[Federal Register Volume 59, Number 205 (Tuesday, October 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26405]
[[Page Unknown]]
[Federal Register: October 25, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9801, et al.]
Proposed Exemptions; Alex. Brown & Sons, Inc. (ABS) et al.
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 restriction of the Employee
Retirement income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request 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. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, 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, U.S. 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.
Alex. Brown & Sons, Incorporated (ABS)
Located in Baltimore, Maryland
[Application No. D-9801]
Proposed Exemption
I. Transactions
A. Effective August 12, 1994, the restrictions of sections 406(a)
and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b)
of the Code by reason of section 4975(c)(1) (A) through (D) of the Code
shall not apply to the following transactions involving trusts and
certificates evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A. (1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded Plan.\1\
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\1\Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective August 12, 1994, the restrictions of sections
406(b)(1) and 406(b)(2) of the Act and the taxes imposed by section
4975 (a) and (b) of the Code by reason of section 4975(c)(1)(E) of the
Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no
more than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.\2\ For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
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\2\For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B. (1) or (2).
C. Effective August 12, 1994, the restrictions of sections 406(a),
406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a)
and (b) of the Code by reason of section 4975(c) of the Code, shall not
apply to transactions in connection with the servicing, management and
operation of a trust, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.3
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\3\In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. Effective August 12, 1994, the restrictions of sections 406(a)
and 407(a) of the Act, and the taxes imposed by sections 4975(a) and
(b) of the Code by reason of sections 4975(c)(1)(A) through (D) of the
Code, shall not apply to any transactions to which those restrictions
or taxes would otherwise apply merely because a person is deemed to be
a party in interest or disqualified person (including a fiduciary) with
respect to a plan by virtue of providing services to the plan (or by
virtue of having a relationship to such service provider described in
section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2) (F),
(G), (H) or (I) of the Code), solely because of the plan's ownership of
certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D & P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) A certificate--
(a) that represents a beneficial ownership interest in the assets
of a trust; and
(b) that entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) A certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) that is issued by and is an obligation of a trust;
with respect to certificates defined in (1) and (2) above for which ABS
or any of its affiliates is either (i) the sole underwriter or the
manager or co-manager of the underwriting syndicate, or (ii) a selling
or placement agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either
(a) secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property);
(d) obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) ``guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) Property which had secured any of the obligations described in
subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the investment pool consists only of
assets of the type which have been included in other investment pools,
(ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories
by S&P's, Moody's, D & P, or Fitch for at least one year prior to the
plan's acquisition of certificates pursuant to this exemption, and
(iii) certificates evidencing interests in such other investment pools
have been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption.
C. ``Underwriter'' means:
(1) ABS;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
ABS; or
(3) Any member of an underwriting syndicate or selling group of
which ABS or a person described in (2) is a manager or co-manager with
respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services loans contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(1) Which is secured by equipment which is leased;
(2) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) With respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as the
trust would be have if the equipment note were secured only by the
equipment and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust holds a security interest in the lease;
(2) The trust holds a security interest in the leased motor
vehicle; and
(3) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as the trust would receive
under a motor vehicle installment loan contract.
V. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
Effective Date: This exemption, if granted, will be effective for
transactions occurring on or after August 12, 1994.
Summary of Facts and Representations
1. ABS, an investment banking firm, provides financial advice to,
and raises capital for, a broad range of domestic and international
clients. ABS conducts business from its headquarters in Baltimore and
in various cities across the United States, as well as London and
Geneva. ABS is the oldest banking firm in the United States, having
been in business since 1800. Since its inception, ABS has been very
active in the government bond, corporate equity and municipal finance
and housing finance areas. As of December 31, 1993, ABS had total
assets of over $1.2 billion and total shareholder's equity of over $345
million. For the year ended December 31, 1993, ABS had gross revenues
of over $628 million and net earnings, after income taxes, of over $89
million.
Trust Assets
2. ABS seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) Single and multi-family residential or
commercial mortgage investment trusts;\4\ (2) motor vehicle receivable
investment trusts; (3) consumer or commercial receivables investment
trusts; and (4) guaranteed governmental mortgage pool certificate
investment trusts.\5\
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\4\The Department notes that PTE 83-1 [48 FR 895, January 7,
1983], a class exemption for mortgage pool investment trusts, would
generally apply to trusts containing single-family residential
mortgages, provided that the applicable conditions of PTE 83-1 are
met. ABS requests relief for single-family residential mortgages in
this exemption because it would prefer one exemption for all trusts
of similar structure. However, ABS has stated that it may still
avail itself of the exemptive relief provided by PTE 83-1.
\5\Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mortgages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.\6\
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\6\Trust assets may also include obligations that are secured by
leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. The sponsor or
servicer of a trust selects assets to be included in the trust. These
assets are receivables which may have been originated by a sponsor or
servicer of the trust, an affiliate of the sponsor or servicer, or by
an unrelated lender and subsequently acquired by the trust sponsor or
servicer.
On or prior to the closing date, the sponsor acquires legal title
to all assets selected for the trust, establishes the trust and
designates an independent entity as trustee. On the closing date, the
sponsor conveys to the trust legal title to the assets, and the trustee
issues certificates representing fractional undivided interests in the
trust assets. ABS, alone or together with other broker-dealers, acts as
underwriter or placement agent with respect to the sale of the
certificates. The majority of the public offerings of certificates made
to date have been underwritten on a firm commitment basis. However,
some may be undertaken on a best efforts basis. In addition, ABS has
privately placed certificates on both a firm commitment and an agency
basis. ABS may also act as the lead underwriter for a syndicate of
securities underwriters. ABS may also act as the servicer or seller to
the trust of the receivables or the trust sponsor.
Certificate holders are entitled to receive monthly, quarterly or
semi-annually installments of principal and/or interest, or lease
payments due on the receivables, adjusted, in the case of payments of
interest, to a specified rate--the pass-through rate--which may be
fixed or variable.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
certificate holders) to hold funds received between distribution dates.
The account is under the sole control of the trustee, who invests the
account's assets in short-term securities which have received a rating
comparable to the rating assigned to the certificates. In some cases,
the servicer may be permitted to make a single deposit into the account
once a month. When the servicer makes such monthly deposits, payments
received from obligors by the servicer may be commingled with the
servicer's assets during the month prior to deposit. Usually, the
period of time between receipt of funds by the servicer and deposit of
these funds in a segregated account does not exceed one month.
Furthermore, in those cases where distributions are made semi-annually,
the servicer will furnish a report on the operation of the trust to the
trustee on a monthly basis. At or about the time this report is
delivered to the trustee, it will be made available to certificate
holders and delivered to or made available to each rating agency that
has rated the certificates.
5. Some of the certificates will be multi-class certificates. ABS
requests exemptive relief for two types of multi-class certificates:
``strip'' certificates and ``fast-pay/slow-pay'' certificates. Strip
certificates are a type of security in which the stream of interest
payments on receivables is split from the flow of principal payments
and separate classes of certificates are established, each representing
rights to disproportionate payments of principal and interest.7
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\7\It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(1)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. In certain transactions of
this type, interest and/or principal payments received on the
underlying receivables are distributed first to the class of
certificates having the earliest stated maturity of principal, and/or
earlier payment schedule, and only when that class of certificates have
been paid in full (or has received a specified amount) will
distributions be made with respect to the second class of certificates.
Distributions on certificates having later stated maturities will
proceed in like manner until all the certificateholders have been paid
in full. The only difference between this multi-class pass-through
arrangement and a single-class pass-through arrangement is the order in
which distributions are made to certificateholders. In each case,
certificateholders will have a beneficial ownership interest in the
underlying assets. In neither case will the rights of a plan purchasing
a certificate be subordinated to the rights of another
certificateholder in the event of default on any of the underlying
obligations. In particular, if the amount available for distribution to
certificateholders is less than the amount required to be so
distributed, all senior certificateholders then entitled to receive
distributions will share in the amount distributed on a pro rata
basis.8
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\8\If a trust issues subordinated certificates, holders of such
subordinated certificates may not share in the amount distributed on
a pro rata basis with the senior certificateholders. The Department
notes that the exemption does not provide relief for plan investment
in such subordinated certificates.
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6. For tax reasons, the trust must be maintained as an essentially
passive entity. Therefore, both the sponsor's discretion and the
servicer's discretion with respect to assets included in a trust are
severely limited. Pooling and servicing agreements provide for the
substitution of receivables by the sponsor only in the event of defects
in documentation discovered within a short time after the issuance of
trust certificates. Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
Parties to Transactions
7. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a homeowner or automobile
purchaser, or leases property to the lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
8. The sponsor will be one of three entities: (i) A special-purpose
corporation unaffiliated with the servicer, (ii) a special-purpose or
other corporation affiliated with the servicer, or (iii) the servicer
itself. Where the sponsor is not also the servicer, the sponsor's role
will generally be limited to acquiring the receivables to be included
in the trust, establishing the trust, designating the trustee, and
assigning the receivables to the trust.
9. The trustee of a trust is the legal owner of the obligations in
the trust. The trustee is also a party to or beneficiary of all the
documents and instruments deposited in the trust, and as such is
responsible for enforcing all the rights created thereby in favor of
certificateholders.
The trustee will be an independent entity, and therefore will be
unrelated to ABS, the trust sponsor or the servicer. ABS represents
that the trustee will be a substantial financial institution or trust
company experienced in trust activities. The trustee receives a fee for
its services, which will be paid by the servicer, sponsor or the trust
as specified in the pooling and servicing agreement. The method of
compensating the trustee which is specified in the pooling and
servicing agreement will be disclosed in the prospectus or private
placement memorandum relating to the offering of the certificates.
10. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, it is common for the
receivables to be ``subserviced'' by their respective originators and
for a single entity to ``master service'' the pool of receivables on
behalf of the owners of the related series of certificates. Where this
arrangement is adopted, a receivable continues to be serviced from the
perspective of the borrower by the local subservicer, while the
investor's perspective is that the entire pool of receivables is
serviced by a single, central master servicer who collects payments
from the local subservicers and passes them through to
certificateholders.
In some cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (though they
themselves may be related) will be unrelated to ABS. In other cases,
however, affiliates of ABS may originate or service receivables
included in a trust, or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. Where the sponsor of a trust is not the originator of
receivables included in a trust, the sponsor generally purchases the
receivables in the secondary market, either directly from the
originator or from another secondary market participant. The price the
sponsor pays for a receivable is determined by competitive market
forces, taking into account payment terms, interest rate, quality, and
forecasts as to future interest rates.
As compensation for the receivables transferred to the trust, the
sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates. If the sponsor receives certificates from the trust, the
sponsor sells all or a portion of these certificates for cash to
investors or securities underwriters. In some transactions, the sponsor
or an affiliate may retain a portion of the certificates for its own
account. In addition, in some transactions the originator may sell
receivables to a trust for cash. At the time of the sale, the trustee
would sell certificates to the public or to underwriters and use the
cash proceeds of the sale to pay the originator for receivables sold to
the trust. The transfer of the receivables to the trust by the sponsor,
the sale of certificates to investors, and the receipt of the cash
proceeds by the sponsor generally take place simultaneously.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on receivables included in the trust minus a specified servicing
fee.9 This rate is generally determined by the same market forces
that determine the price of a certificate. The price of a certificate
and its pass-through, or coupon, rate together determine the yield to
investors. If an investor purchases a certificate at less than par,
that discount augments the stated pass-through rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
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\9\The pass-through rate on certificates representing interests
in trusts holding leases is determined by breaking down lease
payments into ``principal'' and ``interest'' components based on an
implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor, and receive fees for acting in
that capacity) will retain the difference between payments received on
the receivables in the trust and payments payable (at the pass-through
rate) to certificateholders, except that in some cases a portion of the
payments on receivables may be paid to a third party, such as a fee
paid to a provider of credit support. The servicer may receive
additional compensation by having the use of the amounts paid on the
receivables between the time they are received by the servicer and the
time they are due to the trust (which time is set forth in the pooling
and servicing agreement). The servicer will be required to pay the
administrative expenses of servicing the trust, including, in some
cases, the trustee's fee, out of its servicing compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is
established.
14. The servicer may be entitled to retain certain administrative
fees paid by a third party, usually the obligor. These administrative
fees fall into three categories: (a) Prepayment fees; (b) Late payment
and payment extension fees; and (c) Fees and charges associated with
foreclosure or repossession, or other conversion of a secured position
into cash proceeds, upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
15. Payments on receivables may be made by obligors to the servicer
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and
servicing agreement may permit the servicer to place these payments in
non-interest bearing accounts in itself or to commingle such payments
with its own funds prior to the distribution dates. In these cases, the
servicer would be entitled to the benefit derived from the use of the
funds between the date of payment on a receivable and the pass-through
date. Commingled payments may not be protected from the creditors of
the servicer in the event of the servicer's bankruptcy or receivership.
In those instances when payments on receivables are held in non-
interest bearing accounts or are commingled with the servicer's own
funds, the servicer is required to deposit these payments by a date
specified in the pooling and servicing agreement into an account from
which the trustee makes payments to certificateholders.
16. ABS and any other participating underwriter will receive a fee
in connection with the securities underwriting or private placement of
certificates. In a firm commitment underwriting, this fee would
normally consist of the difference between what ABS receives for the
certificates that it distributes and what it pays the sponsor for those
certificates. In a private placement, the fee may also take the form of
an agency commission paid by the sponsor. Such fees are negotiated at
arm's-length with the sponsor, originator or unrelated lender and are
affected by fees in comparable offerings.
Purchase of Receivables by the Servicer
17. The applicant represents that as the principal amount of the
receivables in a trust is reduced by payments, the cost of
administering the trust generally increases, making the servicing of
the trust prohibitively expensive at some point. Consequently, the
pooling and servicing agreement generally provides that the servicer
may purchase the receivables remaining in the trust when the aggregate
unpaid balance payable on the receivables is reduced to a specified
percentage (usually 5 to 10 percent) of the initial aggregate unpaid
balance.
The purchase price of a receivable is specified in the pooling and
servicing agreement and will be at least equal to: (1) The unpaid
principal balance on the receivable plus accrued interest, less any
unreimbursed advances of principal made by the servicer; or (2) The
greater of (a) the amount in (1) or (b) the fair market value of such
obligations in the case of a REMIC, or the fair market value of the
certificates in the case of a trust that is not a REMIC.
Certificate Ratings
18. The certificates will have received one of the three highest
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance
or other credit support (such as surety bonds, letters of credit,
guarantees, or the creation of a class of certificates with
subordinated cash flow) will be obtained by the trust sponsor to the
extent necessary for the certificates to attain the desired rating. The
amount of this credit support is set by the rating agencies at a level
that is a multiple of the worst historical net credit loss experience
for the type of obligations included in the issuing trust.
Provision of Credit Support
19. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust (i.e. act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) out of liquidation proceeds, (c) from the
credit support provider (which may be itself) or, (d) in the case of a
trust that issues subordinated certificates, from amounts otherwise
distributable to holders of subordinated certificates, and the master
servicer will advance such funds in a timely manner. When the servicer
is the provider of the credit support and provides its own funds to
cover defaulted payments, it will do so either on the initiative of the
trustee, or on its own initiative on behalf of the trustee, but in
either event it will provide such funds to cover payments to the full
extent of its obligations under the credit support mechanism. In some
cases, however, the master servicer may not be obligated to advance
funds but instead would be called upon to provide funds to cover
defaulted payments to the full extent of its obligations as insurer.
However, a master servicer typically can recover advances either from
the provider of credit support or from future payments on the affected
assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the servicer out of future payments on receivables held
by the trust to the extent not covered by credit support. However,
where the master servicer provides credit support to the trust, there
are protections in place to guard against a delay in calling upon the
credit support to take advantage of the fact that the credit support
declines proportionally with the decrease in the principal amount of
the obligations in the trust as payments on receivables are passed
through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount becomes a fixed dollar
amount subject to reduction only for actual draws. From the time that
the floor amount is effective until the end of the life of the trust,
there are no proportionate reductions in the credit support amount
caused by reductions in the pool principal balance. Indeed, since the
floor is a fixed dollar amount, the amount of credit support ordinarily
increases as a percentage of the pool principal balance during the
period that the floor is in effect.
Disclosure
20. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
(c) Identification of the independent trustee for the trust;
(d) A description of the receivables contained in the trust,
including the types of receivables, the diversification of the
receivables, their principal terms, and their material legal aspects;
(e) A description of the sponsor and servicer;
(f) A description of the pooling and servicing agreement, including
a description of the seller's principal representations and warranties
as to the trust assets and the trustee's remedy for any breach thereof;
a description of the procedures for collection of payments on
receivables and for making distributions to investors, and a
description of the accounts into which such payments are deposited and
from which such distributions are made; identification of the servicing
compensation and any fees for credit enhancement that are deducted from
payments on receivables before distributions are made to investors; a
description of periodic statements provided to the trustee, and
provided to or made available to investors by the trustee; and a
description of the events that constitute events of default under the
pooling and servicing contract and a description of the trustee's and
the investors' remedies incident thereto;
(g) A description of the credit support;
(h) A general discussion of the principal federal income tax
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
(i) A description of the underwriters' plan for distributing the
pass-through securities to investors; and
(j) Information about the scope and nature of the secondary market,
if any, for the certificates.
21. Reports indicating the amount of payments of principal and
interest are provided to certificateholders at least as frequently as
distributions are made to certificateholders. Certificateholders will
also be provided with periodic information statements setting forth
material information concerning the underlying assets, including, where
applicable, information as to the amount and number of delinquent and
defaulted loans or receivables.
22. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates. While the Securities and Exchange Commission's
interpretation of the periodic reporting requirements is subject to
change, periodic reports concerning a trust will be filed to the extent
required under the Securities Exchange Act of 1934.
23. At or about the time distributions are made to
certificateholders, a report will be delivered to the trustee as to the
status of the trust and its assets, including underlying obligations.
Such report will typically contain information regarding the trust's
assets, payments received or collected by the servicer, the amount of
prepayments, delinquencies, servicer advances, defaults and
foreclosures, the amount of any payments made pursuant to any credit
support, and the amount of compensation payable to the servicer. Such
report also will be delivered to or made available to the rating agency
or agencies that have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the servicer,
paying agent or trustee summarizing information regarding the trust and
its assets. Such statement will include information regarding the trust
and its assets, including underlying receivables. Such statement will
typically contain information regarding payments and prepayments,
delinquencies, the remaining amount of the guaranty or other credit
support and a breakdown of payments between principal and interest.
Secondary Market Transactions
24. It is ABS's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter, and it is
ABS's intention to attempt to make a market for any certificates for
which ABS is lead or co-managing underwriter. In general, it is also
ABS's policy to facilitate sales by investors who purchase certificates
if ABS has acted as agent or principal in the original private
placement of the certificates and if such investors request ABS's
assistance.
Retroactive Relief
25. ABS represents that it has engaged in transactions related to
mortgage-backed and asset-backed securities based on the assumption
that retroactive relief would not be granted. However, it is possible
that some transactions may have occurred that would be prohibited. For
example, because many certificates are held in street or nominee name,
it is not always possible to identify whether the percentage interest
of plans in a trust is or is not ``significant'' for purposes of the
Department's regulation relating to the definition of plan assets (29
CFR 2510.3-101(f)). These problems are compounded as transactions occur
in the secondary market. In addition, with respect to the ``publicly-
offered security'' exception contained in that regulation (29 CFR
2510.3-101(b)), it is difficult to determine whether each purchaser of
a certificate is independent of all other purchasers.
Therefore, ABS requests relief retroactive for transactions which
have occurred on or after August 12, 1994, the date ABS originally
filed its exemption application with the Department.
Summary
26. In summary, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute receivables
contained in the trust once the trust has been formed;
(b) Certificates in which plans invest will have been rated in one
of the three highest rating categories by S&P's, Moody's, D&P or Fitch.
Credit support will be obtained to the extent necessary to attain the
desired rating;
(c) All transactions for which ABS seeks exemptive relief will be
governed by the pooling and servicing agreement, which is made
available to plan fiduciaries for their review prior to the plan's
investment in certificates;
(d) Exemptive relief from sections 406(b) and 407 for sales to
plans is substantially limited; and
(e) ABS has made, and anticipates that it will continue to make, a
secondary market in certificates.
Discussion of Proposed Exemption
I. Differences between Proposed Exemption and Class Exemption PTE 83-1
The exemptive relief proposed herein is similar to that provided in
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts, amended and
restated as PTE 83-1 [48 FR 895, January 7, 1983].
PTE 83-1 applies to mortgage pool investment trusts consisting of
interest-bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property. The exemption
provides relief from sections 406(a) and 407 for the sale, exchange or
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406(a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (1) The proposed exemption
provides individual exemptive relief rather than class relief; (2) The
proposed exemption covers transactions involving trusts containing a
broader range of assets than single-family residential mortgages; (3)
Instead of requiring a system for insuring the pooled receivables, the
proposed exemption conditions relief upon the certificates having
received one of the three highest ratings available from S&P's,
Moody's, D&P or Fitch (insurance or other credit support would be
obtained only to the extent necessary for the certificates to attain
the desired rating); and (4) The proposed exemption provides more
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
After consideration of the representations of the applicant and
information provided by S&P's, Moody's, D&P and Fitch, the Department
has decided to condition exemptive relief upon the certificates having
attained a rating in one of the three highest generic rating categories
from S&P's, Moody's, D&P or Fitch. The Department believes that the
rating condition will permit the applicant flexibility in structuring
trusts containing a variety of mortgages and other receivables while
ensuring that the interests of plans investing in certificates are
protected. The Department also believes that the ratings are indicative
of the relative safety of investments in trusts containing secured
receivables. The Department is conditioning the proposed exemptive
relief upon each particular type of asset-backed security having been
rated in one of the three highest rating categories for at least one
year and having been sold to investors other than plans for at least
one year.10
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\1\0In referring to different ``types'' of asset-backed
securities, the Department means certificates representing interests
in trusts containing different ``types'' of receivables, such as
single family residential mortgages, multi-family residential
mortgages, commercial mortgages, home equity loans, auto loan
receivables, installment obligations for consumer durables secured
by purchase money security interests, etc. The Department intends
this condition to require that certificates in which a plan invests
are of the type that have been rated (in one of the three highest
generic rating categories by S&P's, D&P, Fitch or Moody's) and
purchased by investors other than plans for at least one year prior
to the plan's investment pursuant to the proposed exemption. In this
regard, the Department does not intend to require that the
particular assets contained in a trust must have been ``seasoned''
(e.g., originated at least one year prior to the plan's investment
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
ABS represents that in some cases a trust sponsor, trustee,
servicer, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates may be a pre-existing party
in interest with respect to an investing plan.11 In these cases, a
direct or indirect sale of certificates by that party in interest to
the plan would be a prohibited sale or exchange of property under
section 406(a)(1)(A) of the Act.12 Likewise, issues are raised
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a
plan to purchase certificates where trust funds will be used to benefit
a party in interest.
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\1\1In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which ABS or any
of its affiliates is either (a) the sole underwriter or manager or
co-manager of the underwriting syndicate, or (b) a selling or
placement agent.
\1\2The applicant represents that where a trust sponsor is an
affiliate of ABS, sales to plans by the sponsor may be exempt under
PTE 75-1, Part II (relating to purchases and sales of securities by
broker-dealers and their affiliates), if ABS is not a fiduciary with
respect to plan assets to be invested in certificates.
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Additionally, ABS represents that a trust sponsor, servicer,
trustee, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates representing an interest in
a trust may be a fiduciary with respect to an investing plan. ABS
represents that the exercise of fiduciary authority by any of these
parties to cause the plan to invest in certificates representing an
interest in the trust would violate section 406(b)(1), and in some
cases section 406(b)(2), of the Act.
Moreover, ABS represents that to the extent there is a plan asset
``look through'' to the underlying assets of a trust, the investment in
certificates by a plan covering employees of an obligor under
receivables contained in a trust may be prohibited by sections 406(a)
and 407(a) of the Act.
After consideration of the issues involved, the Department has
determined to provide the limited sections 406(b) and 407(a) relief as
specified in the proposed exemption.
Notice to Interested Persons
The applicant represents that because those potentially interested
participants and beneficiaries cannot all be identified, the only
practical means of notifying such participants and beneficiaries of
this proposed exemption is by the publication of this notice in the
Federal Register. Comments and requests for a hearing must be received
by the Department not later than 30 days from the date of publication
of this notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The Masters, Mates and Pilots Pension Plan (the Pension Plan) and
Individual Retirement Account Plan (the IRAP; Together, the Plans)
Located in Linthicum Heights, Maryland
[Application Nos. D-9618 and D-9619]
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)
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 continued holding by the Plans
of their shares of stock (the Stock) in American Heavy Lift Shipping
Company (AHL), provided that (a) the Plans' independent fiduciary has
determined that the Plans' holding of the Stock is appropriate for the
Plans and in the best interests of the Plans' participants and
beneficiaries; and (b) the Plans' independent fiduciary continues to
monitor the Plans' holding of the Stock and determines at all times
that such transaction remains in the best interests of the Plans.
Temporary Nature of Exemption
If the proposed exemption is granted, the exemption will be
effective until the later of: (1) December 31, 1995, or (2) December
31, 1996 provided another application for exemption is filed with the
Department prior to December 31, 1995.
Summary of Facts and Representations
1. The Pension Plan is a defined benefit plan that currently has
approximately 5,800 participants. As of December 31, 1992, the Pension
Plan had approximately $673 million in assets. The IRAP is a defined
contribution plan that currently has approximately 5,200 participants.
As of December 31, 1992, the IRAP had approximately $87 million in
assets. The Plans principally cover members of the International
Organization of Masters, Mates and Pilots.
2. Bear Stearns Fiduciary Services, Inc. (BSFS) is a registered
investment advisor which serves as the Named Fiduciary for the Special
Assets Portfolio of the Plans. The Special Assets Portfolio consists of
various venture capital and other non-liquid investments which were
made by a former investment manager of the Plans, Tower Asset
Management, Inc. (Tower), and which were the subject of protracted
litigation (the Litigation) between the Department, Tower, the Plans
and certain of their trustees, and certain plan participants.13
The Litigation ultimately was settled pursuant to Court Order entered
by the United States District Court for the Southern District of New
York (the Court).
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\1\3In re Masters, Mates and Pilots Pension Plan and IRAP
Litigation, Lead File No. 85 Civ. 9545 (VLB) (S.D.N.Y.)
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3. In the course of the Litigation, BSFS was appointed Named
Fiduciary for the Plans' Special Assets Portfolio by Court Order dated
September 18, 1990 (the Court Order). BSFS assumed its responsibilities
on November 8, 1990. The Court Order provided that the Named Fiduciary,
rather than the Plans' trustees, has the ``sole, exclusive, full and
complete authority and discretion concerning the control, management
and disposition of the Special Assets Portfolio''.
4. Since February, 1987, the Plans have each owned 45 shares of the
Stock, which Stock represents all of the outstanding shares of AHL. AHL
is a Delaware corporation, headquartered in Houston, Texas, that is
engaged in the shipping industry. Its principal assets consist of four
single-hulled tankers, built in the 1950's, that are used primarily for
the transportation of petroleum products in the Jones Act trade (i.e.,
American-flagged tankers in the domestic intra-coastal trade). The
Plans' Stock can be traced back to certain prior investments made by
Tower and is held in the Plans' Special Assets Portfolio, along with
the Plans' other remaining Tower-initiated investments.
5. Since AHL is an employer of employees covered under the Plans,
the Stock constitutes employer securities under section 407(d)(1) of
the Act. The applicants represent that the Stock constituted qualifying
employer securities within the meaning of section 407(d)(5) of the Act
at the time of its acquisition, but as of January 1, 1993, the Stock
ceased to be a qualifying employer security because the Stock is
wholly-owned by the Plans and thus cannot meet the requirements of
section 407(f) of the Act. However, the Plans' continued holding of the
Stock is currently exempt from the prohibited transaction restrictions
of the Act pursuant to Prohibited Transaction Class Exemption No. 79-15
as a result of a court order, dated November 2, 1992, entered in the
Litigation (the PTE 79-15 Order). Under the terms of the PTE 79-15
Order, this exemption is effective until the later of: a) December 31,
1993; or b) December 31, 1994, provided the Plans make application to
the Department for an exemption to permit the continued holding of the
Stock. By filing the request which is the subject of the exemption
proposed herein, the exemption provided under the PTE 79-15 Order has
been automatically extended to December 31, 1994.
6. While BSFS, in its capacity as Named Fiduciary, has ultimate
investment management responsibility for the Special Assets Portfolio,
it does not exercise investment management discretion over the
portfolio's assets on a day-to-day basis. Rather, as contemplated by
the Court Order, responsibility for the day-to-day management and
supervision of the portfolio's assets has been delegated at all times
to independent investment managers selected by BSFS. With respect to
the Plans' investment in the Stock, such responsibility was first
delegated to Sunwestern Advisors, L.P. (Sunwestern), which served as
the investment manager for this investment until July 14, 1992.
Effective that date, Sunwestern's responsibilities were assumed by a
new investment manager, Potomac Asset Management, Inc. (Potomac), which
continues to serve in that capacity.
7. Potomac, a registered investment adviser founded in 1978, is
owned by three principals, all of whom are analysts as well as
portfolio managers. In addition to the principals, Potomac has an
experienced fixed-income manager, equity manager, and corporate finance
consultant. In addition to its traditional investment management of
$165 million in bond and stock portfolios, Potomac maintains a
corporate finance business consisting of private placement consulting
and monitoring for pension funds, fair market value analysis for
various clients, restructuring and financing of private companies and
related activities. Potomac has had experience in managing investments
by multi-employer plans in privately-held companies, similar to the
situation involving the Plans' investment in the Stock.
8. Potomac represents that aggressive efforts were made by
Sunwestern to sell the Plans' Stock in 1991 and 1992. These efforts
were unsuccessful largely due to the age of AHL's ships and market
uncertainties created by the Oil Pollution Act of 1990 (OPA 1990). By
the time these sales efforts were discontinued in mid-1992, no bona
fide offers for any price above essentially scrap value had
materialized. Under OPA 1990, every single-hull tanker engaged in the
domestic petroleum trade must be converted to a double-hulled tanker or
it will be phased out of service beginning in 1995, depending upon its
year of construction. AHL's four tankers were constructed between 1957
and 1960. Therefore, AHL must either double-hull two of the tankers
before the end of 1995 and the other two by the end of 1996, or those
ships will be prohibited from engaging in the domestic petroleum trade.
If AHL chooses not to double-hull the ships, it will have to depend on
the less consistent grain, vegetable oil, etc. trade for business.
9. Potomac represents that, in its judgment, there has been no
change in market conditions that would permit a sale of the Plans'
interest in the near term, and, more importantly by year end when the
exemption pursuant to the PTE 79-15 Order expires. While AHL has
returned to profitability (see reps. 10 and 11, below), the twin
problems that plagued prior sales efforts (see rep. 8, above) still
remain and make the sale of AHL on a going concern basis, in Potomac's
opinion, a virtual impossibility. The only expressions of interest that
Potomac has received since becoming investment manager in 1992 have
consisted of casual inquiries concerning whether AHL would sell one of
its vessels at slightly below scrap value. In addition, the scrapping
of AHL's ships is not feasible at the present time due to existing
contractual commitments. Currently, several of AHL's ships are on
extended term charter and thus, with the possible exception of a single
ship, AHL could not now scrap its fleet without abrogating its
contractual obligations.
10. Potomac represents that while no sale of AHL is currently
feasible on favorable terms, AHL has returned to profitability
following the difficulties it experienced over the last half of 1991
and during 1992. Potomac states that these profitable operations will
result in a very significant return to the Plans on their investment
over the near term, particularly when compared to the only viable
alternative, a sale of AHL's ships at a price approximating their scrap
value. Since a scrap value sale of the ships remains available after
the relatively short period of profitable operations permitted under
OPA 1990, Potomac believes that the Plans' retention of their
investment is the preferable investment course of action over the near
term, even if OPA 1990's requirements ultimately end the useful life of
AHL's ships.
11. Potomac represents that AHL's Board, subject to Potomac's
review as investment manager, has instituted a number of measures
designed to return AHL to profitability. These measures included a
change in AHL's key management, the ability of new management to secure
term, as opposed to spot charters, and the installation of more refined
and sophisticated cash management and management information systems.
In addition, AHL had significant necessary maintenance performed,
including the successful completion of total drydock on three of AHL's
four ships. During the first quarter of 1994, AHL earned a net profit
of $787,284 from operations, and shareholders' equity rose to the
highest level in AHL's history. Potomac represents that it believes
that in 1994, AHL will earn between $1.2 million and $1.6 million from
operations. Potomac further represents that the scrap value of the
ships will not decline significantly from today's values, if at all,
over the near term. Thus, even if AHL found that OPA 1990's
requirements left it with no option other than scrapping its vessels
after 1996, the continued operation of the company, so long as it is
profitable, will leave the Plans with the added value generated by such
profitability, plus roughly the same scrap value that they could now
realize. In addition, this investment option allows AHL to continue to
study other options and await market developments that may
significantly enhance the value of its assets to a potential buyer and
thus significantly enhance the value of the Plans' investment.
12. One such potential market development involves the
reconstruction of existing single-hulled vessels to meet the
requirements of OPA 1990, which may present a cost-effective
alternative to the building of new ships. This alternative entails
attaching new, double-hulled cargo bodies to the engine and crew
sections of existing ships. Potomac represents that discussions it has
had with Avondale Industries, Inc. (Avondale), one of the nation's
leading shipbuilding companies, suggest that the cost of rebuilding an
existing vessel in this fashion would be approximately 50% of the cost
of a new vessel. This potential cost savings represents an important
value potential for AHL's existing ships that Potomac represents would
exceed the ship's scrap value and may be attractive to a possible buyer
should a demand for rebuilt ships, in fact, develop. Potomac has been
exploring this option in discussions with Avondale and representatives
of the United States Coast Guard. In addition, preliminary discussions
have been held with the Federal Maritime Administration concerning the
potential financing of such a project, by whomever is the owner, with
federal loan guarantees. Potomac emphasizes in exploring this option
that it does not intend the Plans either to make any additional
investment in AHL for this purpose, or to guarantee any financing for
AHL. In fact, BSFS, in its capacity of named fiduciary for the Plans
with oversight responsibility over Potomac (see rep. 13., below), has
made it clear to Potomac that any such investment by the Plans, either
directly or in the form of guarantees, is out of the question. Rather,
it is Potomac's goal to advance this conversion project so as to make
AHL and its ships attractive to a potential buyer/investor in the event
a market for reconfigured vessels develops as a cost-effective
alternative to new construction.
13. BSFS represents that its obligations under the Court Order to
monitor and report on the activities of the investment managers for the
Special Assets Portfolio sharply restrict Potomac's opportunity to
perpetuate unduly the Plans' continued ownership of AHL. Pursuant to
the investment management agreement with Potomac that BSFS negotiated
on behalf of the Plans, Potomac is obligated to supply detailed
quarterly reports on each of the Special Assets it manages and to
comply with written investment guidelines. Those guidelines state that
Potomac ``shall seek, among other prudent objectives, to: (A) Maximize
the Plans' net, long-term investment return [and] (B) Liquidate each
such investment when and insofar as prudent * * *'' Furthermore, the
guidelines require Potomac to prepare and update on a quarterly basis
an ``action plan'' for each asset, including AHL. The action plan
requires the investment manager to state the timetable for achieving a
sale (if sale is intended) or for achieving any other stated objective.
In short, BSFS represents that significant mechanisms are in place to
prevent Potomac from improperly seeking to continue indefinitely to
manage the Plans' Stock in AHL. BSFS represents that in its capacity as
Named Fiduciary, it has reviewed in depth Potomac's analysis of the
various options available and has accepted Potomac's conclusion that
the continued ownership of the Stock is in the best interests of the
Plans.
14. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 408(a) of the
Act because: (a) the proposed exemption would continue for a limited
period of time a transaction permitted by the PTE 79-15 Order; (b) the
Plans' independent investment manager, Potomac, has reviewed the Plans'
holding of the Stock and has determined that it is in the best interest
of both Plans to continue holding the Stock; (c) Potomac will continue
to monitor the transaction to determine whether it remains in the
Plans' best interests to retain the Stock; d) BSFS, which has the
overall responsibility as Named Fiduciary over the Plans' investment in
the Stock, has reviewed Potomac's findings and agrees with Potomac's
determination that the Plans' continued holding of the Stock is in the
best interests of both Plans; and e) the Plans will make no additional
investment in AHL, nor will they guarantee any financing to AHL, for
the purpose of double-hulling of the ships.
FOR FURTHER INFORMATION CONTACT: 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 protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 20th day of October, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration.
[FR Doc. 94-26405 Filed 10-24-94; 8:45 am]
BILLING CODE 4510-29-P
