[Federal Register Volume 61, Number 216 (Wednesday, November 6, 1996)]
[Notices]
[Pages 57461-57479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28504]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10079, et al.]
Proposed Exemptions; Pikeville National Bank
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, 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,
[[Page 57462]]
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.Pikeville National Bank &
Trust Company; Trust Company of Kentucky; and First American Bank
(collectively, the Banks) Located in Pikeville and Ashland, Kentucky
[Application Numbers D-10079 through D-10082]
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, shall not apply to: (1) the cash sales on
December 28, 1994 and January 13, 1995, of certain collateralized
mortgage obligations (CMOs) and other mortgage-backed securities
(collectively, the Securities) held by eighty-nine (89) employee
benefit plans, Keogh plans and individual retirement accounts (IRAs)
for which the Banks act as trustee (the Plans) to Pikeville National
Corporation (PNC), a party in interest with respect to the Plans; (2)
the ``makewhole'' payments made by PNC to the Plans on January 20,
1995, in connection with the sale of certain Securities by the Plans on
the open market on November 2, 1994; and (3) the proposed additional
``makewhole'' and interest payments to be made by PNC to the Plans, as
of the date the exemption is granted, as a result of: (i) the
additional amounts owed to such Plans based on the amortized cost of
the Securities at the time of the transactions in situations where the
amortized cost exceeded the outstanding principal balance of the
Securities (plus a reasonable rate of interest on such amounts), and
(ii) the additional accrued but unpaid interest on the Securities which
was owed to the Plans at the time of the sale to PNC on December 28,
1994 (plus a reasonable rate of interest on such amounts); provided
that the following conditions are met:
(a) Each sale was a one-time transaction for cash;
(b) Each Plan has received or will receive a total amount for the
Securities owned by the Plan, including the sale proceeds and
``makewhole'' payments for transactions that occurred either on the
open market or with PNC, which is equal to the greater of: (i) the
outstanding principal balance for each Security owned by the Plan, plus
accrued but unpaid interest, at the time of the sale; (ii) the
amortized cost for each Security owned by the Plan on the date of the
sale, plus accrued but unpaid interest, as determined by the Banks; or
(iii) the fair market value of each Security owned by the Plan as
determined by the Banks from broker-dealers or pricing services
independent of the Banks at the time of the sale;
(c) With respect to the ``makewhole'' payments made by PNC to the
Plans on January 20, 1995, the Plans receive a reasonable rate of
interest for the period from November 2, 1994 (the date of the sale of
certain Securities on the open market) until January 20, 1995 (the date
such payments were made), to the extent this amount is not already
accounted for under the additional ``makewhole'' payments which are due
for the Securities based on the amounts referred to above in Item
(3)(i);
(d) The Plans did not pay any commissions or other expenses with
respect to the transactions;
(e) The Banks, as trustee of the Plans, determined that the sale of
the Securities was in the best interests of each of the Plans and their
participants and beneficiaries at the time of the transaction;
(f) The Banks took all appropriate actions necessary to safeguard
the interests of the Plans and their participants and beneficiaries in
connection with the transactions; and
(g) Each Plan received a reasonable rate of return on the
Securities during the period of time that it held the Securities.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of December 28, 1994, and January 13, 1995, for the sales of the
Securities made to PNC, and as of January 20, 1995, for the
``makewhole'' payments made by PNC in connection with the sale of the
Securities to an unrelated party on November 2, 1994. In addition, this
proposed exemption will be effective for the additional ``makewhole''
and interest payments due to the Plans as of the date such payments are
made to the affected Plans.
Summary of Facts and Representations
1. The Banks are wholly-owned subsidiaries of PNC, a bank holding
company organized under federal and Kentucky laws which is located at
208 North Mayo Trail in Pikeville, Kentucky. The Banks are: (a) the
Pikeville National Bank and Trust Company, located at 208 North Mayo
Trail in Pikeville, Kentucky; (b) the Trust Company of Kentucky,
located at 1544 Winchester Avenue in Ashland, Kentucky; and (c) the
First American Bank, located at 1544 Winchester Avenue in Ashland,
Kentucky. The Banks offer traditional banking services (e.g. checking,
savings, loans and trusts) to both individuals and entities in their
localities.
2. The Banks serve as trustees for the Plans and have investment
discretion for either some or all of the assets of such Plans. The
Plans consist of a total of eighty-nine (89) plans, including various
profit sharing plans, money purchase pension plans, 401(k) plans,
simplified employee benefit plans (SEPs), Keogh plans and IRAs. The
Plans that are employee benefit plans covered under Title I of the Act,
such as the profit sharing and money purchase pension plans, are
maintained by small businesses in the Pikeville and Ashland, Kentucky
areas. All of these Plans have fewer than 100 participants.\1\
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\1\ Examples of some of these Plans are: (i) the Sandy Valley
Explosive Co., 401(k) Plan, which had 28 participants and total
assets of $90,398 as of September 30, 1994; (ii) the Corbin Coal
Co., Inc. Profit Sharing Plan, which had 9 participants and total
assets of $440,772 as of September 30, 1994; and (iii) the Baird,
Baird, Baird & Jones P.S.C. Retirement Plan, which had 49
participants and total assets of $2,539,844 as of September 30,
1994.
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[[Page 57463]]
Some of the Plans are Keogh plans (a/k/s HR 10 plans) and IRAs
which are not employee benefit plans covered under the Act.\2\ Of the
eighty-nine (89) Plans involved in the subject transactions by the
Banks, twenty-nine (29) are IRAs and ten (10) are Keogh plans.
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\2\ Pursuant to 29 CFR 2510.3-2(d) and 2510.3-3(b), the IRAs and
Keogh plans would not be employee benefit plans under of Title I of
the Act. However, such plans are subject to the provisions of Title
II of the Act and, specifically, the prohibited transaction
provisions of section 4975 of the Code.
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3. The Banks represent that at various times during the period from
July 1992 until January 1994, assets of the Plans were invested in the
Securities. The Securities were purchased from broker-dealers that were
independent of the Plans and their sponsoring employers as well as the
Banks and their affiliates.
The Securities are collateralized mortgage obligations (i.e. CMOs)
and other mortgage-backed securities. The Securities are investment
products through which investors purchase interests in pools of
residential mortgage loans. In general, investors in these securities
receive payments of principal and interest or, in some cases, either
principal or interest only, depending upon the type of security
purchased. Interest payments change monthly in relation to a specific
index, such as the London Interbank Offered Rate (LIBOR) or the U.S.
Federal Reserve's Cost of Funds Index (COFI), contained in a formula
used to calculate the interest rate for such securities. Principal
payments on the Securities vary in amount and timing depending upon how
quickly the outstanding principal amounts on the underlying mortgages
held in the mortgage pools are prepaid by the obligors. The repayment
of principal and interest on the underlying mortgages in the various
pools is usually guaranteed by U.S. Government Agencies, such as the
Federal Home Loan Mortgage Corporation (FHLMC or ``Freddie Mac'') or
the Federal National Mortgage Association (FNMA or ``Fannie Mae'').
4. The Securities consisted of twenty-six (26) separate securities.
All of the Securities were CMOs or Real Estate Mortgage Investment
Conduits (REMICs), except for one ``structured'' note issued by the
Federal Home Loan Bank (FHLB) and three fixed coupon notes issued by
FNMA, which were backed by pools of residential mortgages.
The CMOs are described as follows: (a) FHLMC REMIC--Planned
Amortization Class (PAC) Series 1059, Class F, CUSIP #312905MB5; (b)
FHLMC REMIC--PAC Series 1459, Class P, CUSIP #312914DV3; (c) FHLMC
REMIC--PAC Series 1551, Class E, CUSIP #312916XX2; (d) FHLMC REMIC--
Targeted Amortization Class (TAC) Series 1580, Class H, CUSIP
#3133TOA7; (e) FNMA REMIC--Scheduled Amortization Class Series 1993-
168, Class N, CUSIP #31359DQH9; (f) General Electric (GE) Capital
Mortgage Services REMIC--PAC Series 1993-13, Class A6, CUSIP
#36157LSB5; (g) FHLMC REMIC--Z Tranche Series 1393, Class J, CUSIP
#312912SQ2; (h) FHLMC REMIC--Z Tranche Series 1411, Class ZA, CUSIP
#312912X45; (i) FHLMC REMIC--Inverse Floater Series 1438, Class F,
CUSIP #312913TJ5; (j) FHLMC REMIC--Inverse Floater Series 1625, Class
SB, CUSIP #3133T22Q2; (k) FHLMC REMIC--Inverse Floater Series 1660,
Class S, CUSIP #3133T3QK7; (l) FHLMC REMIC--Inverse Floater Series
1665, Class S, CUSIP #3133T3RD2; (m) FNMA REMIC--Inverse Floater Series
1993-102, Class S, CUSIP #31359AR43; (n) FNMA REMIC--Inverse Floater
Series 1993-115, Class SE, CUSIP #31359BDT1; (o) FNMA REMIC--Inverse
Floater Series 1993-185, Class SH, CUSIP #31359DU50; (p) FNMA REMIC--
Inverse Floater Series G93-31, Class SD, CUSIP #31359DZW6; (q) FHLMC
REMIC--Inverse Floater Series 1385, Class S, CUSIP #312912KK3; (r) FNMA
REMIC--Z Tranche Series 1992-123, Class Z, CUSIP #31358N4F6; (s) FNMA
REMIC--Inverse Floater Series 1992-129, Class S, CUSIP #31358N7D8; (t)
FNMA REMIC--Inverse Floater Series G93-14, Class S, CUSIP #31358TX87;
(u) FNMA REMIC--Principal Only (PO) Series 1993-161, Class GC, CUSIP
#31359BXX0; and (v) GE Capital Mortgage Services REMIC--Inverse Floater
Series 1993-17, Class A20, CUSIP #36157LUY2.
The other Securities that were not CMOs are described as follows:
(a) FHLB Structured Note, CUSIP #313389FC7, an inverse floater indexed
bond with a coupon formula based on six-month LIBOR; (b) FNMA Note,
CUSIP #31359CAL9, a fixed coupon note paying 6.43 percent annually, due
to mature on January 13, 2004, but callable on or after January 13,
1997; (c) FNMA Medium Term Note, CUSIP #31364AJ37, a fixed coupon note
paying 6.17 percent annually, due to mature on December 2, 2003, but
callable on or after December 2, 1996; and (d) FNMA Medium Term Note,
CUSIP #31364AVX7, a fixed coupon note paying 6.80 percent annually, due
to mature on October 23, 2002, but callable on or after October 23,
1995.
Of the twenty-six (26) Securities, twenty-four (24) had their
underlying mortgages guaranteed by either the FNMA, FHLMC, or FHLB. The
Banks represent that most of the CMOs would be considered ``guaranteed
governmental mortgage pool certificates'' (see 29 CFR 2510.3-
101).3 The Banks state that it is unclear whether the Securities
that are not CMOs would be so considered because they are debt, rather
than equity, instruments issued by a U.S. Government agency. However,
the Banks state that all of the Securities are ``publicly-offered
securities'' (see 29 CFR 2510.3-101(a)(2) and (b)).4
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3 In this regard, under 29 CFR 2510.3-101(i), if a plan
acquires a ``guaranteed governmental mortgage pool certificate'',
the plan's assets would include the certificate but not any of the
mortgages underlying such certificate. A ``guaranteed governmental
mortgage pool certificate'' is a certificate (i) that is backed by,
or evidences an interest in, specified mortgages or participation
interests, and (ii) whose interest and principal payments are
guaranteed by the Government National Mortgage Association (GNMA),
FHLMC (i.e. ``Freddie Mac'') or FNMA (i.e. ``Fannie Mae''). Thus,
the Banks represent that since most of the CMOs that were owned by
the Plans had interest and principal payments payable under the CMOs
guaranteed by FHLMC or FNMA, the assets of the Plans did not include
any of the mortgages underlying such CMOs.
4 In addition, under 29 CFR 2510.3-101(a)(2) and (b), if
a plan acquires a ``publicly-offered security'' that grants the plan
an equity interest in an entity, the plan's assets would include the
security but not any of the underlying assets of the entity.
Therefore, the Banks represent that the assets of the Plans that
owned the CMOs issued by GE Capital Mortgage Services did not
include any of the mortgages underlying such CMOs even though such
CMOs would not be considered a ``guaranteed governmental mortgage
pool certificate'' under the Department's ``plan assets''
regulation.
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5. All of the CMOs mentioned above were structured as REMICs
pursuant to section 860D of the Code. The various classes of these
Securities receive principal and, possibly, interest payments in
differing portions and at differing times from the cash flows provided
from the monthly payments received on the underlying mortgages.
The repayment of principal from the underlying mortgages fluctuates
significantly. To facilitate the structuring of such REMICs, the
prepayments on the pools of mortgages are commonly measured relative to
a variety of prepayment models. The model used for these REMICs is the
Public Securities Association's standard prepayment model or ``PSA''.
For example, this model may assume that mortgages will prepay at an
annual rate of .2 percent in the first month after origination, then
the prepayment rate would increase at an annual rate of .2
[[Page 57464]]
percent per month up to the 30th month after origination and then the
prepayment rate would remain constant at 6 percent per annum in the
30th and later months. Such an assumption is called 100 PSA.
The REMIC structure allocates principal payments to the various
classes or ``tranches'' in varying amounts as principal payments are
made according to the allocations specified in the prospectuses. The
exact date of repayment of all principal to any REMIC class is not
known until the mortgage-backed securities are paid in full. The
maturity for the various classes is referred to as the ``weighted
average life'' (WAL). The WAL for a particular class of securities
refers to the average amount of time, expressed in years, which will
elapse from the date of the issuance of such securities until each
dollar of principal has been repaid to the investor based on the PSA
assumption. The holders of all classes will receive all of their
principal back. The timing of when that principal is returned is
dependent on how quickly the underlying mortgages are repaid or
refinanced. However, in no event will the time for the recovery of
principal exceed the final maturity date of the underlying mortgages.
Each month the monthly payments on the underlying mortgages are
collected and distributed to the holders of the various REMIC classes.
Depending upon the structure of the REMIC, interest may be paid monthly
according to a specific formula. The CMOs owned by the Plans, referred
to above, included ``principal only'' (POs) tranches, ``Z class''
tranches, and inverse floating rate classes (i.e. so-called ``inverse
floaters'') with coupon rate formulas based on either LIBOR or COFI.
The ``principal only'' CMOs are similar to other bonds where an
investor purchases the security at a discount and receives the
principal cash flow off the collateral. The difference in the principal
amount invested and the face value equates to the investment's yield.
The timing of the cash flows received determines the ultimate yield on
the investment. With a ``principal only'' CMO, the faster the
collateral pays down, the higher the yield the investor receives.
Income is recognized by accreting the discount over the expected life
of the security. There are no regular interest payments received on
``principal only'' CMOs.
There is no loss of principal because the investor will ultimately
receive the face value of the CMO, assuming that the underlying
mortgages are guaranteed by a U.S. Government agency (e.g. FNMA or
FHLMC). However, there is no guarantee as to the timing of the cash
flows for such CMO's and the ultimate yields to the investors can be
difficult to predict.
The CMOs that are ``Z tranche'' classes of such Securities are the
last tranches entitled to repayment of principal from the underlying
mortgages. Therefore, such CMOs are the most susceptible to principal
payment extensions which lengthen the duration of the security beyond
the initially determined WAL, based on the PSA assumptions for
prepayments on the underlying mortgages. As noted above, the timing for
when all principal payments will be made is dependent on how quickly
the underlying mortgages are repaid or refinanced. If interest rates
increase significantly for a period of time, then there will be
significantly fewer mortgages that are repaid or refinanced. Such
interest rate increases can dramatically change the WAL for a ``Z
tranche'' CMO, as well as other lower ranked CMO tranches. In addition,
the amount of principal payments that a ``Z tranche'' CMO investor will
receive during such periods will be much less.
The CMOs that are ``inverse floaters'' are so described because the
formulas used to calculate the interest payments, which adjust monthly
for each class of the Security, usually raise the interest rate when
the index falls and lower the interest rate when the index rises.
Most of the coupon rate formulas are based on an interest rate
index known as ``LIBOR''. LIBOR refers to the arithmetic mean of the
London Interbank offered quotations for one-month Eurodollar deposits.
LIBOR moves up or down as interest rates move up or down. The movement
of LIBOR has an inverse relationship with respect to the interest paid
on the inverse floating rate classes. The CMOs with interest rate
formulas based on the COFI rate operate in the same manner. Therefore,
significant interest rate increases can have a dramatically adverse
affect on the investor's coupon rate and can lower the market value of
the security vis a vis other fixed income securities of comparable
duration (see Paragraph 7 below).
6. The Securities were purchased by the Banks, as trustee of the
Plans, from the following entities: (a) Kemper Securities; (b) Crews &
Associates; (c) Marcus, Stowell & Beye; (d) Bear Stearns; (e) Morgan
Keegan; (f) Merrill Lynch; and (g) First Institutional Securities. As
noted earlier, these entities were all independent of the Plans as well
as the Banks and their affiliates. In addition, the applicant notes
that the Banks acted as a trustee with investment discretion for the
assets of the Plans that were invested in the Securities and the
entities that sold the Securities to the Plans were not acting as
fiduciaries for such Plans.5
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\5\ The Department is not providing any views in this proposed
exemption as to fiduciary status and related decisions involved in
the investment of the Plans in the subject transactions.
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7. With respect to the CMOs, at the time of the purchase of these
Securities by the Plans, the Banks anticipated that most of the CMOs
would be retired within two to five years of the date of purchase due
to prepayments of the underlying mortgages in each pool as obligors
refinanced their mortgages at lower interest rates. The Banks thought
that the CMOs would yield the Plans a high rate of return which would
be superior to the yields available on other fixed income securities of
comparable duration at the time of the transactions.6 The Banks
note that the ideal time to buy CMOs that are ``inverse floaters''
would be when interest rates, as measured by indices such as LIBOR or
COFI, are high and are expected to go down during the time the investor
is holding the CMOs. However, when interest rates rise, the rate of
return on these CMOs goes down and the securities become less valuable.
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\6\ For example, the Banks state that a five-year U.S. Treasury
Note yielded 8.7 percent on March 31, 1990, but yielded only 4.7
percent on September 28, 1993. The Banks note that this interest
rate ``environment'' led to the development of new structured
products, such as ``inverse floaters'', which many investors
believed would produce superior returns based on interest rate
projections at the time.
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The Banks note that initially the Plans were receiving monthly
interest payments on the CMOs at rates that were significantly above
the market rate for comparable securities, as measured by interest rate
indexes at the time. However, increases in such interest rates during
1994 changed the investment outlook for the Securities. As a result,
the Banks anticipated that the CMOs would not be retired for many years
because of the projected decrease in the prepayments of mortgages held
in each pool. Furthermore, the increases in interest rates caused both
the rate of return on the CMOs (as measured by the monthly interest
payments) and the market value of the CMOs to decrease significantly.
In addition, the Banks state that similar decreases in market value
were occurring with respect to the other Securities that were not CMOs.
This was particularly true for the FHLB Structured Note because it had
a coupon rate formula, based on LIBOR, that was similar to the CMOs
that were ``inverse
[[Page 57465]]
floaters''.7 The FNMA Medium Term Notes, which paid fixed coupon
rates, were also declining in market value vis a vis other fixed income
securities of comparable duration (e.g. US Treasury Notes) although to
a lesser extent than the ``inverse floaters''.
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\7\ The coupon formula for the FHLB Structured Note was 14.375
percent--(2 x six-month LIBOR). This Security's coupon had a cap
of 14.375 percent and a floor of 0 percent. The coupon rate was
reset annually on April 6 and October 6. The coupons ranged from 8
percent as of April 6, 1993 to 2.6875 percent as of October 6, 1994.
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Therefore, by the end of 1994, the Banks state that the Plans were
faced with the prospect of incurring significant losses on their
investments in the Securities, particularly the ``inverse floaters''
and ``Z tranche'' CMOs.8
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\8\ The Department is expressing no opinion in this proposed
exemption regarding whether the acquisition and holding of the CMOs
by the Plans violated any of the fiduciary responsibility provisions
of Part 4 of Title I of the Act.
The Department notes that 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.
Section 404(a) of the Act also states that a plan fiduciary should
diversify the investments of a plan so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent
not to do so.
In this regard, the Department is not providing any opinion as
to whether a particular category of investments or investment
strategy would be considered prudent or in the best interests of a
plan as required by section 404 of the Act. The determination of the
prudence of a particular investment or investment course of action
must be made by a plan fiduciary after appropriate consideration to
those facts and circumstances that, given the scope of such
fiduciary's investment duties, the fiduciary knows or should know
are relevant to the particular investment or investment course of
action involved, including the plan's potential exposure to losses
and the role the investment or investment course of action plays in
that portion of the plan's investment portfolio with respect to
which the fiduciary has investment duties (see 29 CFR 2550.404a-1).
The Department also notes that in order to act prudently in making
investment decisions, a plan fiduciary must consider, among other
factors, the availability, risks and potential return of alternative
investments for the plan. Thus, a particular investment by a plan,
which is selected in preference to other alternative investments,
would generally not be prudent if such investment involves a greater
risk to the security of a plan's assets than comparable investments
offering a similar return or result.
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8. In November and December 1994, the Banks obtained bids from
various broker-dealers and pricing services in order to establish the
fair market value of the CMOs and other Securities. The Banks received
market price information on the Securities from Bloomberg Financial
Markets (i.e. a well-known pricing service for CMOs), as well as bid
quotations from Bear Stearns, Smith Barney, Alex Brown & Sons, Morgan
Keegan, DLJ (i.e. Donaldson, Lufkin & Jenrette), and Prudential
Securities (the Broker-Dealers). All of the information received
confirmed that the fair market value of the Securities was below their
book value (i.e. either the outstanding principal balance or the
amortized cost).
The Banks represent that ten (10) of the twenty-six (26) total
Securities held by the Plans were sold on the open market on November
2, 1994, for $1,156,028.46.9 This transaction included six (6) of
the CMOs and all four (4) of the Securities that were not CMOs. The
Securities were sold after the Banks obtained bids for the Securities,
on an all or nothing basis, from all of the Broker-Dealers. After
obtaining bids from the Broker-Dealers, the Banks sold these Securities
to Prudential Securities (Prudential) because it was the broker with
the highest average total bid for all of the Securities that were
involved. The bids obtained by the Banks for all of these Securities
were as follows:
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\9\ These Securities were the following: (1) FHLMC REMIC--PAC
Series 1059, Class F, CUSIP #312905MB5; (2) FHLMC REMIC--PAC Series
1459, Class P, CUSIP #312914DV3; (3) FHLMC REMIC--PAC Series 1551,
Class E, CUSIP #312916XX2; (4) FHLB Structured Note, CUSIP
#313389FC7; (5) FHLMC REMIC--TAC Series 1580, Class H, CUSIP
#3133TOA7; (6) FNMA Note, CUSIP #31359CAL9; (7) FNMA REMIC--
Scheduled Amortization Class Series 1993-168, Class N, CUSIP
#31359DQH9; (8) FNMA Medium Term Note, CUSIP #31364AJ37; (9) FNMA
Medium Term Note, CUSIP #31364AVX7; and (10) GE Capital Mortgage
Services REMIC--PAC Series 1993-13, Class A6, CUSIP #36157LSB5.
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(a) Alex Brown--77.944; (b) Bear Stearns--76.996; (c) Morgan
Keegan--76.996; (d) Smith Barney--77.913; (e) DLJ--77.364; and (f)
Prudential--78.068.10
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\10\ The Broker-Dealers' bids represent a price quoted per $100
of principal. To determine the price for the Securities received by
the Banks based on the average bid quoted, the par value of the
Securities would be multiplied by the particular quote, expressed as
a percentage of 100. For example, if the par value of the Securities
was $100,000 and the average bid for the Securities was $78.50 per
$100 of principal, the quoted price would have been $78,500 since
$100,000 x .7850 = $78,500.
---------------------------------------------------------------------------
After the sale of these Securities to Prudential, the Banks made
the Plans ``whole'' for their losses on the investments. In this
regard, the Plans received separate ``makewhole'' payments from PNC,
the Banks' holding company, on January 20, 1995, of $210,725. These
``makewhole'' payments equalled the difference between the book value
(as discussed in Paragraph 12 below) of the Securities at the time of
sale and the market price received from the sale of the Securities to
Prudential. The Banks represent that the Plans involved will also
receive additional payments, as of the date the proposed exemption is
granted, reflecting a reasonable rate of interest for the period from
November 2, 1994 (the date of the sale of these Securities on the open
market) until January 20, 1995 (the date such payments were made to the
Plans).11
---------------------------------------------------------------------------
\11\ The Banks state that the interest on this ``makewhole''
payment for the 2.5 month period would be approximately $1,720.43.
---------------------------------------------------------------------------
Since the ``makewhole'' payments made on January 20, 1995 were a
transaction between the Plans and PNC, a party in interest with respect
to the Plans, the Banks request that the proposed exemption cover such
``makewhole'' payments. There will also be additional ``makewhole''
payments made to the Plans, as of the date the proposed exemption is
granted, to reflect the additional amounts owned to the Plans based on
the difference between the book value (i.e. outstanding principal
balance) and the amortized cost of some of the Securities, where the
latter amount would have been greater at the time of the transaction
(as discussed further below).
9. On December 28, 1994, the Banks sold fifteen (15) of the
remaining sixteen (16) Securities from the Plans to PNC for
$3,069,187.54.12
---------------------------------------------------------------------------
\ 12\ These Securities were the following: (1) FHLMC REMIC--Z
Tranche Series 1393, Class J, CUSIP #312912SQ2; (2) FHLMC REMIC--Z
Tranche Series 1411, Class ZA, CUSIP #312912X45; (3) FHLMC REMIC--
Inverse Floater Series 1438, Class F, CUSIP #312913TJ5; (4) FHLMC
REMIC--Inverse Floater Series 1625, Class SB, CUSIP #3133T22Q2; (5)
FHLMC REMIC--Inverse Floater Series 1660, Class S, CUSIP #3133T3QK7;
(6) FHLMC REMIC--Inverse Floater Series 1665, Class S, CUSIP
#3133T3RD2; (7) FNMA REMIC--Inverse Floater Series 1993-102, Class
S, CUSIP #31359AR43; (8) FNMA REMIC--Inverse Floater Series 1993-
115, Class SE, CUSIP #31359BDT1; (9) FNMA REMIC--Inverse Floater
Series 1993-185, Class SH, CUSIP #31359DU50; (10) FNMA REMIC--
Inverse Floater Series G93-31, Class SD, CUSIP #31359DZW6; (11)
FHLMC REMIC--Inverse Floater Series 1385, Class S, CUSIP #312912KK3;
(12) FNMA REMIC--Z Tranche Series 1992-123, Class Z, CUSIP
#31358N4F6; (13) FNMA REMIC--Inverse Floater Series 1992-129, Class
S, CUSIP #31358N7D8; (14) FNMA REMIC--Inverse Floater Series G93-14,
Class S, CUSIP #31358TX87; and (15) FNMA REMIC--Principal Only (PO)
Series 1993-161, Class GC, CUSIP #31359BXX0.
---------------------------------------------------------------------------
The Securities were sold for cash at an amount equal to the book
value of the Securities, as calculated by the Banks, at the time of the
transaction (as discussed further in Paragraph 12 below).
10. Prior to the transaction on December 28, 1994, the Banks
obtained bid quotations for each of the Securities from Bear Stearns,
Smith Barney, and Alex Brown & Sons, as well as market price
information from Bloomberg Financial Markets (Bloomberg). All of the
quotations received from these Broker-Dealers and the information
[[Page 57466]]
obtained from Bloomberg showed that the fair market value of the
Securities was below their book value as of December 15, 1994. The
following chart shows the market price information from Bloomberg for
each of the Securities involved in the sale to PNC on December 28,
1994.
------------------------------------------------------------------------
Bloomberg
Securities (CMOs) market
price
------------------------------------------------------------------------
FHLMC REMIC--Z Tran. 1393, Class J........................... 89.688
FHLMC REMIC--Z Tran. 1411, Class ZA.......................... 57.500
FHLMC REMIC--Inv. Fl. 1438, Class F.......................... 82.000
FHLMC REMIC--Inv. Fl. 1625, Class SB......................... 77.313
FHLMC REMIC--Inv. Fl. 1660, Class S.......................... 60.094
FHLMC REMIC--Inv. Fl. 1665, Class S.......................... 66.469
FNMA REMIC--Inv. Fl. 1993-102, Class S....................... 39.281
FNMA REMIC--Inv. Fl. 1993-115, Class SE...................... 33.219
FNMA REMIC--Inv. Fl. 1993-185, Class SH...................... 78.063
FNMA REMIC--Inv. Fl. G93-31, Class SD........................ 71.188
FHLMC REMIC--Inv. Fl. 1385, Class S.......................... 63.656
FNMA REMIC--Z Tran. 1992-123, Class Z........................ 79.719
FNMA REMIC--Inv. Fl. 1992-129, Class S....................... 98.813
FNMA REMIC--Inv. Fl. G93-14, Class S......................... 20.500
FNMA REMIC--PO 1993-161, Class GC............................ 19.375
------------------------------------------------------------------------
11. On January 13, 1995, the Banks sold the last remaining Security
(i.e. the GE Capital Mortgage Services REMIC--Inverse Floater Series
1993-17, Class A20) from the Plans to PNC for $187,055.19, an amount
which represented the book value of the Securities at the time of the
transaction. The Banks represent that no bids were obtained from any of
the Broker-Dealers for this transaction because information from
Bloomberg indicated that the market price for the Security would be
approximately 21.65, an amount far below its book value at the time of
the transaction.
12. The total sales proceeds received by the Plans for the
Securities (including the ``makewhole'' payments of $210,725 paid in
connection with certain Securities sold on the open market) was
$4,622,996.19. The Banks state that this amount, which was based on the
book value of the Securities at the time of the transactions, far
exceeded the fair market value of the Securities at the time of the
transactions.13
---------------------------------------------------------------------------
\13\ The Banks note that the original cost of the Securities for
the Plans totalled $5,681,892.89. The Plans had been paid
$427,284.38 in interest and $1,156,914.74 in principal prior to the
transactions.
---------------------------------------------------------------------------
In this regard, the ``book value'' of the Securities was determined
by the Banks to be equal to the outstanding principal balance of the
Securities at the time of the transaction, plus accrued but unpaid
interest. However, the Banks subsequently determined that in some cases
the amortized cost of the Securities,14 as calculated by the
Banks, was greater than the outstanding principal balance of the
Securities. The amortized cost of certain Securities slightly exceeded
their outstanding principal balance in situations where the Securities
were initially purchased by the Plans at a discount to their face
value. The Banks state that a total of eleven (11) of the Securities
were bought by the Plans at a discount. The difference between the
amount paid by PNC to the Plans, based on the outstanding principal
balance of the Securities, and the amount that would have been paid if
the amortized cost method had been used for the Securities bought at a
discount, resulted in an ``underpayment'' of $21,876.89.
---------------------------------------------------------------------------
\14\ The Banks state that the formula used to determine the
amortized cost of these Securities was as follows: [[Purchase
Price--100/WAL x 12] x [WAL x 12--months held]]+100. For example,
assume that a particular CMO investment has been held by a Plan for
6 months. If the WAL was 2.02 years and the purchase price was 90
based on the par value being 100, the formula would be:
[[(90-100)/(2.02 x 12)] x [(2.02 x 12)-6)]]+100
=[(-10/24.24) x (24.24-6)]+100
=(-.4125413 x 18.24)+100
+-7.5247533+100
=92.475247
As the formula indicates, the amortized cost using the average
life at purchase would be $92.475247 as compared to the purchase
price of $90.00. This amortized cost formula allows the ``book
value'' to reflect the yield to the Plan based on the purchase of
the security at a discount from the face value and accretes this
discount over the WAL for the security.
---------------------------------------------------------------------------
The Banks represent that PNC is prepared to pay this additional
amount (plus a reasonable rate of interest on such amount) 15 to
the affected Plans as of the date this proposed exemption is granted.
---------------------------------------------------------------------------
\15\ The Banks state that as of September 1996, the interest on
the additional amount owed would be equal to approximately
$2,297.07, using an annual rate of 6 percent for the 21-month period
since the transaction.
---------------------------------------------------------------------------
In addition, the Banks state that there is accrued but unpaid
interest of approximately $12,194.62, which is still owed to the Plans
on the Securities involved in the transaction with PNC that occurred on
December 28, 1994. The Banks represent that PNC will pay this remaining
accrued interest due on the Securities (plus a reasonable rate of
interest on such amount) 16 to the affected Plans as of the date
this proposed exemption is granted.
---------------------------------------------------------------------------
\16\ The Banks state that as of September 1996, the interest on
this remaining interest amount would be equal to approximately
$1,280.44, using an annual rate of 6 percent for the 21-month period
since the transaction.
---------------------------------------------------------------------------
Therefore, the Plans will receive a total amount that is equal to
the greater of: (i) the outstanding principal balance for each Security
owned by the Plan, plus accrued but unpaid interest, at the time of the
sale; (ii) the amortized cost for each Security owned by the Plan on
the date of the sale, plus accrued but unpaid interest, as determined
by the Banks; or (iii) the fair market value of each Security owned by
the Plan as determined by the Banks from broker-dealers or pricing
services independent of the Banks at the time of the sale. In addition,
the Plans will receive a reasonable rate of interest on any additional
amounts owed to the Plans.
13. The Banks represent that the Plans received a reasonable rate
of return on the Securities during the period of time that such
Securities were held by the Plans. The annualized rate of return for
each Security during this time varied from between 24.63 percent to
0.53 percent. The weighted average annual rate of return on the
Securities was approximately 8.32 percent. The Banks state that the
expected yield on the Securities at the time of purchase exceeded the
yield for other similar fixed income securities of comparable duration.
With respect to the actual yields to the Plans on the Securities, the
Banks state that an analysis of each of the Securities held by the
Plans reveals that the Securities outperformed the rate of return of
leading investment indices for similar fixed-income securities during
the period of time that they were held by the Plans. Therefore, the
Banks represent that each of the Plans that held these Securities
outperformed the rate of return of an appropriate index of fixed-income
securities during this period.
14. The Banks, as trustee of the Plans, represent that the sale of
the Securities was in the best interests of the Plans and their
participants and beneficiaries at the time of the transactions. The
Banks state that the sale transactions insulated the Plans from further
decreases in the fair market value of the Securities. Specifically, the
Banks state that the sale of the Securities by the Plans to Prudential
on November 2, 1994, at their fair market value, plus the ``makewhole''
payments made to the Plans by PNC on January 20, 1995, made the Plans
involved ``whole'' for the
[[Page 57467]]
actual losses they would have otherwise incurred. In addition, the Bank
states that the sale of the other Securities (CMOs) by the Plans to PNC
on December 28, 1994 and January 13, 1995 provided the Plans with an
amount which exceeded the fair market value of the Securities at the
time of the transactions. Finally, the Banks state that the additional
``makewhole'' payments for the book value adjustments based on the
amortized cost of some of the Securities, and the additional payments
for accrued but unpaid interest on some of the Securities (plus a
reasonable rate of interest on such amounts), will be paid to the Plans
as of the date that the exemption is granted.
15. The Banks represent that they took all appropriate actions
necessary to safeguard the interests of the Plans and their
participants and beneficiaries in connection with the sale
transactions. The Banks ensured that each Plan received the appropriate
amount of cash from PNC in exchange for such Plan's Securities. The
Banks also ensured that the Plans did not pay any commissions or other
expenses in connection with the sale of the Securities.
16. In summary, the Bank represents that the sale satisfied the
statutory criteria of section 408(a) of the Act and section 4975 of the
Code because: (a) each sale was a one-time transaction for cash; (b)
each Plan has received or will receive a total amount for its
Securities, including the sale proceeds and ``makewhole'' payments for
transactions that occurred either on the open market or with PNC, which
is equal to the greater of: (i) the outstanding principal balance for
each Security owned by the Plan, plus accrued but unpaid interest, at
the time of the sale, (ii) the amortized cost for each Security owned
by the Plan on the date of the sale, plus accrued but unpaid interest,
as determined by the Banks; or (iii) the fair market value of each
Security owned by the Plan as determined by the Banks based on
information obtained from independent third party sources at the time
of the transactions; (c) the Plans will receive a reasonable rate of
interest on any additional amounts owed to the Plans as of the date
this proposed exemption is granted; (d) the Plans did not pay any
commissions or other expenses with respect to the sales; (e) the Banks,
as trustee of the Plans, determined that the sale of the Securities
would be in the best interests of the Plans; (f) the Banks took all
appropriate actions necessary to safeguard the interests of the Plans
and their participants and beneficiaries in connection with the
transactions; and (g) the Plans received a reasonable rate of return on
the Securities during the period of time that they were held by the
Plans.
Notice to Interested Persons
The applicant states that notice of the proposed exemption shall be
made by first class mail to the appropriate Plan fiduciaries within
fifteen days following the publication of the proposed exemption in the
Federal Register. This notice shall include a copy of the notice of
proposed exemption as published in the Federal Register and a
supplemental statement (see 29 CFR 2570.43(b)(2)) which informs
interested persons of their right to comment on and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a public hearing are due within forty-five days following the
publication of the proposed exemption in the Federal Register.
For Further Information Contact: Mr. E. F. Williams of the
Department, telephone (202) 219-8194. (This is not a toll-free number.)
Univar Corporation Uni$aver Tax Savings Investment Plan (the Plan),
Located in Kirkland, Washington
[Application No. D-10143]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b)(1) and
(b)(2) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to the proposed extension of credit in
the form of guarantees and loans of funds (the Loans), not to exceed
$1,466,785.38, to the Plan by Univar Corporation (the Employer), the
sponsor of the Plan, or its successors, with respect to Guaranteed
Investment Contract No. 62127 (the GIC) issued by Confederation Life
Insurance Company of Canada (Confederation), and the repayment of the
Loans by the Plan to the Employer, or its successors, provided the
following conditions are satisfied: (a) All terms and conditions of the
transactions are no less favorable to the Plan than those the Plan
could receive in arm's-length transactions with unrelated parties; (b)
No interest payments or other expenses will be incurred by the Plan
with respect to the transactions; (c) Repayment of the loans will be
made from proceeds realized from the GIC (the GIC Proceeds) as paid to
the Plan by Confederation, its successors, or any other third-party,
and made only if the repayments do not interfere with the liquidity
needs of the Plan for payment of benefits, transfer of investments,
hardship withdrawals or loans as determined by BZW Barclays Global
Investors, N.A., the Plan trustee; (d) Repayment of the Loans will be
waived by the Employer and its successors to the extent the Loans
exceed the GIC Proceeds, and (e) All unpaid principal and interest that
was due under the GIC on August 12, 1994, minus any Loans from the
Employer and/or payments received under the GIC after August 12, 1994,
will be completely paid by January 1, 2000, by a Loan to the Plan from
the Employer or its successors.
Summary of Facts and Representations
1. The Employer, a Washington corporation, is an international
distributor of industrial, agricultural, and pest control chemicals and
related products and services. The Employer purchases chemicals from
manufacturers in truck, railcar, or tank car quantities and sells the
chemicals in smaller quantities to its customers. The Employer operates
through three wholly-owned subsidiaries: Van Waters & Rogers, Inc.; Van
Waters & Rogers, Ltd.; and Univar Europe, N.V.
On September 30, 1996, all of the Employer's outstanding shares of
common stock were acquired by Royal Pakhoed, N.V. (Pakhoed), a
Netherlands company, through a friendly tender offer and merged with
Pakhoed USA, Inc. a United States subsidiary of Pakhoed. The applicant
represents that the surviving corporation is subject to all the
obligations and liabilities of the Employer and is expected to continue
the business and operations of the Employer substantially as they have
been conducted.
2. The Plan is a defined contribution plan that is intended to
satisfy the provisions of sections 401(a) and 401(k) of the Code, with
employer matching contributions. As of June 30, 1996, the Plan had
2,218 participants and beneficiaries and total assets of
$60,687,828.85.
The fiduciaries of the Plan are the Finance Committee of the Board
of Directors of the Employer (the Finance Committee), the Pension
Management Committee (Pension Committee), and the trustee, BZW Barclays
Global Investors, N.A. (Barclays). The Finance Committee establishes
the funding policy for the Plan and appoints and monitors the Pension
Committee. The
[[Page 57468]]
Pension Committee consists of executives of the Employer, who inter
alia, supervise the daily administration of the Plan. Barclays, a
national bank of the United States, represents that it is a fiduciary
with respect to the Plan and performs as trustee, investment manager,
and outside recordkeeper for the Plan.
The Pension Committee selects various funds that are offered by the
Plan to its participants as investment vehicles for their individual
accounts. Participants of the Plan can daily direct investments of the
assets in their individual accounts among the various funds offered by
the Plan.
One of the funds offered by the Plan to participants is the Fixed
Income Fund (the Fixed Fund), which invests in various guaranteed
investment contracts issued by insurance companies. There are currently
969 individual participant accounts of the Plan invested in the Fixed
Fund.
3. Among the assets of the Fixed Fund is the GIC, which represents
approximately 2.4 percent of the total assets of the Plan. The GIC has
an effective date of April 2, 1990, and an expiration date of April 5,
1995, and was issued for the principal amount of $1,000,000 with a
guaranteed interest rate of 9.18 percent compounded annually. The
applicant represents that the GIC had a Book Value of $1,466,758.38
(the Book Value), as of August 12, 1994, which represents the principal
deposit plus accrued interest, and minus any withdrawals to that date.
The applicant represents that the insurance regulators of Canada
seized the assets of Confederation on August 11, 1994. The following
day the Ingham County Circuit Court, Mason, Michigan placed the assets
of Confederation located in the United States in conservatorship and
rehabilitation proceedings under the administration of state insurance
regulators, and all withdrawals and interest payments with respect to
the GIC were suspended.17
---------------------------------------------------------------------------
17 The Department notes that the decision to acquire and hold
the GIC is governed by the fiduciary responsibility provisions of
Part 4, Subtitle B of Title I of the Act. In this regard, the
Department is not herein proposing relief for any violation of Part
4 which may have arisen as a result of the acquisition and holding
of the GIC by the Plan.
---------------------------------------------------------------------------
After August 12, 1994. The trustee of the Plan has continued to
value the GIC at its Book Value of $1,466,758.38, and has not placed
restrictions with respect to contributions, loan withdrawals,
transfers, and distributions into or out of the Fixed Fund.
4. In order to maintain the Book Value of the GIC and the liquidity
of the Fixed Fund and to avoid having to segregate the GIC from the
Fixed Fund or suspend transfers from the Fixed Fund because of the GIC,
the Employer proposes to guarantee and loan funds (the Loans) for a
total amount not to exceed the Book Value of the GIC, as determined on
August 12, 1994.18
---------------------------------------------------------------------------
\ 18\ The Department notes that the exemption, if granted will
not affect the ability of a participant or beneficiary to bring a
civil action against plan fiduciaries for any breaches of section
404 of the Act which may have occurred in connection with any aspect
of the GIC transaction.
---------------------------------------------------------------------------
The Loans will be unsecured and interest-free and made, as needed,
to provide for withdrawals from the Fixed Fund of the Plan for benefit
distributions, investment transfers, or hardship withdrawals and loans.
The Employer also represents that it will make a final Loan to the
Plan by January 1, 2000, that totals $1,466,785.38, minus any other
Loans made to the Plan after August 12, 1994, and/or minus any payments
received by the Plan from the GIC Proceeds after August 12, 1994.
In addition, the applicant represents that the Plan will not incur
any interest payments or other expenses from the Loans, and repayment
of the Loans will be restricted to proceeds from the GIC as paid to the
Plan by Confederation, its successors, or any other third-party. Also,
the applicant represents that repayment of the Loans will be waived by
the Employer, or its successors, to the extent the loans exceed the
proceeds realized from the GIC by the Plan.
Barclays in an agreement dated July 10, 1996, agrees to monitor and
enforce the Employer's fulfillment of its obligations to the Plan to
make the Loans to the Plan. In addition, if the Employer fails in its
obligation of the Loans, Barclays will take prudent and appropriate
action required to protect the interests of the Plan and its
participants and beneficiaries. Barclays pledges to perform its duties
in accordance with the fiduciary requirements of the Act.
Barclays further represents that the undertakings by the Employer
with respect to its promise to make the Loans as described in the
exemption application, and the acceptance by the Plan of such
undertakings are in the best interests of the Plan and its participants
and beneficiaries.
5. In summary, the applicant represents that the proposed
transactions will satisfy the criteria for an exemption under section
408(a) of the Act because (a) the Loans will enable the Plan to fund
benefit payments and make loans, withdrawals, transfers, and
distributions from the Fixed Fund of the Plan; (b) repayments of the
Loans will be restricted to the proceeds realized from the GIC; (c)
repayments will be restricted by liquidity needs of the Plan and waived
by the Employer, or its successors, to the extent the Loans exceed the
proceeds realized from the GIC by the Plan; and (d) no interest
payments or other expenses will be incurred by the Plan with respect to
the transactions.
For Further Information Contact: Mr. C.E. Beaver of the Department,
telephone (202) 523-8881. (This is not a toll-free number.)
BA Securities, Inc. (BA) Located in San Francisco, California
[Application No. D-10335]
Proposed Exemption
I. Transactions
A. Effective August 29, 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.19
---------------------------------------------------------------------------
\19\ 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 August 29, 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
[[Page 57469]]
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.20 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;
---------------------------------------------------------------------------
\20\ 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 August 29, 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.21
---------------------------------------------------------------------------
\21\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
---------------------------------------------------------------------------
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. Effective August 29, 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 any transactions to which those restrictions
or taxes would otherwise apply merely because a person is deemed to be
a party in interest or disqualified person (including a fiduciary) with
respect to a plan by virtue of providing services to the plan (or by
virtue of having a relationship to such service provider described in
section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2)
(F), (G), (H) or (I) of the Code), solely because of the plan's
ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D & P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
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
[[Page 57470]]
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 BA
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); \22\
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\22\ 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.
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(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) BA;
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
BA; or
(3) any member of an underwriting syndicate or selling group of
which BA or a person described in (2) is a manager or co-manager with
respect to the certificates.
D. Sponsor means the entity that organizes a trust by depositing
obligations therein in exchange for certificates.
E. Master Servicer means the entity that is a party to the pooling
and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. Subservicer means an entity which, under the supervision of and
on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. Servicer means any entity which services loans contained in the
trust, including the master servicer and any subservicer.
H. Trustee means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. Insurer means the insurer or guarantor of, or provider of other
credit support for, a trust. Notwithstanding the foregoing, a person is
not an insurer solely because it holds securities representing an
interest in a trust which are of a class subordinated to certificates
representing an interest in the same trust.
J. Obligor means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. Excluded Plan means any plan with respect to which any member of
the Restricted Group is a ``plan sponsor'' within the meaning of
section 3(16)(B) of the Act.
L. Restricted Group with respect to a class of certificates means:
(1) each underwriter;
(2) each insurer;
(3) the sponsor;
(4) the trustee;
(5) each servicer;
(6) any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) any affiliate of a person described in (1)-(6) above.
M. Affiliate of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section
[[Page 57471]]
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. BA means BA Securities, Inc. and its affiliates.
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts at 35932.
Summary of Facts and Representations
1. BA is the wholly-owned, separately capitalized investment
banking subsidiary of BankAmerica Corporation (the Bank), a multi-bank
holding company which was incorporated in Delaware in 1968. On March
31, 1996 the Bank's consolidated assets were approximately $234.2
billion. The Bank is headquartered in San Francisco and, through its
various subsidiaries, provides a diversified range of financial
services to its customers. The Bank's depository subsidiaries provide
consumer banking and other retail banking services. The Bank, through
its banking and other subsidiaries, also provides wholesale banking and
financial products and services throughout the United States and in
overseas markets to business customers. These products and services
encompass corporate lending, business finance, leasing, cash
management, trade finance and investment banking services.
BA was incorporated in 1986. It maintains its principal place of
business in San Francisco, California, and has branch operations in
Chicago, Los Angeles, New York, Atlanta and Portland.
BA is a member of the National Association of Securities Dealers
and a primary dealer in U.S. Treasury securities. BA also underwrites
and deals in corporate debt securities, commercial paper, municipal
securities, high-yield securities and asset-backed securities, provides
private placement and corporate finance advisory services, including
merger and acquisition advisory services, publishes research on a wide
range of securities and issuers, and engages in syndication, arranging
and trading of bank loans.
BA and its predecessors, including Security Pacific Corporation and
Continental Bank Corporation, have extensive experience in asset
securitizations. BA has participated in securitization transactions as
lead or co-manager of underwritten public offerings, and as private
placement agent or commercial paper conduit agent/dealer for
transactions backed by retail auto receivables, bank and retail credit
cards, equipment loans and leases, manufactured housing loans, auto
leases, unsecured consumer loans, dealer floor plan accounts, trade
receivables and student loans.
BA represents that it received Federal Reserve Board authorization
to underwrite and deal in commercial paper, municipal revenue bonds,
residential mortgage-related securities and consumer receivable-related
securities. In October 1994, BA received Federal Reserve Board approval
to underwrite and deal in corporate debt and equity securities. These
orders are subject to the condition that BA does not derive more than
10% of its total gross revenues from such activities. In addition, BA's
affiliates have the power to sell interests in their own assets in the
form of asset-backed securities.
Trust Assets
2. BA 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; 23 (2) motor vehicle
[[Page 57472]]
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.24
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\ 23\ The Department notes that PTE 83-1 [48 FR 895, January 7,
1983], a class exemption for mortgage pool investment trusts, would
generally apply to trusts containing single-family residential
mortgages, provided that the applicable conditions of PTE 83-1 are
met. BA requests relief for single-family residential mortgages in
this exemption because it would prefer one exemption for all trusts
of similar structure. However, BA has stated that it may still avail
itself of the exemptive relief provided by PTE 83-1.
\24\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mortgages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.25
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25 Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. The sponsor or
servicer of a trust selects assets to be included in the trust. These
assets are receivables which may have been originated by a sponsor or
servicer of the trust, an affiliate of the sponsor or servicer, or by
an unrelated lender and subsequently acquired by the trust sponsor or
servicer.26
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\26\ 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.
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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. BA, 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 BA on a firm commitment basis.
In addition, BA anticipates that it may privately place
certificates on both a firm commitment and an agency basis. BA 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 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. BA
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.27
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\27\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(1)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. 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.28
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\28\ If a trust issues subordinated certificates, holders of
such subordinated certificates may not share in the amount
distributed on a pro rata basis with the senior certificateholders.
The Department notes that the exemption does not provide relief for
plan investment in such subordinated certificates.
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[[Page 57473]]
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 BA, the trust sponsor or the servicer. BA 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, 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 BA. In other cases,
however, affiliates of BA 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.
[[Page 57474]]
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.\29\ This rate is generally determined by the same market forces
that determine the price of a certificate. The price of a certificate
and its pass-through, or coupon, rate together determine the yield to
investors. If an investor purchases a certificate at less than par,
that discount augments the stated pass-through rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
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\29\ The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor 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 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
[[Page 57475]]
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;
(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
[[Page 57476]]
Annual Reports on Form 10-K, many trusts obtain, by application to the
Securities and Exchange Commission, a complete exemption from the
requirement to file quarterly reports on Form 10-Q and a modification
of the disclosure requirements for annual reports on Form 10-K. If such
an exemption is obtained, these trusts normally would continue to have
the obligation to file current reports on Form 8-K to report material
developments concerning the trust and the certificates. While the
Securities and Exchange Commission's interpretation of the periodic
reporting requirements is subject to change, periodic reports
concerning a trust will be filed to the extent required under the
Securities Exchange Act of 1934.
23. At or about the time distributions are made to
certificateholders, a report will be delivered to the trustee as to the
status of the trust and its assets, including underlying obligations.
Such report will typically contain information regarding the trust's
assets, payments received or collected by the servicer, the amount of
prepayments, delinquencies, servicer advances, defaults and
foreclosures, the amount of any payments made pursuant to any credit
support, and the amount of compensation payable to the servicer. Such
report also will be delivered to or made available to the rating agency
or agencies that have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the servicer,
paying agent or trustee summarizing information regarding the trust and
its assets. Such statement will include information regarding the trust
and its assets, including underlying receivables. Such statement will
typically contain information regarding payments and prepayments,
delinquencies, the remaining amount of the guaranty or other credit
support and a breakdown of payments between principal and interest.
Forward Delivery Commitments
24. To date, no forward delivery commitments have been entered into
by BA in connection with the offering of any certificates, but BA 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 BA
may find it desirable in the future to enter into such commitments for
the purchase of certificates.
Secondary Market Transactions
25. It is BA's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter. BA
anticipates that it will make a market in certificates.
Retroactive Relief
26. BA 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, BA requests the exemptive relief granted to be
retroactive to August 29, 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 BA 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) BA 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 406(a) and 407 for the sale, exchange or
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406(a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (1) The proposed exemption
provides individual exemptive relief rather than class relief; (2) The
proposed exemption covers transactions involving trusts containing a
broader range of assets than single-family residential mortgages; (3)
Instead of requiring a system for insuring the pooled receivables, the
proposed exemption conditions relief upon the certificates having
received one of the three highest ratings available from S&P's,
Moody's, D&P or Fitch (insurance or other credit support would be
obtained only to the extent necessary for the certificates to attain
the desired rating); and (4) The proposed exemption provides more
[[Page 57477]]
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.30
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\30\ 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).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
BA 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.31 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.32 Likewise, issues are raised
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a
plan to purchase certificates where trust funds will be used to benefit
a party in interest.
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\31\ In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which BA 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.
\32\ The applicant represents that where a trust sponsor is an
affiliate of BA, 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 BA is not a fiduciary with
respect to plan assets to be invested in certificates.
---------------------------------------------------------------------------
Additionally, BA 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. BA
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, BA 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.)
Zions Bancorporation and Affiliated Companies (Zions) Located in Salt
Lake City, Utah
[Application No. L-10338]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406(a) and (b) of the Act shall not apply to the
reinsurance of risks and the receipt of premiums therefrom by Zions
Life Insurance Company (ZLIC) in connection with an insurance contract
sold by American Bankers Life Insurance Company (AB) to provide group
life and accidental death and dismemberment insurance to employees of
Zions (the Plan), provided the following conditions are met:
(a) ZLIC--
(1) Is a party in interest with respect to the Plan by reason of a
stock or partnership affiliation with Zions that is described in
section 3(14) (E) or (G) of the Act,
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one State as defined in section 3(10) of the Act,
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state which has neither been revoked
nor suspended, and
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its domiciliary State, Arizona) by the Insurance
Commissioner of the State of Arizona within 5 years prior to the end of
the year preceding the year in which the reinsurance transaction
occurred.
(b) The Plan pays no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid with respect to the direct sale of such
contracts or the reinsurance thereof; and
(d) For each taxable year of ZLIC, the gross premiums and annuity
considerations received in that taxable year by ZLIC for life and
health insurance or annuity contracts for all employee benefit plans
(and their employers) with respect to which ZLIC is a party in interest
by reason of a relationship to such employer described in section 3(14)
(E) or (G) of the Act does not exceed 50% of the gross premiums and
annuity considerations received for all lines of insurance (whether
direct insurance or reinsurance) in that taxable year by ZLIC. For
purposes of this condition (d):
(1) the term ``gross premiums and annuity considerations received''
means as to the numerator the total of premiums and annuity
considerations received, both for the subject reinsurance transactions
as well as for any direct sale or other reinsurance of life insurance,
health insurance or
[[Page 57478]]
annuity contracts to such plans (and their employers) by ZLIC. This
total is to be reduced (in both the numerator and the denominator of
the fraction) by experience refunds paid or credited in that taxable
year by ZLIC.
(2) all premium and annuity considerations written by ZLIC for
plans which it alone maintains are to be excluded from both the
numerator and the denominator of the fraction.
Preamble
On August 7, 1979, the Department published a class exemption
[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44FR 46365] which
permits insurance companies that have substantial stock or partnership
affiliations with employers establishing or maintaining employee
benefit plans to make direct sales of life insurance, health insurance
or annuity contracts which fund such plans if certain conditions are
satisfied.
In PTE 79-41, the Department stated its views that if a plan
purchases an insurance contract from a company that is unrelated to the
employer pursuant to an arrangement or understanding, written or oral,
under which it is expected that the unrelated company will subsequently
reinsure all or part of the risk related to such insurance with an
insurance company which is a party in interest with respect to the
plan, the purchase of the insurance contract would be a prohibited
transaction.
The Department further stated that as of the date of publication of
PTE 79-41, it had received several applications for exemption under
which a plan or its employer would contract with an unrelated company
for insurance, and the unrelated company would, pursuant to an
arrangement or understanding, reinsure part or all of the risk with
(and cede part or all of the premiums to) an insurance company
affiliated with the employer maintaining the plan. The Department felt
that it would not be appropriate to cover the various types of
reinsurance transactions for which it had received applications within
the scope of the class exemption, but would instead consider such
applications on the merits of each individual case.
Summary of Facts and Representations
1. Zions is a publicly traded bank holding company organized under
the laws of the State of Utah in 1955. Zions provides a full range of
banking and related services through its subsidiaries located in Utah,
Nevada and Arizona. Zions has several subsidiaries, including a
mortgage company, a life insurance company (ZLIC), an insurance agency
company, and a securities brokerage company.
2. ZLIC is a corporation organized under the laws of Arizona, its
domiciliary state. ZLIC is a wholly owned subsidiary of Zions. ZLIC is
principally in the business of reinsurance, primarily with respect to
mortgage life and other credit life products. The applicant represents
that $765,000 in premiums was written by ZLIC in 1995.
3. Zions provides to its employees certain welfare benefits through
the Plan. The Plan includes group life, dependent life, supplemental
life and accidental death and dismemberment insurance issued by AB with
respect to the employees of Zions. The Plan is a fully insured welfare
plan within the meaning of section 3(1) of the Act. The Plan currently
has approximately 2,400 participants and beneficiaries.
4. The insurance is currently underwritten by AB, an unaffiliated
insurance carrier. Zions has entered into a policy with AB for 100% of
this coverage. Zions proposes to use its subsidiary, ZLIC, to reinsure
50% of the risk through a reinsurance contract between ZLIC and AB in
which AB would pay 50% of the premiums to ZLIC. From the participants'
perspective, the participants have a binding contract with AB, which is
legally responsible for the risk associated under the Plan. AB is
liable to provide the promised coverage regardless of the proposed
reinsurance arrangement.
5. The applicant represents that the proposed transaction will not
in any way affect the cost to the insureds of the group life insurance
contracts, and the Plan will pay no more than adequate consideration
for the insurance. Also, Plan participants are afforded insurance
protection from AB at competitive rates arrived at through arm's-length
negotiations. AB is rated ``A'' by the A. W. Best Company, whose
insurance ratings are widely used in financial and regulatory circles.
AB has assets in excess of $600 million. AB will continue to have the
ultimate responsibility in the event of loss to pay insurance benefits
to the employee's beneficiary. The applicant represents that ZLIC is a
sound, viable company which is dependent upon insurance customers that
are unrelated to itself and its affiliates for premium revenue.
6. The applicant represents that the proposed reinsurance
transaction will meet all of the conditions of PTE 79-41 covering
direct insurance transactions:
(a) ZLIC is a party in interest with respect to the Plan (within
the meaning of section 3(14)(G) of the Act) by reason of stock
affiliation with Zions, which maintains the Plan.
(b) ZLIC is licensed to do business in Arizona.
(c) ZLIC has undergone an examination by an independent certified
public accountant for 1995.
(d) ZLIC has received a Certificate of Authority from its
domiciliary state, Arizona, which has neither been revoked nor
suspended.
(e) The Plan will pay no more than adequate consideration for the
insurance. The proposed transaction will not in any way affect the cost
to the insureds of the group life insurance transaction.
(f) No commissions will be paid with respect to the acquisition of
insurance by Zions from AB or the acquisition of reinsurance by AB from
ZLIC.
(g) For each taxable year of ZLIC, the ``gross premiums and annuity
considerations received'' in that taxable year for group life and
health insurance (both direct insurance and reinsurance) for all
employee benefit plans (and their employers) with respect to which ZLIC
is a party in interest by reason of a relationship to such employer
described in section 3(14)(E) or (G) of the Act will not exceed 50% of
the ``gross premiums and annuity considerations received'' by ZLIC from
all lines of insurance in that taxable year. All of the premium income
of ZLIC comes from reinsurance. ZLIC has received no premiums for the
Plan insurance in the past. ZLIC wrote $765,000 in premiums in 1995,
and the applicant estimates that the 1996 premiums should be 15-25%
higher. In 1995, the premium income for ZLIC all came from AB, and
represented reinsurance premiums relating to policies sold by AB to
entities unrelated to Zions and its affiliates. Thus, 100% of ZLIC's
premiums for 1995 were derived from insurance (or reinsurance thereon)
sold to entities other than Zions and its affiliated group.
7. In summary, the applicant represents that the proposed
transaction will meet the criteria of section 408(a) of the Act
because: a) Plan participants and beneficiaries are afforded insurance
protection by AB, an ``A'' rated group insurer, at competitive market
rates arrived at through arm's-length negotiations; b) ZLIC is a sound,
viable insurance company which does a substantial amount of public
business outside its affiliated group of companies; and c) each of the
protections provided to the Plan and its participants and beneficiaries
by PTE 79-41 will be met under the proposed reinsurance transaction.
For Further Information Contact: Gary H. Lefkowitz of the
Department,
[[Page 57479]]
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 1st day of November, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 96-28504 Filed 11-5-96; 8:45 am]
BILLING CODE 4510-29-P
