[Federal Register Volume 61, Number 220 (Wednesday, November 13, 1996)]
[Notices]
[Pages 58237-58253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29035]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
[Application No. D-10108, et al.]
Proposed Exemptions; Morgan Stanley & Company Incorporated
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
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
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. 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 requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Morgan Stanley & Co. Incorporated; Located in New York, New York
[Application No. D-10108]
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 August 25, 1995, the restrictions of section 406(a)(1)
(A) through (D) of the Employee Retirement Income Security Act of 1974
(the Act) and the taxes imposed by section 4975 (a) and (b) of the
Internal Revenue Code of 1986 (the Code), by reason of section 4975
(c)(1) (A) through (D) of the Code, shall not apply to any purchase or
sale of a security between an employee benefit plan and a broker-dealer
affiliated with Morgan Stanley & Co. and subject to British law (MSC/UK
Affiliate), if the following conditions, and the conditions of Section
II, are satisfied:
(1) The MSC/UK Affiliate customarily purchases and sells securities
for its own account in the ordinary course of its business as a broker-
dealer.
(2) Such transaction is on terms at least as favorable to the plan
as those which the plan could obtain in an arm's length transaction
with an unrelated party.
(3) Neither the MSC/UK Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets, and the MSC/UK Affiliate is a party in interest or
disqualified person with respect to the plan assets involved in the
transaction solely by reason of section 3(14)(B) of the Act or section
4975(e)(2)(B) of the Code, or by reason of a relationship to a person
described in such sections. For purposes of this paragraph, the MSC/UK
Affiliate shall not be deemed to be a fiduciary with respect to a plan
solely by reason of providing securities custodial services for a plan.
B. Effective August 25, 1995, the restrictions of section 406(a)(1)
(A) through (D) 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 lending of securities that are assets of
an employee benefit plan to an MSC/UK Affiliate if the following
conditions, and the conditions of Section II, are satisfied:
(1) Neither the MSC/UK Affiliate (the Borrower) nor an affiliate of
the Borrower has discretionary authority or control with respect to the
investment of the plan assets involved in the transaction, or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets;
(2) The plan receives from the Borrower, either by physical
delivery or by book entry in a securities depository located in the
United States, by the close of business on the day on which the
securities lent are delivered to the Borrower, collateral consisting of
U.S. currency, securities issued or
[[Page 58238]]
guaranteed by the United States Government or its agencies or
instrumentalities, or irrevocable United States bank letters of credit
issued by a person other than the Borrower or an affiliate thereof, or
any combination thereof, having, as of the close of business on the
preceding business day, a market value (or, in the case of letters of
credit, a stated amount) equal to not less than 100 percent of the then
market value of the securities lent. The collateral referred to in this
Section I(B)(2) must be held in the United States;
(3) Prior to the making of any such loan, the Borrower shall have
furnished the following items to the fiduciary for the plan who is
making decisions on behalf of the plan with respect to the lending of
securities (the Lending Fiduciary): (1) the most recent available
audited statement of the Borrower's financial condition, (2) the most
recent available unaudited statement of the Borrower's financial
condition (if more recent than such audited stated), and (3) a
representation that, at the time the loan is negotiated, there has been
no material adverse change in the Borrower's financial condition since
the date of the most recent financial statement furnished to the plan
that has not been disclosed to the Lending Fiduciary. Such
representation may be made by the Borrower's agreement that each such
loan shall constitute a representation by the Borrower that there has
been no such material adverse change;
(4) The loan is made pursuant to a written loan agreement, the
terms of which are at least as favorable to the plan as those which the
plan could obtain in an arm's-length transaction with an unrelated
party. Such agreement may be in the form of a master agreement covering
a series of securities-lending transactions;
(5) The plan (1) receives a reasonable fee that is related to the
value of the borrowed securities and the duration of the loan, or (2)
has the opportunity to derive compensation through the investment of
cash collateral. Where the plan has that opportunity, the plan may pay
a loan rebate or similar fee to the Borrower, if such fee is not
greater than the plan would pay an unrelated party in an arm's-length
transaction;
(6) The plan receives the equivalent of all distributions made to
holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities;
(7) If the market value of the collateral on the close of trading
on a business day is less than 100 percent of the market value of the
borrowed securities at the close of trading on that day, the Borrower
shall deliver, by the close of business on the following business day,
an additional amount of collateral (as described in paragraph (2)) the
market value of which, together with the market value of all previously
delivered collateral, equals at least 100 percent of the market value
of all the borrowed securities as of such preceding day.
Notwithstanding the foregoing, part of the collateral may be returned
to the Borrower if the market value of the collateral exceeds 100
percent of the market value of the borrowed securities, as long as the
market value of the remaining collateral equals at least 100 percent of
the market value of the borrowed securities;
(8) The loan may be terminated by the plan at any time, whereupon
the Borrower shall deliver certificates for securities identical to the
borrowed securities (or the equivalent thereof in the event of
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the plan within (1) the customary delivery
period for such securities, (2) three business days, or (3) the time
negotiated for such delivery by the plan and the Borrower, whichever is
lesser; and
(9) In the event the loan is terminated and the Borrower fails to
return the borrowed securities or the equivalent thereof within the
time described in paragraph (8) above, then (i) the plan may, under the
terms of the loan agreement, purchase securities identical to the
borrowed securities (or their equivalent as described above) and may
apply the collateral to the payment of the purchase price, any other
obligations of the Borrower under the agreement, and any expenses
associated with the sale and/or purchase, and (ii) the Borrower is
obligated, under the terms of the loan agreement, to pay, and does pay
to the plan, the amount of any remaining obligations and expenses not
covered by the collateral plus interest at a reasonable rate.
Notwithstanding the foregoing, the Borrower may, in the event the
Borrower fails to return borrowed securities as described above,
replace non-cash collateral with an amount of cash not less than the
then current market value of the collateral, provided such replacement
is approved by the Lending Fiduciary.
(10) If the Borrower fails to comply with any condition of this
exemption, in the course of engaging in a securities-lending
transactions, the plan fiduciary who caused the plan to engage in such
transaction shall not be deemed to have caused the plan to engage in a
transaction prohibited by section 406(a)(1)(A) through (D) of the Act
solely by reason of the Borrower's failure to comply with the
conditions of the exemption.
C. Effective August 25, 1995, the restrictions of sections
406(a)(1) (A) through (D) and 406(b)(2) of the Act and the taxes
imposed by section 4975 (a) and (b) of the Code shall not apply to any
extension of credit to an employee benefit plan by an MSC/UK Affiliate
to permit the settlement of securities transactions or in connection
with the writing of options contracts provided that the following
conditions are met:
(a) The MSC/UK Affiliate is not a fiduciary with respect to any
assets of such plan, unless no interest or other consideration is
received by such fiduciary or any affiliate thereof in connection with
such extension of credit; and
(b) Such extension of credit would be lawful under the Securities
Exchange Act of 1934 and any rules or regulations thereunder if such
act, rules or regulations were applicable.
Section II--General Conditions
A. The MSC/UK Affiliate is registered as a broker-dealer with the
Securities and Futures Authority of the United Kingdom (the S.F.A.);
B. The MSC/UK Affiliate is in compliance with all requirements of
Rule 15a-6 (17 CFR 240.15a-6) under the Securities and Exchange Act of
1934, which provides for foreign broker-dealers a limited exemption
from U.S. registration requirements;
C. Prior to the transaction, the MSC/UK Affiliate enters into a
written agreement with the plan in which the MSC/UK Affiliate consents
to the jurisdiction of the courts of the United States with respect to
the transactions covered by this exemption;
D.(1) The MSC/UK Affiliate maintains or causes to be maintained
within the United States for a period of six years from the date of
such transaction such records as are necessary to enable the persons
described in this section to determine whether the conditions of this
exemption have been met; except that a party in interest with respect
to an employee benefit plan, other than the MSC/UK Affiliate, shall not
be subject to a civil penalty under section 502(i) of the Act or the
taxes imposed by section 4975(a) or (b) of the Code, if such records
are not maintained, or are not available for examination as required by
this section, and a prohibited transaction will not be deemed to have
occurred if, due to circumstances
[[Page 58239]]
beyond the control of the MSC/UK Affiliate, such records are lost or
destroyed prior to the end of such six year period;
(2) The records referred to in subsection (1) above are
unconditionally available for examination during normal business hours
by duly authorized employees of the Department of Labor, the Internal
Revenue Service, plan participants and beneficiaries, any employer of
plan participants and beneficiaries, and any employee organization any
of whose members are covered by such plan; except that none of the
persons described in this subsection shall be authorized to examine
trade secrets of Morgan Stanley & Co. or the MSC/UK or any commercial
or financial information which is privileged or confidential.
Section III--Definitions
``Affiliate'' of a person shall include: (i) Any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such other person; (ii) any officer,
director, or partner, employee or relative (as defined in section 3(15)
of the Act) of such other person; and (iii) any corporation or
partnership of which such other person is an officer, director or
partner. For purposes of this definition, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual.
``Security'' shall include equities, fixed income securities,
options on equity and on fixed income securities, government
obligations, and any other instrument that constitutes a security under
U.S. securities laws. The term ``security'' does not include swap
agreements or other notional principal contracts.
Summary of Facts and Representations
1. Morgan Stanley & Co. Incorporated (MSC) is an international
securities firm that performs securities underwriting, distribution and
trading, merger, acquisition, restructuring and other corporate
financial services for clients world wide. Clients include
multinational corporations, governments, emerging growth companies,
financial institutions and individual investors.
2. MSC has foreign affiliates world wide who are in the business of
trading securities, including a broker-dealer affiliate in London,
England (the MSC/UK Affiliate), currently Morgan Stanley & Co.
International Limited. MSC represents that in the ordinary course of
their business as broker-dealers, these foreign affiliates customarily
operate as traders in dealers markets wherein the broker-dealer
purchases and sells securities for its own account and engages in
purchases and sales of securities with its clients, and that such
trades are referred to as principal transactions. MSC states that in
issuing Prohibited Transaction Class Exemption 75-1 (PTCE 75-1, 40 FR
50845, October 31, 1975) the Department has recognized the functions of
registered broker-dealers in principal transactions on behalf of
clients which are employee benefit plans covered by the Act. Part II of
PTCE 75-1 provides exemptive relief from section 406(a) of the Act for
principal transactions between plans and broker-dealers which are
registered under the Securities Exchange Act of 1934, provided all
requirements stated in Part II are satisfied. MSC represents that like
the U.S. dealer markets, international equity and debt markets,
including the options markets, are no less dependent on a willingness
of dealers to trade as principals. In the absence of an exemption for
principal transactions, such as PTCE 75-1, those responsible for
trading activities on behalf of plan investors would be prevented from
engaging in transactions with those broker-dealers and banks that
provide the markets for the securities and are most capable of handling
such transactions.
3. MSC represents that over the past decade, plans have
increasingly invested in foreign equity and debt securities, including
foreign government securities. MSC states that plans seeking to enter
into such investments may wish to increase the number of trading
partners available to them by trading with foreign broker-dealers such
as the MSC/UK Affiliate. However, where MSC provides services to such
plans which are covered by the Act, principal transactions with the
MSC/UK Affiliate would be prohibited by the Act. The exemptive relief
afforded U.S. broker-dealers by PTCE 75-1 would not be available with
respect to the MSC/UK Affiliate because that class exemption is limited
to broker-dealers registered with the U.S. Securities and Exchange
Commission (S.E.C.) under the Securities Exchange Act of 1934 (the 1934
Act). MSC represents that its MSC/UK Affiliate is not so registered
but, instead, is governed by the rules, regulations and registration
requirements of the Securities and Futures Authority of the United
Kingdom (the S.F.A.). Furthermore, MSC represents that Rule 15(a)-6 of
the 1934 Act offers foreign broker-dealers limited exemption from the
S.E.C. registration requirements pursuant to provisions with which the
MSC/UK Affiliate is able to comply. However, MSC states that because of
the S.E.C. registration requirement of PTCE 75-1, the MSC/UK Affiliate
is prevented from engaging in principal transactions with plans with
respect to which MSC is a party in interest, even though such affiliate
is registered with the S.F.A., experienced in the markets, and able to
satisfy the Rule 15(a)-6 requirements for S.E.C. registration
exemption. Accordingly, MSC is requesting an individual exemption to
permit its MSC/UK Affiliate to engage in principal transactions with
plans under the terms and conditions set forth herein, which MSC
represents are equivalent to those set forth in PTCE 75-1, Part
II.1
---------------------------------------------------------------------------
\1\ The Department notes that the proposed principal
transactions are subject to the fiduciary responsibility
requirements of part 4, subtitle B, title I of the Act. Section
404(a) of the Act requires, among other things, that a fiduciary of
a plan act prudently, solely in the interest of the plan's
participants and beneficiaries, and for the exclusive purpose of
providing benefits to participants and beneficiaries when making
investment decisions on behalf of a plan.
---------------------------------------------------------------------------
4. The proposed exemption will be applicable only to transactions
affected by an MSC/UK Affiliate which is registered as a broker-dealer
with the S.F.A. and in compliance with Rule 15(a)-6. MSC represents
that the role of a broker-dealer in a principal transaction in the
United Kingdom is substantially identical to that of a broker-dealer in
a principal transaction in the United States. MSC further represents
that registration of a broker-dealer with the S.F.A. is equivalent to
registration of a broker-dealer with the S.E.C. under the 1934 Act. MSC
maintains that the S.F.A. has promulgated rules for broker-dealers
which are equivalent to S.E.C. rules, relating to registration
requirements, minimum capitalization, reporting requirements, periodic
examinations, fund segregation, client protection, and enforcement. MSC
represents that the rules and regulations set forth by the S.F.A. and
the S.E.C. share a common objective: the protection of the investor by
the regulation of securities markets. MSC explains that under S.F.A.
rules, persons who manage investments or give advice with respect to
investments must be registered as a ``registered representative''. If a
person is not a registered representative and, as part of his duties,
makes commitments in market dealings or transactions, that person must
be registered as a ``registered trader''. MSC represents that the
S.F.A. rules require each firm which employs registered representatives
or
[[Page 58240]]
registered traders to have positive tangible net worth and be able to
meet its obligations as they fall due, and that the S.F.A. rules set
forth comprehensive financial resource and reporting/disclosure rules
regarding capital adequacy. In addition to demonstration of capital
adequacy, MSC states that the S.F.A. rules impose reporting/disclosure
requirements on broker-dealers with respect to risk management,
internal controls, and all records relating to a counterparty, and that
all records must be produced at the request of the S.F.A. at any time.
MSC states that S.F.A.'s registration requirements for broker-dealers
are backed up by potential fines and penalties, and rules which
establish a comprehensive disciplinary system.
5. MSC represents that in addition to the protections which are
afforded by registration with S.F.A., compliance with the requirements
of Rule 15a-6 (17 CFR 240.15a-6) under the 1934 Act will offer
additional protections in lieu of registration with the S.E.C. MSC
states that Rule 15a-6 provides an exemption from U.S. broker-dealer
registration for a foreign broker-dealer that induces or attempts to
induce the purchase or sale of any security (including over-the-counter
equity and debt options) by a ``U.S. institutional investor'' or a
``U.S. major institutional investor'', provided that the foreign broker
dealer, among other things, enters into these transactions through a
U.S. registered broker-dealer intermediary. The term ``U.S.
institutional investor'', as defined in Rule 15a-6(b)(7), includes an
employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974 (the Act) if (a) the investment decision is
made by a plan fiduciary, as defined in section 3(21) of the Act, which
is either a bank, savings and loan association, insurance company or
registered investment advisor, or (b) the employee benefit plan has
total assets in excess of $5 million, or (c) the employee benefit plan
is a self-directed plan with investment decisions made solely by
persons that are ``accredited investors'' as defined in Rule 501(a)(1)
of Regulation D of the Securities Act of 1933, as amended. The term
``U.S. major institutional investor'' is defined as a person that is a
U.S. institutional investor that has total assets in excess of $100
million. MSC represents that the intermediation of the U.S. registered
broker-dealer imposes upon the foreign broker-dealer the requirement
that the securities transaction be effected in accordance with a number
of U.S. securities laws and regulations applicable to U.S. registered
broker-dealers.
MSC represents that under Rule 15a-6, a foreign broker-dealer that
induces or attempts to induce the purchase or sale of any security by a
U.S. institutional or major institutional investor in accordance with
Rule 15a-6 must, among other things:
(a) Consent to service of process for any civil action brought by,
or proceeding before, the S.E.C. or any self-regulatory organization;
(b) Provide the S.E.C. with any information or documents within its
possession, custody or control, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the S.E.C. requests and that relates to
transactions effected pursuant to the Rule;
(c) Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major institutional
investors are effected to (among other things):
(1) Effect the transactions, other than negotiating their terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
(5) Receive, deliver, and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or U.S. major institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of
Securities); and
(6) Participate in all oral communications (e.g., telephone calls)
between the foreign associated person and the U.S. institutional
investor (not the U.S. major institutional investor), and accompany the
foreign associated person on all visits with both U.S. institutional
and major institutional investors. By virtue of this participation, the
U.S. registered broker-dealer would become responsible for the content
of all these communications.
6. MSC represents that a normal part of the execution of securities
transactions by broker-dealers on behalf of customers, including
employee benefit plans, is the extension of credit to customers to
permit the settlement of transactions in the customary settlement
period, and that such extensions of credit are also customary
activities of broker-dealers in connection with the writing of option
contracts. MSC notes that exemptive relief for such transactions is
provided under Part V of PTCE 75-1. However, the exemptive relief under
Part V of PTCE 75-1, like that under Part II, is available only with
respect to broker-dealers which are registered with the S.E.C. under
the 1934 Act. Accordingly, MSC requests that the exemption include
relief for extensions of credit by the MSC/UK affiliate in the ordinary
course of the purchase or sale of securities, regardless of whether
they are effected on an agency or a principal basis. The proposed
exemption provides relief for extensions of credit by the MSC/UK
Affiliate to a plan to permit the settlement of securities transactions
or in connection with the writing of options contracts, provided that
the MSC/UK Affiliate is not a fiduciary with respect to any assets of
the plan, unless no interest or other consideration is received by the
MSC/UK Affiliate in connection with such extension of credit. The
proposed exemption also requires that the extension of credit would be
lawful under the 1934 Act and any rules or regulations thereunder if
such act, rules, or regulations were applicable.
7. In addition to exemptive relief for principal transactions and
extensions of credit in connection with the purchase or sale of
securities, MSC is also requesting exemptive relief for the lending of
securities, equivalent to that provided under the terms and conditions
of Prohibited Transaction Class Exemption 81-6 (PTCE 81-6, 46 FR 7527,
January 23, 1981, amended at 52 FR 18754, May 19, 1987), a class
exemption to permit certain loans of securities by employee benefit
plans. MSC represents that in PTCE 81-6 the Department has recognized
that securities lending represents a low-risk means of enhancing the
investment return of plans with respect to securities that would
otherwise be idle. MSC represents that the conditions of Section I(B)
of the proposed exemption will subject the MSC/UK Affiliate to all of
the conditions imposed on broker-dealers under PTCE 81-6, other than
registration under the 1934 Act. MSC notes that such conditions include
requirements relating to daily marking to market, setting collateral at
100 percent of the market value of the securities, the rules for
termination of the loan, and return of the borrowed securities. In
addition, MSC notes that
[[Page 58241]]
the collateral will be in U.S. dollars and will be held in the United
States.
8. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) With respect to principal transactions affected
by the MSC/UK Affiliate, the exemption will enable plans to realize the
same benefits of efficiency and convenience which derive from principal
transactions executed pursuant to Part II of PTCE 75-1 by broker-
dealers registered in the United States; (2) With respect to extensions
of credit by the MSC/UK Affiliate in connection with purchases or sales
of securities, the exemption will enable the MSC/UK to extend credit in
the ordinary course of business to affect the transactions within the
customary settlement period or in connection with the writing of
options contracts; (3) With respect to securities lending transactions
affected by the MSC/UK Affiliate, the exemption will enable plans to
realize a low-risk return on securities that otherwise would remain
idle, as in securities lending transactions executed pursuant to PTCE
81-6 by broker-dealers registered in the United States; and (3) The
proposed exemption generally imposes terms and conditions upon the
transactions executed by the MSC/UK Affiliate which are the same as
those imposed on U.S. broker-dealers under PTCE 75-1 and PTCE 81-6.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Electric Pension Trust (the GE Trust), Located in Fairfield,
Connecticut
[Application Nos. D-10285 Thru D-10287]
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
406(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,2 shall not apply, effective July 12,
1996, to the past sale by the GE Trust of its stock in AmeriData
Technologies, Inc. (the AmeriData Stock) to General Electric Capital
Corporation (GECC) and GECC's indirect, wholly-owned subsidiary, GAC
Acquisition I Corporation (GAC), both of which are parties in interest
with respect to the GE Trust and affiliates of the General Electric
Company (GE) the sponsor of the GE Trust, in connection with the merger
(the Merger) of GAC and AmeriData Technologies, Inc. (AmeriData),
provided that the following conditions were satisfied:
---------------------------------------------------------------------------
\2\ For purposes of this proposed exemption references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
(a) The sale of the AmeriData Stock by the GE Trust was a one-time
transaction for cash;
(b) The GE Trust received the fair market value for each share of
the AmeriData Stock on the date of the sale;
(c) The GE Trust received no less consideration than that received
by similarly situated AmeriData shareholders at the same time in the
same transaction;
(d) The GE Trust paid no commissions, fees or other expenses in
connection with the sale of the AmeriData Stock to GECC and GAC;
(e) The terms of the sale were no less favorable to the GE Trust
than those obtainable by other similarly situated shareholders of
AmeriData Stock;
(f) The GE Trust tendered its shares of AmeriData Stock only at the
close of the tender-offer period and only after a majority of the
outstanding shares of AmeriData had been tendered; and
(g) The transactions engaged in by the GE Trust with respect to the
AmeriData Stock (including the acquisition, holding and subsequent sale
to GECC and GAC) were not part of an arrangement designed to benefit
GE, any of its affiliates, or any other party in interest with respect
to the GE Trust.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of July 12, 1996, the closing date of the tender-offer period for
the AmeriData Stock in connection with the Merger.
Summary of Facts and Representations
1. The GE Trust is a single pension trust through which three (3)
defined benefit plans (the Plans) are funded. These Plans provide
pension and death benefits to eligible employees and their
beneficiaries. As of December 31, 1995, there were approximately
465,000 participants in the Plans. The Plans which participate in the
GE Trust are: (a) the General Electric Company Pension Plan (the GE
Plan), which is maintained by GE; (b) the Components Pension Plan for
Puerto Rico, which is maintained by Caribe General Electric Products,
Inc., an affiliate of GE; and (c) the ERC Retirement Plan, which is
maintained by Employers Reinsurance Corporation, an affiliate of GE. As
of December 31, 1995, the GE Trust had total net assets of
approximately $30.3 billion.
2. The assets of the GE Trust are held in trust by seven (7)
trustees (the Trustees) who are all employees of GE and who are
appointed by the Benefit Plans Investment Committee (BPIC). The Board
of Directors of GE appoints officers of GE to serve as members of BPIC.
BPIC determines the investment policies with respect to the assets of
the Plans in the GE Trust.
3. GE offers diversified manufacturing and technical services
worldwide. An indirect, wholly-owned subsidiary of GE, GECC, provides
financial services in the following categories: special insurance
services, consumer services, specialized financing, equipment
management, and mid-market financing. The affiliates of GE play a
primary role in the proposed transaction. In this regard, GECC
established GAC, as an indirect, wholly-owned special purpose
subsidiary, to acquire AmeriData. In this regard, it is represented
that GAC will be merged into AmeriData at which time AmeriData will
become an affiliate of GE. Because GECC is a participating employer
under the GE Plan, GECC and GAC are parties in interest with respect to
the GE Trust.
4. AmeriData, with offices in Stamford, Connecticut, is a
corporation registered under the laws of the State of Delaware.
AmeriData is an international provider of computer products and
services, as well as technology consulting services. Shares of
AmeriData Stock are widely-held and publicly-traded on the New York
Stock Exchange. It is represented that approximately 24,938,845 shares
of AmeriData Stock are considered outstanding for purposes of Delaware
General Corporation Law (DGCL), as of July 23, 1996.
5. The Applicants represent that, as of December 31, 1995, the
readily identifiable shareholders of AmeriData Stock were: (1) the GE
Trust; (2) two investment Partnerships; (3) SBC Technologies, Inc., a
wholly-owned subsidiary of AmeriData; and (4) the officers and
directors of AmeriData. It is represented that the remaining shares of
AmeriData Stock were held by the general public.
As of December 31, 1995, the officers and directors of AmeriData
owned 11.8 percent (11.8%) of the shares of AmeriData Stock. It is
represented that, as of May 20, 1996, management shareholders of
AmeriData owning approximately 6 percent (6%) of the
[[Page 58242]]
outstanding shares of AmeriData Stock had entered into binding
agreements to tender their shares. None of the officers and directors
of AmeriData are employed by GE or its affiliates.
With respect to the two investment partnerships, the combined
ownership represented a total of 10.9% of the shares of AmeriData
Stock. Neither investment partnership has any affiliation with GE.
6. As of December 31, 1995, the GE Trust owned approximately
2,101,404 shares of the AmeriData Stock. These shares represented
approximately 9.7 percent (9.7%) of the total outstanding shares of the
AmeriData Stock at that time. It is represented that the Trustees
acquired the 2,101,404 shares of the AmeriData Stock in a number of
transactions over the period from May 1993 through October 1994. The
cost to the GE Trust of its 2,101,404 shares of AmeriData stock, as
shown on the GE Trust's financial records, was $21,566,026. It is
represented that the GE Trust acquired some of the AmeriData Stock in
blind transactions on the open market. In addition, the remaining
AmeriData Stock was acquired in various transactions with AmeriData or
its predecessor, including but not limited to purchases, the exercise
of warrants, and the receipt of stock dividends.3 It is
represented that at the time of these transactions neither AmeriData
nor its predecessor was related to GE, nor was either a party in
interest with respect to the GE Trust. The Applicants represent that
the decisions made by the Trustees regarding the acquisition of the
AmeriData Stock were made independent of, and without knowledge that in
the future an affiliate of GE would attempt to acquire all of the
outstanding shares of AmeriData Stock.
---------------------------------------------------------------------------
\3\ In this regard, the Department is not providing any opinion
in this proposed exemption as to whether the acquisition and holding
of the AmeriData Stock by the GE Trust violated any of the
provisions of Part IV of Title I of the Act. However, the Department
notes that section 404(a) of the Act requires, among other things,
that a plan fiduciary act prudently, solely in the interest of the
participants and beneficiaries of a plan, and for the exclusive
purpose of providing benefits to participants and beneficiaries when
making investment decisions for such plan.
---------------------------------------------------------------------------
7. On May 20, 1996, GECC, GAC and AmeriData entered into an
agreement and plan of merger (the Merger Agreement). In this regard,
the Boards of Directors of these parties unanimously approved the
acquisition of AmeriData by GECC and GAC by means of the merger of GAC
with and into AmeriData. In connection with the Merger, GAC made a
tender offer on May 24, 1996, for all outstanding shares of AmeriData
Stock. The tender-offer period began on May 24, 1996, and was to expire
on June 21, 1996, subject to the satisfaction or waiver of certain
closing conditions. Because certain closing conditions could not be
satisfied or waived before June 21, the tender-offer period was
extended until July 12, 1996.
Pursuant to the tender, GAC offered to purchase the stock of
AmeriData for $16 a share or approximately $490 million in the
aggregate. The tender price represented a premium of approximately 47.1
percent (47.1%) over the closing price of $10\7/8\ per share for
AmeriData Stock on April 19, 1996, thirty-one (31) days prior to the
public announcement of the execution of the Merger Agreement. In this
regard, it is represented the trading price of shares of AmeriData
Stock on the open market during the tender-offer period, ranged from
$15\3/4\ to $15\7/8\ per share, except that the closing price per share
was $15\5/8\ on May 27, and $16 on June 17, and July 5, 8, and 10,
1996. The Board of Directors of AmeriData unanimously approved such
tender offer and recommended that its shareholders accept the tender.
8. While it would have been possible for the GE Trust, as a
shareholder of AmeriData Stock to ignore the recommendation of the
Board of Directors and sell its shares in the open market or in a
private transaction before the close of the tender-offer period, it is
represented that this approach would probably have resulted in loss of
some profits to the GE Trust. Since any purchaser of the AmeriData
Stock (either in the open market or in a private transaction) during
the tender-offer period could normally expect to resell such shares for
the tender-offer price, the transaction would be worthwhile for such
purchaser only if it paid to the GE Trust a price less than the tender-
offer price so as to realize a profit from the spread. By accepting the
tender offer, the GE Trust avoided losing part of the profit on its
investment and was able to sell its shares for the full tender-offer
price.
9. Regardless of whether or not the GE Trust tendered its shares,
once a majority of the outstanding shares of AmeriData Stock were
tendered by shareholders other than the GE Trust, in no event could the
GE Trust have continued to hold its shares of AmeriData Stock. In this
regard, under the terms of the Merger Agreement, GAC was not required
to proceed with the purchase of the tendered shares, if less than a
majority of AmeriData Stock was tendered as of the close of the tender-
offer period. However, if a majority, but less than 100 percent (100%)
of the shares of AmeriData Stock were tendered, then GAC was bound to
acquire the tendered shares. Further, under the terms of the Merger
Agreement once a majority of shares had been tendered, GAC in its
capacity as the acquiring corporation, was obligated to cause a forced
redemption of all the shares of AmeriData Stock which had not been
tendered initially. In this regard, under the terms of the Merger
Agreement, such follow-on merger would redeem, at the same $16 per
share consideration, all the remaining shares of AmeriData Stock held
by parties other than GAC. GAC was assured under Delaware law, that
once a majority of shares had been tendered, it would be able to
acquire all of the shares of AmeriData either through a short-form
merger or a shareholder vote followed by a merger. In the event that at
least 90 percent (90%) of the shares of AmeriData Stock were tendered
in the tender offer, such follow-on merger would be a ``short-form''
merger under Section 253 of the DGCL and would not require a vote of
shareholders. In the event that less than 90 percent (90%) of the
shares were tendered, a follow-on merger under Section 251 of DGCL
would be accomplished by a shareholder vote.
It is represented that the total number of shares of AmeriData
Stock tendered to GAC at the close of the tender-offer period was
22,421,080 out of a total of 24,938,845 shares. The number of shares
tendered represented 89.9 percent (89.9%) of the total number of
outstanding shares of AmeriData Stock. In order to proceed with a
``short-form'' merger under Section 253 of the DGCL which would not
require a vote of shareholders, GAC subsequently purchased a sufficient
number of shares of AmeriData Stock directly from AmeriData at the same
$16 per share price so that GAC became a 90 percent (90%) shareholder.
AmeriData was then merged with GAC using the ``short-form'' merger
provisions of DGCL with the result that AmeriData as a surviving
company is now a wholly owned subsidiary of GECC.
10. The Applicants represent that the Trustees made a fiduciary
decision not to tender the GE Trust's shares of AmeriData Stock until
the close of the tender-offer period, and then to do so only if at that
time at least 51 percent (51%) of the other shareholders had already
tendered their shares. The Trustees determined that such a conditional
tender should be made, and that the shares of AmeriData Stock held by
the GE Trust should be tendered only if the specified conditions were
met immediately prior to the close of the
[[Page 58243]]
tender-offer period, so that the arm's length nature of the transaction
by the Trustees would be confirmed by the actions of independent
parties, prior to the tender by the Trustees. Also, the Trustees
concluded that by waiting for a majority of shareholders other than the
GE Trust to tender, no issue would arise as to whether the Trustees had
facilitated the acquisition by GAC of AmeriData Stock, since once a
majority of other shareholders had tendered their shares, GAC was
obligated to redeem all of the outstanding shares of AmeriData Stock.
11. The Trustees carried out the conditional tender in a two part
process. First, several days prior to the close of the tender-offer
period, the Trustees filed a letter with the Chase Manhattan Bank, in
its capacity as Depository for the tender-offer, which stated that the
Trustees' tender of the shares of AmeriData Stock held by the GE Trust
was conditional and was to be effective if and only if immediately
prior to the expiration of the tender-offer period, at least 51 percent
(51%) of the shares of AmeriData Stock had been validly tendered and
not withdrawn. In addition, the Trustees dispatched a letter which
would effectuate the transmittal of its shares of AmeriData Stock,
providing that the conditions of its tender were met. As more than a
majority of shares of AmeriData Stock were tendered by independent
shareholders at the close of the tender-offer period, the GE Trust
tendered its shares to GAC on July 12, 1996. In this regard, it is
represented that, as of July 17, 1996, a check in an amount of
approximately $33,622,464 million representing a purchase price of $16
per share, payable to the GE Trust for its 2,101,404 shares of
AmeriData Stock tendered to GAC was received by State Street Bank,
acting as custodian for the GE Trust. Accordingly, the GE Trust and the
Plans (collectively, the Applicants) request retroactive relief from
the prohibited transactions provisions of the Act provided certain
conditions were met for the past sale to GAC under the terms of the
tender offer of AmeriData Stock which, prior to the effective date of
this exemption, was held by the GE Trust.
12. The Applicants maintain that the proposed sale is
administratively feasible in that the transaction would be a one-time
cash sale. In this regard, there will be no need for the Department to
monitor or supervise the transaction. It is represented that the cost
of filing the application for exemption will be borne by GE Trust and
that the cost of notifying interested persons will be borne by GE or
one of its affiliates.
13. It is represented that the transaction is protective of the GE
Trust and the Plans, because the terms of transaction to the Plan were
no less favorable than those received by other similarly situated
shareholders of AmeriData Stock. In this regard, the terms of the
tender were carefully negotiated on an arm's length basis as to all
AmeriData shareholders by parties independent of the Applicants.
It is represented that the transaction has sufficient safeguards
for the protection of the Plans. Among such safeguards included in this
exemption, is the fact that the GE Trust could only tender its shares
of AmeriData Stock at the close of the tender-offer period and then
only if at the close of such period a majority of the outstanding
shares of AmeriData Stock had already been tendered by parties other
than the GE Trust. In this regard it is represented that GE Trust could
not have caused the transaction to occur because of their decision to
tender. In addition, because the GE Trust did not tender its shares
until the end of the tender-offer period and then tendered only after a
majority of independent investors in AmeriData had tendered, it is
represented that the arm's length nature of the tender was confirmed.
It is further represented that the GE Trust was protected, because
a majority of the shares of AmeriData Stock were tendered by
independent shareholders before the GE Trust tendered its shares. Since
all tenders were revocable up to the close of the tender-offer period,
had a third party made a more favorable offer, then all the
shareholders, including the GE Trust, would have revoked their tender
to GAC in favor of such competing offer. Accordingly, it is represented
that there was no potential for abuse. In addition, it is represented
that during the tender-offer period, there was in fact no competing
tender offer made by a third party.
14. It is represented that the transaction is in the interest of
the GE Trust and the Plans, because accepting the tender resulted in
the highest and best sales price of AmeriData Stock for the GE Trust
and the Plans. In this regard, the GE Trust and the Plans avoided
disposing of their shares of AmeriData Stock on the open market at less
than the tender-offer price. It is represented that the GE Trust was
informally advised by outside investment counsel that, because the GE
Trust would be disposing of a large block of AmeriData Stock, if such
shares were sold on the open market the price would likely be reduced
to as low as $15\1/2\ per share. It is estimated that if the GE Trust
had disposed of the AmeriData Stock on the open market at $15\1/2\ per
share, rather than tendering such shares at $16 per share, the Plans
would have received $1,050,702 less.
Further, the GE Trust and the Plans benefit from being able to
tender the AmeriData Stock, rather than sell the shares on the open
market. In this regard, in a sale on the open market the Plans would
have paid commissions, which were not incurred by the Plans by
accepting the tender offer.
15. In summary, the Applicants represent that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) The sale of the AmeriData Stock by the GE Trust was a one- time
transaction for cash;
(b) The GE Trust, and the Plans received the fair market value for
each share of the AmeriData Stock on the date of the sale;
(c) The GE Trust received no less consideration than other
similarly situated shareholders of the AmeriData Stock received at the
same time in the same transaction;
(d) The GE Trust paid no commissions, fees, or other expenses in
connection with the sale of the AmeriData Stock to GECC and GAC;
(e) The terms of the sale were no less favorable to the GE Trust,
and the Plans, then those obtainable in an arm's length transaction
engaged in by other similarly situated shareholders of AmeriData Stock;
and
(f) The GE Trust tendered its shares of AmeriData Stock only at the
close of the tender-offer period and only after a majority of the
outstanding shares of AmeriData had been tendered.
Notice to Interested Persons
The Applicants represent that because of the large number of
potentially interested persons, it is not possible to provide a
separate copy of the Notice of Proposed Exemption (the Notice) to each
participant in the Plans. However, GE will post a photocopy of the
Notice, as published in the Federal Register, plus a copy of the
supplemental statement (the Supplemental Statement), in the form set
forth in the Department's regulations under 29 CFR 2570.43(b)(2), on
bulletin boards normally used for employee notices in each of its
offices and operating facilities and in the offices and operating
facilities of its affiliates within fifteen (15) days of the
publication of such Notice in the Federal Register. Apart from this
method of notifying all interested persons, the Applicants represent
that the only practical form of providing notice to former employees,
[[Page 58244]]
retirees, and other employees, is to publish a notice in the 1995
Summary Annual Report which will be distributed to such person on or
before December 15, 1996, via first class mail. Such notice in the
Summary Annual Report will notify former employees, retirees, and other
employees that they may obtain a copy of the proposed exemption and
information on how to comment from Joseph C. Keifer, Controller of the
GE Trust at (203) 921-2167. The comment period will end thirty (30)
days after the mailing of the Summary Annual Report.
FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
First Chicago NBD Corporation (FCNBD), Located in Chicago, Illinois
[Application No. D-10361]
Proposed Exemption
I. Transactions
A. Effective October 8, 1996, 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.4
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
B. Effective October 8, 1996, 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.5 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;
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certifi cates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B. (1) or (2).
C. Effective October 8, 1996, 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.6
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. Effective October 8, 1996, 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
[[Page 58245]]
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 Structured
Rating Group (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,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. Certificate means:
(1) A certificate--
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) A certificate denominated as a debt instrument--
(a) That represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) 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
FCNBD 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); 7
---------------------------------------------------------------------------
\7\ It is the Department's view that the definition of ``trust''
contained in III.B. includes a two-tier structure under which
certificates issued by the first trust, which contains a pool of
receivables described above, are transferred to a second trust which
issues securities that are sold to plans. However, the Department is
of the further view that, since the exemption provides relief for
the direct or indirect acquisition or disposition of certificates
that are not subordinated, no relief would be available if the
certificates held by the second trust were subordinated to the
rights and interests evidenced by other certificates issued by the
first trust.
---------------------------------------------------------------------------
(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 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) FCNBD;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
FCNBD; or
(3) Any member of an underwriting syndicate or selling group of
which FCNBD 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.
[[Page 58246]]
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 receivables contained in the
trust, but is not a party to the pooling and servicing agreement.
G. Servicer means any entity which services receivables 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 would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. Qualified Motor Vehicle Lease means a lease of a motor vehicle
where:
(1) The trust holds a security interest in the lease;
(2) The trust holds a security interest in the leased motor
vehicle; and
(3) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. FCNBD means First Chicago NBD Corporation and its affiliates.
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts at 35932.
Summary of Facts and Representations
1. FCNBD, a Delaware corporation, is a Chicago, Illinois based bank
holding company formed by the merger of First Chicago Corporation with
and into NBD Bancorp, Inc., which has assets of over $113 billion and
through its subsidiaries operates more than 763 branches in various
cities in Florida, Illinois, Indiana, Michigan and Wisconsin, as well
as various overseas locations. FCNBD also owns and operates
subsidiaries that engage in trust, brokerage, investment management,
equipment leasing, venture capital, mortgage banking, consumer finance
and insurance.
First Chicago Capital Markets, Inc. (FCCM), a Delaware corporation,
is a wholly-owned indirect subsidiary of FCNBD. FCCM was organized in
1988 and pursuant to an August 1988 order (the 1988 Order) of the
Federal Reserve Board (FRB) is authorized to engage, to a limited
extent, in underwriting and dealing in certain mortgage-backed
securities, municipal revenue bonds, commercial paper and consumer
receivables-related securities transactions. In March, 1994, FCCM
received further authorization from the FRB to: (i) underwrite and deal
in all types of debt securities, including rated and unrated long-term
debt, medium term notes and convertible debt securities; (ii) privately
place and act as riskless principal in all types of securities,
including equity securities; and (iii) engage in certain related
investment and advisory activities. These orders are currently subject
to the condition that FCNBD does not derive more than 10% of its total
gross revenues from such activities. FCCM does not at this time have
authority to underwrite equity securities. FCCM is a broker-dealer
registered with the Securities and Exchange Commission and in all 50
states, and is a member of the National Association of Securities
Dealers, Inc. In addition, FCNBD affiliates have the power to sell
interests in their own assets in the form of asset-backed securities.
FCNBD's investment banking department has served as senior manager
with full structuring responsibilities for over $16.4 billion in public
asset-backed securities transactions since 1988 and agented $1.1
billion of private placement transactions in 1994 alone. It has one of
the largest departments specializing in asset-backed securities of any
bank or Wall Street firm, with approximately 50 professionals. The
asset-backed securities staff has extensive experience in structuring
both taxable and tax-exempt obligations having a wide range of
structural characteristics as well as security arrangements. FCNBD
originated and placed $22.8 billion in asset-backed commercial paper
transactions through October 1995.
Trust Assets
2. FCNBD seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) single and multi-family residential or
commercial mortgage investment trusts; 8 (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.9
---------------------------------------------------------------------------
\8\ The Department notes that PTE 83-1 [48 FR 895, January 7,
1983], a class exemption for mortgage
[[Page 58247]]
pool investment trusts, would generally apply to trusts containing
single-family residential mortgages, provided that the applicable
conditions of PTE 83-1 are met. FCNBD requests relief for single-
family residential mortgages in this exemption because it would
prefer one exemption for all trusts of similar structure. However,
FCNBD has stated that it may still avail itself of the exemptive
relief provided by PTE 83-1.
\9\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
---------------------------------------------------------------------------
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.10
---------------------------------------------------------------------------
\10\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
---------------------------------------------------------------------------
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.11
---------------------------------------------------------------------------
\11\ It is the view of the Department that section III.B.(4)
includes within the definition of the term ``trust'' rights under
any yield supplement or similar arrangement which obligates the
sponsor or master servicer, or another party specified in the
relevant pooling and servicing agreement, to supplement the interest
rates otherwise payable on the obligations described in section
III.B.(1), in accordance with the terms of a yield supplement
arrangement described in the pooling and servicing agreement,
provided that such arrangements do not involve swap agreement or
other notional principal contracts.
---------------------------------------------------------------------------
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. FCNBD, alone or together with other broker-dealers, acts
as underwriter or placement agent with respect to the sale of the
certificates. All of the public offerings of certificates presently
contemplated are to be underwritten by FCNBD on a firm commitment
basis. In addition, FCNBD anticipates that it may privately place
certificates on both a firm commitment and an agency basis. FCNBD may
also act as the lead underwriter for a syndicate of securities
underwriters.
Certificateholders will be entitled to receive monthly, quarterly
or semi-annual installments of principal and/or interest, or lease
payments due on the receivables, adjusted, in the case of payments of
interest, to a specified rate--the pass-through rate--which may be
fixed or variable.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
certificateholders) to hold funds received between distribution dates.
The account is under the sole control of the trustee, who invests the
account's assets in short-term securities which have received a rating
comparable to the rating assigned to the certificates. In some cases,
the servicer may be permitted to make a single deposit into the account
once a month. When the servicer makes such monthly deposits, payments
received from obligors by the servicer may be commingled with the
servicer's assets during the month prior to deposit. Usually, the
period of time between receipt of funds by the servicer and deposit of
these funds in a segregated account does not exceed one month.
Furthermore, in those cases where distributions are made semi-annually,
the servicer will furnish a report on the operation of the trust to the
trustee on a monthly basis. At or about the time this report is
delivered to the trustee, it
[[Page 58248]]
will be made available to certificateholders and delivered to or made
available to each rating agency that has rated the certificates.
5. Some of the certificates will be multi-class certificates. FCNBD
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.12
---------------------------------------------------------------------------
\12\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
---------------------------------------------------------------------------
``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying receivables are distributed first
to the class of certificates having the earliest stated maturity of
principal, and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class 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.13
---------------------------------------------------------------------------
\13\ 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.
---------------------------------------------------------------------------
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 (within 120 days, except in the case of obligations
having an original term of 30 years, in which case the period will not
exceed two years). Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
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 a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their 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
or other corporation unaffiliated with the servicer, (ii) a special-
purpose or other corporation affiliated with the servicer, or (iii) the
servicer itself. Where the sponsor is not also the servicer, the
sponsor's role will generally be limited to acquiring the receivables
to be included in the trust, establishing the trust, designating the
trustee, and assigning the receivables to the trust.
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 FCNBD, the trust sponsor or the servicer. FCNBD represents
that the trustee will be a substantial financial institution or trust
company experienced in trust activities. The trustee receives a fee for
its services, which will be paid by the servicer or sponsor. 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, the receivables may be
``subserviced'' by their respective originators and a single entity may
``master service'' the pool of receivables on behalf of the owners of
the related series of certificates. Where this arrangement is adopted,
a receivable continues to be serviced from the perspective of the
borrower by the local subservicer, while the investor's perspective is
that the entire pool of receivables is serviced by a single, central
master servicer who collects payments from the local subservicers and
passes them through to certificateholders.
Receivables of the type suitable for inclusion in a trust
invariably are serviced with the assistance of a computer. After the
sale, the servicer keeps the sold receivables on the computer system in
order to continue monitoring the accounts. Although the records
relating to sold receivables are kept in the same master file as
receivables retained by the originator, the sold receivables are
flagged as having been sold. To protect the investor's interest, the
servicer ordinarily covenants that this ``sold flag'' will be included
in all records relating to the sold receivables, including the master
file, archives, tape extracts and printouts.
The sold flags are invisible to the obligor and do not affect the
manner in which the servicer performs the billing,
[[Page 58249]]
posting and collection procedures related to the sold receivables.
However, the servicer uses the sold flag to identify the receivables
for the purpose of reporting all activity on those receivables after
their sale to investors.
Depending on the type of receivable and the details of the
servicer's computer system, in some cases the servicer's internal
reports can be adapted for investor reporting with little or no
modification. In other cases, the servicer may have to perform special
calculations to fulfill the investor reporting responsibilities. These
calculations can be performed on the servicer's main computer, or on a
small computer with data supplied by the main system. In all cases, the
numbers produced for the investors are reconciled to the servicer's
books and reviewed by public accountants.
The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates are generally made on a
firm commitment basis. Private placement of certificates may be made on
a firm commitment or agency basis. It is anticipated that the lead and
co-managing underwriters will make a market in certificates offered to
the public.
In some cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (although they may
themselves be related) will be unrelated to FCNBD. In other cases,
however, affiliates of FCNBD may originate or service receivables
included in a trust or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. In some cases, the sponsor will obtain the receivables from
various originators pursuant to existing contracts with such
originators under which the sponsor continually buys receivables. In
other cases, the sponsor will purchase the receivables at fair market
value from the originator or a third party pursuant to a purchase and
sale agreement related to the specific offering of certificates. In
other cases, the sponsor will originate the receivables itself.
As compensation for the receivables transferred to the trust, the
sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates. If the sponsor receives certificates from the trust, the
sponsor sells all or a portion of these certificates for cash to
investors or securities underwriters.
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.14 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.
---------------------------------------------------------------------------
\14\ 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.
---------------------------------------------------------------------------
13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting in that capacity) will retain the difference
between payments received on the receivables in the trust and payments
payable (at the pass-through rate) to certificateholders, except that
in some cases a portion of the payments on receivables may be paid to a
third party, such as a fee paid to a provider of credit support. The
servicer may receive additional compensation by having the use of the
amounts paid on the receivables between the time they are received by
the servicer and the time they are due to the trust (which time is set
forth in the pooling and servicing agreement). The servicer typically
will be required to pay the administrative expenses of servicing the
trust, including in some cases the trustee's fee, out of its servicing
compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is
established.
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) expenses, fees and charges
associated with foreclosure or repossession, or other conversion of a
secured position into cash proceeds, upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
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 maintained with itself or to commingle
such payments with its own funds prior to the distribution dates. In
these cases, the servicer would be entitled to the benefit derived from
the use of the funds between the date of payment on a receivable and
the pass-through date. Commingled payments may not be protected from
the creditors of the servicer in the event of the servicer's bankruptcy
or receivership. In those instances when payments on receivables are
held in non-interest bearing accounts or are commingled with the
servicer's own funds, the servicer is required to deposit these
payments by a date specified in the pooling and servicing agreement
into an account from which the trustee makes payments to
certificateholders.
16. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would consist of the difference
between what the underwriter receives for the certificates that it
distributes and what it pays the sponsor for those certificates. In a
private placement, the fee normally takes the form of an agency
commission paid by the sponsor. In a best efforts underwriting in which
the underwriter would sell certificates in a public offering on an
agency basis, the underwriter would receive an agency commission rather
than a fee based on the difference between the price at which the
certificates are sold to the public and what it pays the sponsor. In
some private placements, the underwriter may buy certificates as
principal, in which case its compensation would be the difference
between what it receives for the
[[Page 58250]]
certificates that it sells and what it pays the sponsor for these
certificates.
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
receivables 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 overcollateralization) will be obtained by the trust
sponsor to the extent necessary for the certificates to attain the
desired rating. The amount of this credit support is set by the rating
agencies at a level that is a multiple of the worst historical net
credit loss experience for the type of obligations included in the
issuing trust.
Provision of Credit Support
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) from the credit support provider (which
may be the master servicer or an affiliate thereof) or, (c) in the case
of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates, and
the master servicer will advance such funds in a timely manner. When
the servicer is the provider of the credit support and provides its own
funds to cover defaulted payments, it will do so either on the
initiative of the trustee, or on its own initiative on behalf of the
trustee, but in either event it will provide such funds to cover
payments to the full extent of its obligations under the credit support
mechanism. In some cases, however, the master servicer may not be
obligated to advance funds but instead would be called upon to provide
funds to cover defaulted payments to the full extent of its obligations
as insurer. Moreover, a master servicer typically can recover advances
either from the provider of credit support or from future payments on
the affected assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the trust as payments on
receivables are passed through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount thereafter is subject
to reduction only for actual draws. From the time that the floor amount
is effective until the end of the life of the trust, there are no
proportionate reductions in the credit support amount caused by
reductions in the pool principal balance. Indeed, since the floor is a
fixed dollar amount, the amount of credit support ordinarily increases
as a percentage of the pool principal balance during the period that
the floor is in effect.
Disclosure
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;
[[Page 58251]]
(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 or
trustee summarizing information regarding the trust and its assets.
Such statement will include information regarding the trust and its
assets, including underlying receivables. Such statement will typically
contain information regarding payments and prepayments, delinquencies,
the remaining amount of the guaranty or other credit support and a
breakdown of payments between principal and interest.
Forward Delivery Commitments
24. To date, no forward delivery commitments have been entered into
by FCNBD in connection with the offering of any certificates, but FCNBD
may contemplate entering into such commitments. The utility of forward
delivery commitments has been recognized with respect to offering
similar certificates backed by pools of residential mortgages, and
FCNBD may find it desirable in the future to enter into such
commitments for the purchase of certificates.
Secondary Market Transactions
25. It is FCNBD's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter. FCNBD
anticipates that it will make a market in certificates.
Retroactive Relief
26. FCNBD represents that it has not engaged in transactions
related to mortgage-backed and asset-backed securities based on the
assumption that retroactive relief would be granted prior to the date
of their application. However, FCNBD requests the exemptive relief
granted to be retroactive to October 8, 1996, the date of their
application, and would like to rely on such retroactive relief for
transactions entered into prior to the date exemptive relief may be
granted.
Summary
27. 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 FCNBD 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) FCNBD anticipates that it will 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
[[Page 58252]]
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 certificate holders 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.15
---------------------------------------------------------------------------
\15\ In 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).
---------------------------------------------------------------------------
III. Limited Section 406(b) and Section 407(a) Relief for Sales
FCNBD 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.16 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.17 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.
---------------------------------------------------------------------------
\16\ In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which FCNBD 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.
\17\ The applicant represents that where a trust sponsor is an
affiliate of FCNBD, 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 FCNBD is not
a fiduciary with respect to plan assets to be invested in
certificates.
---------------------------------------------------------------------------
Additionally, FCNBD 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. FCNBD
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, FCNBD 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.)
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,
[[Page 58253]]
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 7th day of November, 1996.
Ivan Strasfeld
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 96-29035 Filed 11-12-96; 8:45 am]
BILLING CODE 4510-29-P
