders with more
risky credit histories while other banks may not or may offer better
terms to cardholders with superior payment histories. The result may
be that some banks have a higher quality portfolio of receivables
than other banks. The RA Reps stated that if a bank securitizes a
portfolio of receivables which holds a number of riskier accounts,
the Rating Agencies will require more credit enhancement measures
because different assumptions will have to be made about the
performance of the portfolio--e.g. higher charge-off rates will be
assumed and greater ``excess spread'' will be necessary to avoid
losses--in order to achieve an ``AAA'' rating. Thus, for example,
Bank A's certificates may receive an ``AAA'' rating along with
Fleet's certificates even though Bank A may experience more charge-
offs on the credit card accounts and may have different payment
rates on the receivables associated with those accounts.
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23. Fleet represents that the statistics on Certificates backed by
credit card trusts indicate that they are sound investments. In this
regard, Fleet states that public credit card securitization
transactions have been in existence since 1987 and issuers have
successfully sold over $230 billion in Certificates backed by credit
card receivables since then with a zero investor loss rate. Fleet
states further that plans have invested during this time in such
Certificates,
[[Page 43754]]
despite the prohibited transaction provisions of the Act, in reliance
upon the Department's regulation defining ``plan assets'' and,
specifically, the ``100-Holder Exception'' for ``publicly-offered''
securities (see 29 CFR 2510.3-101).15
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\15\ The Department's regulation defining ``plan assets''
provides that, if a plan invests in a publicly-offered security, the
plan's assets will not include, solely by reason of such investment,
any of the underlying assets of the entity issuing the security
(i.e. the ``look-through rule'' will not apply and the operations of
the entity will not be subject to scrutiny under the prohibited
transaction provisions of the Act). The regulation defines a
``publicly-offered'' security as one that is freely transferable,
widely-held, and registered under the federal securities laws. A
class of securities is ``widely held'' if it is owned by 100 or more
investors who are independent of the issuer and of one another at
the conclusion of the offering (see 29 CFR 2510.3-101(b)(3)).
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Fleet maintains that the proposed exemption offers a number of
safeguards in the form of concentration restrictions that are designed
to provide additional protections for plan investors which are not
included in the typical 100-holder exception transactions. For example,
for purposes of the relief from the prohibitions of section 406(b) of
the Act 16 provided under Section I.B. herein (relating to
certain obligors of the Trust who may have discretionary authority for
a plan investing in certificates of the Trust), the proposed exemption
limits such plan's investment in any class of Certificates of any
Series to not more than 25 percent of the principal amount of the
Certificates of that class outstanding at the time of acquisition. In
addition, immediately after the acquisition of the certificates, not
more than 25 percent of the assets of such a plan may be invested in
certificates representing an interest in the trust, or trusts
containing receivables sold or serviced by the same entity. Further,
the proposed exemption requires that at least 50 percent of the
outstanding principal amount of each class of Certificates in which
plans have invested, and at least 50 percent of the outstanding
aggregate interest of the Trust, in connection with the initial
issuance of the Certificates, must be acquired by persons independent
of the Sponsor, the Servicer and other related parties. These
restrictions are designed to protect plan investors from the risks
inherent in excessive ownership concentration and related party
transactions.
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\16\ Section 406(b) of the Act, in pertinent part, prohibits a
plan fiduciary from dealing with the assets of the plan in his own
interest or for his own account, or from acting on behalf of a party
(or representing a party) whose interests are adverse to the
interests of the plan and its participants and beneficiaries.
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24. Fleet represents that the requested exemption is similar to the
Underwriter Exemptions.\17\ The Underwriter Exemptions are a series of
exemptions granted by the Department to various underwriters or trust
sponsors for transactions relating to the acquisition by plans of
certificates representing interests in trusts holding various types of
assets (e.g. single and multi-family residential or commercial
mortgages, motor vehicle leases and related vehicles, equipment leases
or other secured obligations), as provided in Section III.B. of the
Underwriter Exemptions.
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\17\ As indicated in Footnote 7 above, PTE 97-34 (which granted
an amendment to the Underwriter Exemptions) contains the most
comprehensive listing of these exemptions.
---------------------------------------------------------------------------
The Trusts described under the proposed exemption for Certificates
backed by credit card receivables differ from trusts holding secured
obligations in that the Trusts do not contain a fixed pool of assets
and the receivables are not secured by real or tangible personal
property. However, Fleet states that this difference in structure does
not represent a difference in the quality or safety of investments by
plans and other investors in the Certificates. Under the proposed
exemption, Fleet represents that the other forms of credit enhancement
provide at least the same level of security for investors in Trusts
holding credit card receivables as exists for investors in trusts
holding tangible or real property as collateral for the payment
obligations to Certificateholders. In addition, Trusts holding credit
card receivables do not involve the expense and administrative
complexities of foreclosure procedures relating to tangible and real
property.
25. Certificateholders are entitled to receive periodic payments of
interest based upon an interest rate, which may be variable or fixed.
This interest rate is specified or defined in the PSA Supplement for
the particular Series and is applied to the outstanding principal
balance of the Certificates. This outstanding balance (net of any
charge-offs) is known as the investor interest for the senior class of
Certificates. Certificateholders are also entitled to receive principal
payments on the scheduled payment dates, or sooner or later under
certain limited circumstances, pursuant to the PSA Supplement to the
extent of the Certificateholders' investor interest. The payments are
funded from collections on the related receivables and allocated to the
investor interests as provided in the PSA Supplement.
Fleet states that a Series or class of Certificates may have the
benefit of an interest rate swap agreement entered into between the
Trustee for a Trust and a bank or other financial institution acting as
a swap counterparty. Pursuant to the swap agreement, the swap
counterparty would pay a certain rate of interest to the Trust in
return for a payment of a rate of interest by the Trust, from
collections allocable to the relevant Series or class of Certificates,
to the swap counterparty. Fleet represents that the credit rating
provided to a particular Series or class of Certificates by the
relevant Rating Agency may or may not be dependent upon the existence
of a swap agreement. Thus, in some instances, the terms and conditions
of the swap agreements will not effect the credit rating of the Series
or class of Certificates to which the swap relates (i.e. a ``Non-
Ratings Dependent Swap'').
Fleet states that whether or not the credit rating of a particular
Series or class of Certificates is dependent upon the terms and
conditions of one or more interest rate swap agreements entered into by
the Trust (i.e. a ``Ratings Dependent Swap'' or a ``Non-Ratings
Dependent Swap''), each particular swap transaction will be an
``Eligible Swap'' as defined in Section III.HH. above.
In this regard, an Eligible Swap will be a swap transaction:
(a) Which is denominated in U.S. Dollars;
(b) Pursuant to which the Trust pays or receives, on or immediately
prior to the respective payment or distribution date for the applicable
senior class of Certificates, a fixed rate of interest, or a floating
rate of interest based on a publicly available index (e.g. LIBOR or the
U.S. Federal Reserve's Cost of Funds Index (COFI)), with the Trust
receiving such payments on at least a quarterly basis and obligated to
make separate payments no more frequently than the counterparty, with
all simultaneous payments being netted;
(c) Which has a notional amount that does not exceed either (i) the
certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(d) Which is not leveraged (i.e. payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in item (b) above, and the difference between
the products thereof, calculated on a one to one ratio and not on a
multiplier of such difference);
(e) Which has a final termination date that is the earlier of the
date on which
[[Page 43755]]
the Trust terminates or the related class of Certificates is fully
repaid; and
(f) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in items (a) through
(e) above without the consent of the Trustee.
In addition, any Eligible Swap entered into by the Trust will be
with an ``Eligible Swap Counterparty'', which will be a bank or other
financial institution with a rating at the date of issuance of the
Certificates by the Trust which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating
Agencies rating the Certificates (see Section III.II above). However,
if a swap counterparty is relying on its short-term rating to establish
its eligibility, such counterparty must either have a long-term rating
in one of the three highest long-term rating categories or not have a
long-term rating from the applicable Rating Agency.
With respect to a Ratings Dependent Swap, an Eligible Swap
Counterparty will be subject to certain collateralization or other
arrangements satisfactory to the Rating Agencies in the event of a
rating downgrade of such swap counterparty below a level specified by
the Rating Agency, which would be no lower than the level that would
make such counterparty ``eligible'' under this proposed exemption (see
Section III.II. above). If these arrangements are not established
within a specified period, as described in the PSA, there will be an
early payout event causing certificateholders to receive an earlier
than expected payout of principal on their certificates for the series
to which the swap relates. However, with respect to a Non-Ratings
Dependent Swap, the PSA will not specify that there be an early payout
event for the series to which the swap relates if the credit rating of
the swap counterparty falls below the level required for it to be
considered an Eligible Swap Counterparty (as described in Section
III.II. above). In such instances, in order to protect the interests of
the Trust as a swap counterparty, the servicer (as agent for the
trustee of the trust) will be required to either:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement will
terminate);
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms.
Under any termination of a swap, the Trust will not be required to
make any termination payments to the swap counterparty (other than a
currently scheduled payment under the swap agreement) except from
``excess finance charge collections'' or other amounts that would
otherwise be payable to the servicer or the seller (i.e. Fleet). In
this regard, ``excess finance charge collections'' will be, as of any
day funds are distributed from the Trust, the amounts by which the
finance charge collections allocated to certificates of a series exceed
the amounts necessary to pay certificate interest, servicing fees and
expenses, to satisfy cardholder defaults or charge-offs, and to
reinstate credit support.
With respect to Non-Ratings Dependent Swaps, each Rating Agency
rating the Certificates must confirm, as of the date of issuance of the
Certificates by the Trust, that entering into the swap transactions
with the Eligible Swap Counterparty will not effect the rating of the
Certificates, even if such counterparty is no longer an ``eligible''
counterparty and the swap is terminated.\18\
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\18\ RA Reps have indicated to the Department that certain
series of certificates issued by a trust holding credit card
receivables will have certificate ratings that are not dependent on
the existence of a swap transaction entered into by the trust.
Therefore, a downgrade in the swap counterparty's credit rating
would not cause a downgrade in the rating established by the Rating
Agency for the certificates. RA Reps state that in such instances
there will be more credit enhancements (e.g. ``excess spread'',
letters of credit, cash collateral accounts) for the series to
protect the certificateholders than there would be in a comparable
series where the trust enters into a so-called Ratings Dependent
Swap. Non-Ratings Dependent Swaps are generally used as a
convenience to enable the trust to pay certain fixed interest rates
on a series of certificates. However, the receipt of such fixed
rates by the trust from the counterparty is not a necessity for the
trust to be able to make its fixed rate payments to the
certificateholders.
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Any class of senior Certificates to which one or more swap
agreements entered into by the trust applies, will be acquired or held
only by Qualified Plan Investors (as defined in Section III.JJ. above).
Qualified Plan Investors will be plan investors represented by an
appropriate independent fiduciary that is qualified to analyze and
understand the terms and conditions of any swap transaction relating to
the class of senior Certificates to be purchased and the effect such
swap would have upon the credit rating of the senior Certificates to
which the swap relates.
For purposes of the proposed exemption, such a qualified
independent fiduciary will be either:
(i) A ``qualified professional asset manager'' (i.e. QPAM), as
defined under Part V(a) of PTE 84-14;\19\
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\19\ See Footnote 11 above.
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(ii) An ``in-house asset manager'' (i.e. INHAM), as defined under
Part IV(a) of PTE 96-23;\20\ or
---------------------------------------------------------------------------
\20\ See Footnote 12 above.
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(iii) A plan fiduciary with total assets under management of at
least $100 million at the time of the acquisition of such Certificates.
Disclosures Available to Investing Plans
26. In connection with the original issuance of certificates, the
prospectus or private offering memorandum will be furnished to
investing plans. The prospectus or private offering memorandum will
contain information pertinent to a plan's decision to invest in the
Certificates, such as:
(a) Information concerning the Certificates, including payment
terms, certain tax consequences of owning and selling Certificates, the
legal investment status and rating of the Certificates, and any special
considerations with respect to the Certificates;
(b) Information about the underlying receivables, including the
types of receivables, statistical information relating to the
receivables, their payment terms, and the legal aspects of the
receivables;
(c) Information about the servicing of the receivables, including
the identity of the servicer and servicing compensation;
(d) Information about the Sponsor of the Trust;
(e) A full description of the material terms of the Pooling and
Servicing Agreement; and
(f) Information about the scope and nature of the secondary market,
if any, for such Certificates.
Certificateholders will be provided with information concerning the
amount of principal and interest to be paid on Certificates in
connection with each distribution to Certificateholders.
Certificateholders will also be provided with periodic information
statements setting forth material information concerning the status of
the Trust.
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, as amended (the '34 Act). Although
some Trusts that offer Certificates in a public offering will file
quarterly reports on
[[Page 43756]]
Form 10-Q and Annual Reports on Form 10-K, many Trusts (i) obtain, by
application to the 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; or (ii) are
not subject to such requirements for one or more Series of Certificates
issued by the Trust. If such an exemption is obtained, these Trusts
normally would continue to have the obligation to file current reports
on Form 8-K to report material developments concerning the Trust and
the Certificates. While the SEC's interpretation of the periodic
reporting requirement is subject to change, periodic reports concerning
a Trust will be filed to the extent required under the '34 Act.
Fleet states that at or about the time distributions are made to
Certificateholders, reports will be delivered to the Trustee as to the
status of the Trust and its assets, including underlying Receivables.
Such reports will typically contain information regarding the Trust's
assets, payments received or collected by the Servicer, the amount of
delinquencies and defaults, the amount of any payments made pursuant to
any credit support or credit enhancement feature, and the amount of
compensation payable to the Servicer. Such reports will also be
delivered or made available to the Rating Agency that currently rates
the Certificates. Such reports will be available to investors and its
availability will be made known to potential investors. In addition,
promptly after each distribution date, Certificateholders will receive
a statement summarizing information regarding the Trust and its assets
and the applicable Series, including underlying receivables.
28. In summary, Fleet represents that the proposed transactions
will meet the statutory criteria of section 408(a) of the Act because,
among other things:
(a) The acquisition of senior Certificates by a plan will be on
terms (including Certificate price) that are at least as favorable to
the plan as such terms would be in an arm's-length transaction with an
unrelated party;
(b) The rights and interests evidenced by the senior Certificates
will not be subordinated to the rights and interests evidenced by other
investor Certificates of the Trust;
(c) Any senior Certificates acquired by a plan will have received a
rating at the time of such acquisition that is in one of the two
highest generic rating categories from any one of the Rating Agencies
or, for certificates with a duration of one year or less, the highest
short-term generic rating category from any one of the Rating Agencies;
(d) The Trustee of the Trust will not be an affiliate of any other
member of the Restricted Group;
(e) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
Certificates will represent not more than reasonable compensation for
underwriting or placing the Certificates; the consideration received by
the Sponsor as a consequence of the assignment of receivables (or
interests therein) to the Trust will represent not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the Servicer, which are allocable to
the Series or class of certificates purchased by a plan, will represent
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;
(f) Any plan investing in such Certificates will be an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933, as amended;
(g) The terms of each Series or class of Certificates, and the
conditions under which Fleet may designate additional accounts to, or
remove previously-designated accounts from, the Trust will be described
in the prospectus or private placement memorandum provided to investing
plans;
(h) The Trustee of the Trust will be a substantial financial
institution or trust company experienced in trust activities and would
be familiar with its duties, responsibilities and liabilities as a
fiduciary under the Act;
(i) The PSA will include ``Economic Pay Out Events'' triggered by a
decline in the performance of the receivables in the Trust;
(j) To protect against fraud, chargebacks or other dilution of the
receivables in the Trust, the PSA and the Rating Agencies will require
Fleet, as the Trust's sponsor, to maintain a seller interest of not
less than 2 percent of the principal balance of the receivables
contained in the Trust;
(k) Each receivable added to a Trust will be an eligible
receivable, based on criteria of the relevant Rating Agency(ies) and as
specified in the PSA;
(l) The PSA will require that any change in the terms of any
cardholder agreements also will be made applicable to the comparable
segment of accounts owned or serviced by Fleet which are part of the
same program or have the same or substantially similar characteristics;
(m) The addition of new receivables or designation of new accounts,
and the removal of previously-designated accounts, will meet the terms
and conditions for such additions, designations, or removals as
described in the prospectus or private placement memorandum for such
Certificates, which terms and conditions will have been approved by
each relevant Rating Agency, and will not result in the Certificates
receiving a lower credit rating from the relevant Rating Agency than
the then current rating of the Certificates;
(n) Any swap transaction relating to senior Certificates that are
covered by the proposed exemption must satisfy the several investor-
protective conditions applicable to Eligible Swaps and must be entered
into by the Trust with an Eligible Swap Counterparty; and
(o) Any class of Certificates to which one or more swap agreements
entered into by the Trust applies may be acquired or held by plans in
reliance upon this proposed exemption only if such plans are
represented by ``Qualified Plan Investors.''
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and
[[Page 43757]]
protective of the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 2nd day of August, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-20190 Filed 8-10-99; 8:45 am]
BILLING CODE 4510-29-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.