[Federal Register Volume 61, Number 30 (Tuesday, February 13, 1996)]
[Notices]
[Pages 5572-5586]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3117]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09904, et al.]
Proposed Exemptions; Aultman Retirement Savings Plan (the Plan)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and 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, 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.
Aultman Retirement Savings Plan (the Plan), Located in Canton, Ohio
[Application No. D-09904]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed guarantee (the Guarantee) by
Aultman Health Services Association (the Employer), the sponsor of the
Plan, of amounts due the Plan with respect to four guaranteed
investment contracts issued by Confederation Life (Confederation Life),
including the Employer's potential cash advances to the Plan (the
Advances) pursuant to the Guarantee and the potential repayment of the
Advances (the Repayments); provided that the following conditions are
satisfied:
(A) All terms of the transactions are no less favorable to the Plan
than those which the Plan could obtain in an arm's-length transaction
with an unrelated party;
(B) The Plan does not incur any expenses or pay any interest with
respect to the transactions;
(C) The Repayments, if any, are restricted to (1) excess Advances
made by the Employer, and (2) GIC Proceeds, defined as all amounts
actually received
[[Page 5573]]
by the Plan with respect to the GICs from Confederation Life, any
conservator, trustee or person performing similar functions with
respect to Confederation Life or acting as surety or insurer with
respect to Confederation Life, and/or any state guaranty fund or other
entity paying the obligations of Confederation Life with respect to the
GICs;
(D) The Repayments will be made only after the Plan has recovered,
through the Advances plus GIC Proceeds, the amount guaranteed by the
Employer with respect to the GICs; and
(E) To the extent the Advances exceed GIC Proceeds, repayment of
the difference will be waived.
Summary of Facts and Representations
Introduction: The Plan's assets currently include four guaranteed
investment contracts (the GICs) issued by Confederation Life Insurance
Company (Confederation). Confederation has been placed in receivership
and, consequently, payments and withdrawals with respect to the GICs
are prohibited. The Plan sponsor, Aultman Health Services Association
(the Employer), proposes to guarantee that in the eventual resolution
of the receivership the Plan will recover fully its investments in the
GICs, including interest guaranteed under the GICs through their
maturity dates and interest after the maturity dates at a rate
described below. The exemption proposed herein would enable this
guarantee under the terms and conditions described below.
1. The Plan is a defined contribution money purchase pension plan
which provides for individual participant accounts (the Accounts), with
3,496 participants and approximately $42 million in assets as of June
30, 1994. The Plan is sponsored by the Employer, a nonprofit Ohio
corporation engaged in the ownership and operation of Aultman Hospital
in Canton, Ohio. The trustee of the Plan is the Society National Bank
(the Trustee) in Canton, Ohio.
2. Under the terms of the Plan, participants direct individually
the investment of their Accounts among several investment options
offered by the Trustee, including one option which provides a return
based on two items: (a) individual guaranteed investment contracts
purchased by the Plan from insurance companies (the GIC Fund); and (b)
Plan investments in the EB MaGic Fund (the EB Fund), a large collective
investment fund maintained by the Trustee. The Plan is the sole
investor in the individual contracts in the GIC Fund, which includes
the GICs issued by Confederation Life, a Canadian life insurance
company doing business in the United States through subsidiaries. The
GICs were purchased by the Trustee as a general Plan asset before the
Plan documents provided for individually-directed investment of the
Accounts.
The GICs are identified as follows: (A) Contract no. 61931
purchased on January 5, 1990, principal amount $500,000; (B) Contract
no. 61985 purchased on January 16, 1990, principal amount $1 million;
(C) Contract no. 62754 purchased on April 28, 1993, principal amount $1
million; and (D) Contract no. 62773 purchased on August 3, 1993,
principal amount $1 million. Each GIC is a non-benefit-responsive
contract earning interest, payable annually (the Annual Payments), at a
rate specified by its terms (the Contract Rates) over 60 months, at the
end of which principal and accrued, unpaid interest are due on a
specified date (the Maturity Date) in a final maturity payment (the
Maturity Payment). The Employer represents that through 1994, all
Annual Payments due under the GICs had been paid.
3. On August 11, 1994 (the Receivership Date), Confederation Life
was placed in receivership (the Receivership) pursuant to
rehabilitation proceedings by the State of Michigan.1
Consequently, Confederation Life's assets and operations were frozen,
and payments on all its guaranteed investment contracts, including the
GICs held by the Plan, were suspended effective as of the Receivership
Date. Maturity Payments on two of the GICs were due January 5 and
January 16, 1995, but such payments were not made. The Employer
represents that it is not known whether, when, or under what terms the
Plan will receive any further Annual Payments and Maturity Payments due
under the GICs, and further represents that the Plan is exposed to risk
of loss on its investment in the GICs.
1 The Department notes that the decisions to acquire and
hold the GICs are governed by the fiduciary responsibility
requirements of Part 4, Subtitle B, Title I of the Act. In this
proposed exemption, the Department is not proposing relief for any
violations of Part 4 which may have arisen as a result of the
acquisition and holding of the GICs.
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In order to protect the Accounts from any loss on the Plan's
investment in the GICs, the Employer proposes to guarantee that the
Plan will recover all amounts due under the GICs, plus post- maturity
interest at a rate described below, and in its discretion to make
advances to the Plan pursuant to this guarantee. The Employer requests
an exemption for these transactions under the terms and conditions
described herein.
4. The Guarantee: The Employer's proposed guarantee, including the
potential advances and repayments of the advances, will be embodied in
a written agreement between the Trustee and the Employer (the
Agreement). Under the Agreement, the Employer undertakes a guarantee
(the Guarantee) that the Plan will recover with respect to each GIC an
amount referred to in the Agreement as the GIC's ``Current Value'',
defined as follows: (a) The principal amount invested in the GIC, plus
(b) interest thereon through the Maturity Date at the Contract Rate
during any period for which the GIC's terms provide for interest at the
Contract Rate, plus (c) interest after the Maturity Date (herein
referred to as Post-Maturity Interest) at a daily rate of interest
equal to one three-hundred-sixty-fifth (\1/365\) of the lesser of (i)
the ``Index'' interest rate that was quoted in the Wall Street Journal
on the GIC's issue date for the purchase of a new five-year guaranteed
investment contract from an insurance company rated AAA by Standard and
Poor's or by Duff & Phelps, or (ii) the GIC's Contract Rate; less (d)
GIC Proceeds, defined as all amounts received by the Plan with respect
to the GIC from Confederation Life, any conservator, trustee or person
performing similar functions with respect to Confederation Life acting
as surety or insurer with respect to Confederation Life, and/or any
state guaranty fund or other entity otherwise paying the obligations of
Confederation Life with respect to the GIC.
Accordingly, when each Maturity Payment becomes due under each GIC,
the Employer becomes obligated to pay the Plan (not necessarily on each
GIC's Maturity Date, but in no event later than December 31, 2001, as
explained below) the difference between the amount of such Maturity
Payment then due and the amount of GIC Proceeds, if any, actually
received by the Plan with respect to such payment due (the Payment
Obligation). After the Maturity Date of each GIC, the amount of any
Payment Obligation then assumed by the Employer under the Agreement
also includes interest, effective on the Maturity Date prospectively
through the date of the Employer's final payment of the Payment
Obligation, at the rates for Post-Maturity Interest set forth in the
Agreement as described above. The Agreement requires the Trustee to
notify the Employer of the amount of the Payment Obligation upon the
Plan's failure to receive in full any Maturity Payment. As described
below, the
[[Page 5574]]
Employer's payment of amounts due the Plan as Payment Obligation under
the Agreement will be made from time to time at the discretion of the
Employer, and the total Payment Obligation must be paid to the Plan
upon final resolution of the Receivership but no later than December
31, 2001.
5. Advances: The Agreement enables (but does not obligate) the
Employer at any time to reduce the balance of amounts the Employer owes
the Plan under the Guarantee by making ``restorative payments'' of cash
to the Plan. These ``restorative payments'' (the Advances) are treated
under the Agreement as interest-free advances of amounts guaranteed by
the Employer under the Agreement. The Employer represents that although
the Agreement allows Advances at any time, it expects to fulfill its
Guarantee obligations upon eventual resolution of the Receivership, as
discussed below, and that interim Advances are anticipated only in the
event the Plan encounters unforeseen liquidity problems.
6. Repayments and Final Resolution: Prior to final resolution of
the Receivership, any Advances made by the Employer will be repaid
immediately to the Employer (the Repayments) if and whenever the total
GIC Proceeds plus unrepaid Advances exceeds the GICs' Current Value. A
final Repayment will be made to the Employer upon final resolution of
the Receivership, if the sum of GIC Proceeds plus unrepaid Advances
exceeds the Current Value, in the amount of such excess. The Employer
will receive no interest on the amounts repaid under the Agreement.
Upon final resolution of the Receivership, but in no event later
than December 31, 2001, if the GICs' Current Value exceeds the sum of
total GIC Proceeds plus any Advances by the Employer, then the Employer
must make a final Advance in the amount of the difference.
Execution of the Agreement is contingent upon (a) final grant of
the exemption proposed herein and (b) execution of a ``closing
agreement'' between the Employer, the Trustee and the Internal Revenue
Service pursuant to Revenue Procedure 92-16.
7. In summary, the applicant represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) The transactions will protect the Plan against
all risk of loss with respect to its investments in the GICs; (2) The
Plan will recover all principal invested in the GICs plus all interest
due under the GICs' terms; (3) The Plan will not pay any or incur any
expenses with respect to the Advances or the Guarantee; (4) Repayment
of the Advances will be limited to GIC Proceeds and excess Advances;
and (6) Repayment of the Advances will be waived with respect to the
amount by which the Advances exceed the amount the Plan receives from
GIC proceeds.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Jack, Lyon & Jones, P.A. Profit Sharing Plan (the Plan), Located in
Little Rock, AR
[Application No. D-10071]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the (1) proposed purchase by the Plan of
certain improved real property (the Property) from Jack, Lyon & Jones,
P.A., (the Employer), a party in interest with respect to the Plan; (2)
the subsequent leasing (the Lease) of the Property by the Plan to the
Employer; and (3) the potential future repurchase of the Property by
the Employer from the Plan pursuant to the terms of an option agreement
(the Option Agreement).
This proposed exemption is conditioned on the following
requirements:
(a) The interests of the Plan with respect to the purchase of the
Property, the execution and maintenance of the Lease and the potential
repurchase of the Property by the Employer will be represented by First
Commercial Trust Company (FCTC) of Little Rock, Arkansas, which will
serve as the independent fiduciary.
(b) FCTC does not and will not derive more than one percent of its
gross business revenues from the Employer and/or its principals for
each fiscal year that it serves as the independent fiduciary for the
Plan with respect to the transactions described herein.
(c) FCTC will evaluate the transactions, determine that such
transactions are in the best interests of the Plan, and monitor and
enforce compliance with the terms and conditions of the transactions
and the exemption, at all times.
(d) The acquisition price for the Property will be paid by the Plan
in cash and will be based upon the fair market value of the Property as
determined by a qualified, independent appraiser.
(e) The fair market value of the Property will not exceed 25
percent of the assets of the Plan.
(f) The terms of the Lease will remain at least as favorable to the
Plan as those obtainable in an arm's length transaction with an
unrelated party.
(g) The fair market rental amount will be redetermined every three
years that the Lease is in effect by a qualified, independent appraiser
who has been selected by FCTC and, FCTC will then make appropriate
adjustments to such rent.
(h) The Employer will be obligated for all real estate taxes,
utility costs, fees and insurance premiums that are incidental to the
Lease.
(i) The Option Agreement will enable the Plan to sell the Property
to the Employer in the event that FCTC determines that it is not in the
best interest of the Plan to retain the Property.
(j) The Option Agreement will provide that the Employer repurchase
the Property from the Plan for cash in an amount which is not less than
the greater of (i) the Plan's acquisition cost for the Property or (ii)
the fair market value of the Property as determined by a qualified,
independent appraiser who has been selected by FCTC.
(k) The Plan will pay no real estate fees, commissions or other
expenses in connection with the acquisition of the Property, the
administration of the Lease or the repurchase of the Property by the
Employer under the Option Agreement.
Summary of Facts and Representations
1. The Plan is a defined contribution plan that was established by
the Employer on August 1, 1986. As of March 21, 1995, the Plan had 27
participants. As of March 31, 1995, the Plan had total assets of
approximately $837,746. FCTC serves as the Plan trustee as well as the
decisionmaker with respect to Plan investments. The Employer, a
professional corporation engaged in the practice of law, maintains its
principal place of business at 425 West Capitol Avenue, Little Rock,
Arkansas.
2. Among the assets of the Employer is a parcel of improved real
property which is located at 350 Ardsley Place, Nashville, Tennessee.
The Property consists of a 3 bedroom condominium
[[Page 5575]]
end unit. The Employer purchased the Property for $169,900 from Paul J.
Reynard, an unrelated party, on September 30, 1994. Since the date of
purchase, the Employer has used the Property as a working office and
living quarters for visiting attorneys who share time between the
Employer's Nashville and Little Rock offices. The Property is not
located in close proximity to other real property that is owned by the
Employer or its principals.
At present, the Property is encumbered by a mortgage note in the
original principal amount of $169,900. The note was executed between
the Employer and Worthen Bank of Arkansas (Worthen), an unrelated
party, on September 29, 1994. The note carries interest at 8 \1/2\
percent per annum and initially required 5 interest only payments
beginning October 31, 1994 and continuing at monthly intervals
thereafter. Although a final payment of the unpaid principal balance
plus accrued interest was to be due and payable on November 2, 1995, it
is represented that the note has been extended by the parties under the
prior terms and conditions.
3. The Property has been appraised by Mitzi L. Ayers, SRA and
Shirley Adkins, MAI, qualified, independent appraisers who are
affiliated with the appraisal firm of Adkins & Associates, located in
Nashville, Tennessee. Using comparable market values as a basis for
their analysis, the appraisers placed the fair market value of the
Property at $170,000 as of January 24, 1995. Again using the sales
comparison approach to valuation, the appraisers also placed the fair
market rental value of the Property at $1,600 per month as of January
24, 1995.
4. Because it has assets available for reinvestment, the Plan
proposes to purchase the Property from the Employer for cash at its
appraised value of $170,000.2 The Property will then represent
approximately 21 percent of the Plan's assets. Contemporaneously with
its purchase of the Property, the Plan will commence leasing the
Property to the Employer under the terms of a written lease. The Lease
also provides for the Employer's potential repurchase of the Property
from the Plan. The Plan will not be required to pay any real estate
fees or commissions in connection with its acquisition of the Property,
the administration of the Lease or with respect to the future
reacquisition of the Property by the Employer. Accordingly, the
employer requests an administrative exemption from the Department under
the terms and conditions described herein.
2 It is represented that simultaneously with the Plan's
purchase of the Property, the Employer will use the sale proceeds to
pay off its indebtedness to Worthen.
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5. The interests of the Plan with respect to the proposed
transactions will be represented by FCTC, as the independent fiduciary.
Specifically, Mr. Albert M. Crawford, a Certified Employee Benefits
Specialist for FCTC, will undertake the duties that are required of the
independent fiduciary. Other than serving as the Plan's existing
trustee, FCTC represents that it is not related in any way to the
Employer or its principals through any common ownership, debt
relationship, business dealings or family relationships, nor does it
derive (or will it derive) more than one percent of its gross business
revenues from the Employer and/or its principals for each fiscal year
that it serves as the independent fiduciary for the Plan with respect
to the transactions described herein. In addition, FCTC states that it
has extensive experience as a fiduciary under the Act and that it
acknowledges and accepts the duties, responsibilities and liabilities
in acting as a fiduciary with respect to the Plan.
6. The proposed Lease will have a term of 15 years. It may be
renewed by the Employer for three, successive five year periods
provided the Employer notifies the Plan of its intent to renew 60 days
prior to the expiration of the Lease term and it obtains FCTC's
approval with respect to each such extension. The Lease provides that
the Employer pay the Plan an initial monthly rental of $1,600 per
month. In addition, the Employer is required to pay for all utilities
that are associated with the Property, condominium fees, real estate
taxes, insurance premiums and maintenance and repairs to the premises.
During every three years that the Lease is in effect, the Property
will be reappraised, at the expense of the Employer, by a qualified,
independent appraiser who has been selected by FCTC. FCTC will then
adjust the rental for the Property. In the event that the adjusted
rental amount is less than the rental paid by the Employer during the
previous three year period, the Employer will pay the Plan the prior
rental amount.
7. The Lease also contains a provision which authorizes FCTC to
require the Employer to purchase the Property from the Plan under the
terms of an Option Agreement. Any purchase of the Property pursuant to
the Option Agreement will be for a cash amount that is not less than
the greater of (a) The Plan's original acquisition price for the
Property or (b) the fair market value of the Property as determined by
a qualified, independent appraiser who has been selected by FCTC. FCTC
may exercise the option only after it has determined that it is in the
best interests of the Plan and its participants and beneficiaries.
Notice of the exercise of the option must be presented to the Employer
in writing before its expiration. (Expiration of the Option will occur
upon the sale or transfer of the Property by the Plan.) Upon the
presentment of notice, the Employer will have 60 business days to
consummate the repurchase of the Property. The Option Agreement further
requires that the Plan will not be responsible for any real estate
fees, commissions or other expenses that are incurred in connection
with Employer's repurchase of the Property.
8. FCTC believes that the proposed transactions are in the best
interest of the Plan and its participants and beneficiaries for the
following reasons: (a) the proposed purchase of the Property by the
Plan and the leaseback to the Employer will guarantee participants an
annual investment rate of return of approximately 11.92 percent or
greater; (b) the terms of the Lease are comparable to the ones
currently being negotiated in the Nashville area for similar
properties; and (c) the Employer must, if requested, repurchase the
Property under the Option Agreement for a price which may be at, or in
excess of, the fair market value. In addition, FCTC considers the
Employer creditworthy and able to meet any obligations it may have in
the future to repurchase the Property.
In addition to these reasons, FCTC believes that the
diversification of the Plan's investment portfolio in the Property
would be beneficial to its participants and beneficiaries. FCTC notes
that the Plan's investments in real property for the year ending 1994
would amount to less than 25 percent of the Plan's assets. As
additional contributions and earnings are made to the Plan, the
Property will represent a smaller percentage of the total Plan assets.
Consequently, FCTC believes the decision to invest Plan assets in the
Property is a prudent one.
Finally, FCTC represents that it has examined the Plan document,
the investment portfolio for the Plan as well as the most recent Forms
5500 and allocations. In light of this examination, FCTC does not
believe the liquidity of the Plan will be adversely affected if the
proposed transactions are consummated. FCTC also asserts that the
proposed transactions will promote the diversification of the Plan's
assets
[[Page 5576]]
and enable the Plan to achieve its investment objectives.
Aside from the duties that are described above, FCTC has agreed to
monitor the proposed transactions throughout their duration on behalf
of the Plan and take appropriate actions that are deemed necessary and
proper to safeguard the interests of the Plan and its participants and
beneficiaries. FCTC will also monitor the terms and conditions of the
exemption, at all times.
9. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The interests of the Plan with respect to the purchase of the
Property, the execution and maintenance of the Lease and the potential
repurchase of the Property by the Employer will, at all times, be
represented by FCTC.
(b) FCTC, which has evaluated the terms of the transactions and
determined that the such transactions will be in the best interests of
the Plan, will monitor and enforce compliance with the terms and
conditions of the transactions and the exemption, at all times.
(c) The acquisition price for the Property will be paid by the Plan
in cash and will be based upon the fair market value of the Property as
determined by a qualified, independent appraiser.
(d) The fair market value of the Property will not exceed 25
percent of the assets of the Plan.
(e) The terms of the Lease will remain at least as favorable to the
Plan as those obtainable in an arm's length transaction with an
unrelated party.
(f) The fair market rental amount will be redetermined every three
years that the Lease is in effect by a qualified, independent appraiser
who has been selected by FCTC and, FCTC will then make appropriate
adjustments to such rent.
(g) The Employer will be obligated for all real estate taxes,
utility costs, fees and insurance premiums that are incidental to the
Lease.
(h) The Option Agreement will enable the Plan to sell the Property
to the Employer in the event that FCTC determines that it is not in the
best interest of the Plan to retain the Property.
(i) The Option Agreement will provide that the Employer repurchase
the Property from the Plan for cash in an amount which is not less than
the greater of (i) the Plan's acquisition price for the Property or
(ii) the fair market value of the Property as determined by a
qualified, independent appraiser who has been selected by FCTC.
(j) The Plan will pay no real estate fees, commissions or other
expenses in connection with the acquisition of the Property, the
administration of the Lease or the repurchase of the Property by the
Employer under the Option Agreement.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Associated Claims Management 401(k) Plan (the Plan), Located in
Walnut Creek, CA
[Application No. D-10121]
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 section 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale of a group annuity contract
(the GAC) issued by Mutual Benefit Life Insurance Company (Mutual
Benefit) by the Plan to Foundation Health Corporation (FHC), a party in
interest with respect to the Plan, provided that the following
conditions are satisfied: (a) The sale is a one-time transaction for
cash; (b) the Plan suffers no loss nor incurs any expense in connection
with the sale; (c) the purchase price is no less than the fair market
value of the GAC as of the date of the sale; and (d) any payments under
the GAC to FHC, or its successors, after the date of the sale in excess
of FHC's purchase price are paid to the Plan.
Summary of Facts and Representations
1. The Plan is a 401(k) plan maintained by Associated Claims
Management, Inc. (ACMI), a wholly-owned subsidiary of FHC. FHC, a
Delaware corporation headquartered in Rancho Cordova, California, is a
holding company that administers managed health care services, as well
as offering life and disability insurance, through its subsidiaries.
ACMI administers insurance claims and is located in Walnut Creek,
California. As of September 15, 1995, the Plan had 109 participants who
remain invested in the GAC and total assets of approximately $474,995.
The trustees of the Plan are Laurie Stover, Director of Corporate
Compensation and Benefits at FHC, and Danny O. Smithson, Senior Vice
President of FHC.
2. Among the assets of the Plan is the GAC, No. GA-07773, which was
acquired from Mutual Benefit on May 2, 1990 and was intended to serve
as one of the investment options offered to Plan participants. The GAC
is a variant on the insurance product known in the trade as an ``annual
window group annuity contract.'' Under the GAC, two certificates were
issued to the Plan. The first certificate, effective January 1, 1990,
provided for an interest rate of 7.65% and a maturity date of December
31, 1994 (the 1990 Certificate). The second certificate, effective
January 1, 1991, provided for an interest rate of 8.10% and a maturity
date of December 31, 1995 (the 1991 Certificate).
The GAC was designed to operate in the following manner. For each
calendar year during the life of the GAC, Mutual Benefit would issue a
certificate to the Plan setting the guaranteed rate of interest payable
on funds deposited pursuant to the GAC certificate. For each
certificate, the Plan could elect a maturity date of two, three, or
four years from the first of the year. Mutual Benefit would establish a
separate subfund with respect to each certificate such that the GAC,
over a period of time, would be composed of a series of annual subfunds
earning various rates of interest. The GAC could be discontinued by the
Plan at any time. However, the funds deposited pursuant to the GAC
certificates would continue to earn interest until the certificates'
respective maturity dates.
3. On July 16, 1991, Mutual Benefit was placed into rehabilitation
proceedings by the New Jersey Commissioner of Insurance (the
Commissioner).3 As a result, the assets of the Plan invested in
the GAC were frozen, with the exception of certain hardship
withdrawals. In 1994, the terms of the GAC were redefined under a
rehabilitation plan approved by the Commissioner, and all liabilities
and obligations of Mutual Benefit with respect to the GAC were assumed
by the MBL Life Assurance Corporation (MBLLAC), a New Jersey stock life
insurance company located in Newark, New Jersey. The Plan opted to
remain invested in the GAC according to the
[[Page 5577]]
terms of the rehabilitation plan, which provides that withdrawals are
not permitted to participants without penalty until December 31, 1999,
except in the event of hardship or upon retirement after attaining age
59\1/2\.
3 The Department notes that the decision to acquire and
hold the GAC are governed by the fiduciary responsibility
requirements of Part 4, Subtitle B, Title I of the Act. In this
proposed exemption, the Department is not proposing relief for any
violations of Part 4 which may have arisen as a result of the
acquisition and holding of the GAC.
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Under the restructured GAC, the interest due on the 1990 and 1991
Certificates is calculated as follows. From the GAC's inception in
January 1, 1990 to December 31, 1991, interest is credited at the
guaranteed rates set forth in the 1990 and 1991 Certificates, 7.65% and
8.10%, respectively. From January 1, 1992 onward, interest is credited
at a rate pursuant to an insurance industry enhancement, or so-called
``wrapper,'' 4% for 1992, 3.5% for 1993, 3.5% for 1994, and 3.55% for
1995. The wrapper is funded by a consortium of insurance companies (the
Consortium), led by the Prudential Insurance Company of America and
Metropolitan Life Insurance Company, and provides a rate of interest
for insurance products that have been frozen due to the rehabilitory
conservatorship of Mutual Benefit. Beginning with calendar year 1995,
the interest rate set forth is based on the actual investment
performance of a separate account allocated by the Consortium to the
GAC. The applicant represents that it is still uncertain whether MBLLAC
will be able to redeem the GAC at 100% of its accumulated value by
December 31, 1999, as provided by the rehabilitation plan.
4. In order to protect the Plan participants and beneficiaries from
any further risk of investment loss associated with the GAC, the
applicant proposes to purchase the GAC from the Plan for an amount
equal to the account balance of the GAC as determined by MBLLAC as of
the date of the sale. As of September 1, 1995, the GAC had an account
balance of $143,091. This figure represents the principal amounts
deposited pursuant to the 1990 and 1991 Certificates, less withdrawals,
plus (i) the interest that accrued under the 1990 and 1991 Certificates
from January 1, 1990 to December 31, 1991, and (ii) the interest that
accrued under the wrapper from January 1, 1992 to September 1, 1995.
The purchase price will be adjusted to reflect any additional interest
earned from September 1, 1995 to the date of the sale. The sale will be
a one-time transaction for cash, and the Plan will incur no expenses in
connection with the sale.
The applicant represents that the proposed transaction is in the
interests of the Plan because it will enable the Plan to avoid any risk
associated with continued holding of the GAC and to redirect assets to
investments with a more attractive risk-return ratio. In addition, the
proposed transaction will enable participants to obtain distributions,
loans, and withdrawals attributable to GAC funds that have been frozen
since 1991.
4. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (a) The sale will be a one-time transaction for cash; (b) the
Plan will suffer no loss nor incur any expense in connection with the
sale; (c) the transaction will protect the Plan from any risk
associated with continued holding of the GAC, as well as enabling
participants to exercise all of their rights under the Plan to request
distributions, loans, and withdrawals from the Plan; (d) the purchase
price will be the account balance of the GAC as determined by MBLLAC as
of the date of the sale; and (e) any payments under the GAC to FHC, or
its successors, after the date of the sale in excess of FHC's purchase
price will be paid to the Plan.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by first-class mail, by overnight express delivery, or by
posting the required information at ACMI's offices within 15 days of
the date of publication of the notice of pendency in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and/or to request a
hearing with respect to the proposed exemption. Comments and requests
for a hearing are due within 45 days of the date of publication of this
notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
First Union Corporation (First Union), Located in Charlotte, NC
[Application No. D-10165]
Proposed Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A.(1) or (2). Notwithstanding the foregoing,
section I.A. does not provide an exemption from the restrictions of
sections 406(a)(1)(E), 406(a)(2) and 407 for the acquisition or holding
of a certificate on behalf of an Excluded Plan by any person who has
discretionary authority or renders investment advice with respect to
the assets of that Excluded Plan.4
4 Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in
[[Page 5578]]
certificates representing an interest in a trust containing assets sold
or serviced by the same entity.5 For purposes of this paragraph
B.(1)(iv) only, an entity will not be considered to service assets
contained in a trust if it is merely a subservicer of that trust;
5 For purposes of this exemption, each plan participating
in a commingled fund (such as a bank collective trust fund or
insurance company pooled separate account) shall be considered to
own the same proportionate undivided interest in each asset of the
commingled fund as its proportionate interest in the total assets of
the commingled fund as calculated on the most recent preceding
valuation date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975(a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust,
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.6
6 In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. The restrictions of sections 406(a) and 407(a) of the Act, and
the taxes imposed by sections 4975(a) and (b) of the Code by reason of
sections 4975(c)(1)(A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating 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 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 First Union 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--
[[Page 5579]]
(a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property);
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) Property which had secured any of the obligations described in
subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include any
investment pool unless: (i) The investment pool consists only of assets
of the type which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have
been rated in one of the three highest generic rating categories by
S&P's, Moody's, D & P, or Fitch for at least one year prior to the
plan's acquisition of certificates pursuant to this exemption, and
(iii) certificates evidencing interests in such other investment pools
have been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption.
C. ``Underwriter'' means:
(1) First Union;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
First Union; or
(3) Any member of an underwriting syndicate or selling group of
which First Union or a person described in (2) is a manager or co-
manager with respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services loans contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
[[Page 5580]]
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.
Summary of Facts and Representations
1. First Union is a North Carolina-based, multi-bank holding
company registered under the Bank Holding Company Act of 1956, as
amended, and the rules and regulations thereunder. First Union was
incorporated on December 22, 1967. First Union provides a wide range of
commercial and retail banking and trust services. First Union 7
also provides various other financial services, including mortgage
banking, home equity lending, leasing, investment banking, insurance
and securities brokerage services, through other subsidiaries. First
Union Capital Markets Corp. (CMC), formerly First Union Securities,
Inc., is a wholly-owned subsidiary of First Union and a broker-dealer
registered with the Securities and Exchange Commission.8
7 For purposes of this exemption, ``First Union'' shall include
First Union Corporation, First Union Capital Markets Corp., the
direct and indirect national bank association subsidiaries of First
Union Corporation, and their respective subsidiaries and affiliates,
except where the context otherwise requires.
\8\ There are two other SEC-registered broker-dealers in the
First Union family: First Union Brokerage Services, Inc., a North
Carolina corporation (FUBS), and Lieber & Co., a New York general
partnership (Lieber). Neither FUBS nor Lieber currently engages, nor
is it currently contemplated that either will engage, in the
underwriting or private placement of asset- or mortgage-backed
securities.
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Through its subsidiaries and affiliates (including CMC), First
Union is a financial services organization servicing the financial
needs of individuals, businesses, governments and financial
institutions. As to the capital markets, CMC and certain of its bank
affiliates, principally First Union National Bank of North Carolina,
engage in a variety of activities that facilitate the flow of capital
from investors to CMC's and such Bank's middle market customers. In
particular, CMC engages in securities transactions as both principal
and agent and provides underwriting, research and other financial
services. CMC is actively involved in the issuance and trading of high
yield corporate debt, investment grade fixed-income securities
(including mortgage and asset-backed securities), U.S. government
securities and municipal securities.
First Union represents that CMC has the legal authority to
underwrite asset-backed securities. By order dated July 31, 1989, the
Board of Governors of the Federal Reserve (the Board) granted CMC the
power to underwrite and deal in residential mortgage-related and
consumer-receivable related securities. By order dated May 30, 1995,
the Board granted CMC the power to underwrite and deal in all types of
debt securities, including securities issued by a trust, partnership or
limited liability company or other vehicle secured by or representing
interests in debt obligations (such as asset-backed securities not
covered by the July 31, 1989 order). In each case, CMC's power to so
underwrite and deal is subject to a framework of structural and
operating limitations set forth in the applicable order, including a
condition that it does not derive more than a certain percentage of its
gross revenues from such activities. In addition, each of First Union's
national bank association subsidiaries has the power to underwrite
asset-backed securities representing interests in assets originated or
acquired by such national bank association subsidiary.
Trust Assets
12. First Union 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; 9 (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.10
9 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-l are
met. First Union requests relief for single-family residential
mortgages in this exemption because it would prefer one exemption
for all trusts of similar structure. However, First Union has stated
that it may still avail itself of the exemptive relief provided by
PTE 83-1.
10 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 mort gages 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.11
11 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).
[[Page 5581]]
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. The sponsor or
servicer of a trust selects assets to be included in the trust. These
assets are receivables which may have been originated by a sponsor or
servicer of the trust, an affiliate of the sponsor or servicer, or by
an unrelated lender and subsequently acquired by the trust sponsor or
servicer.
On or prior to the closing date, the sponsor acquires legal title
to all assets selected for the trust, establishes the trust and
designates an independent entity as trustee. On the closing date, the
sponsor conveys to the trust legal title to the assets, and the trustee
issues certificates representing fractional undivided interests in the
trust assets. First Union, 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 First Union on a firm commitment
basis. In addition, First Union anticipates that it may privately place
certificates on both a firm commitment and an agency basis. First Union
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. First
Union requests exemptive relief for two types of multi-class
certificates: ``strip'' certificates and ``fast-pay/slow-pay''
certificates. Strip certificates are a type of security in which the
stream of interest payments on receivables is split from the flow of
principal payments and separate classes of certificates are
established, each representing rights to disproportionate payments of
principal and interest.12
\12\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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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.13
13 If a trust issues subordinated certificates, holders of such
subordinated certificates may not share in the amount distributed on
a pro rata basis with the senior certificateholders. The Department
notes that the exemption does not provide relief for plan investment
in such subordinated certificates.
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6. For tax reasons, the trust must be maintained as an essentially
passive entity. Therefore, both the sponsor's discretion and the
servicer's discretion with respect to assets included in a trust are
severely limited. Pooling and servicing agreements provide for the
substitution of receivables by the sponsor only in the event of defects
in documentation discovered within a short time after the issuance of
trust certificates (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 home-owner or automobile
purchaser, or leases property to the lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
8. The sponsor will be one of three entities: (i) A special-purpose
corporation unaffiliated with the servicer, (ii) a special-purpose or
other corporation affiliated with the servicer, or (iii) the servicer
itself. Where the sponsor is not also the servicer, the sponsor's role
will generally be limited
[[Page 5582]]
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 First Union, the trust sponsor or the servicer. First
Union 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 First Union. In some cases
the underwriter will be unrelated to First Union. In other cases,
however, First Union may originate or service receivables included in a
trust, or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. In some cases, the sponsor will obtain the receivables from
various originators pursuant to existing contracts with such
originators under which the sponsor continually buys receivables. In
other cases, the sponsor will purchase the receivables at fair market
value from the originator or a third party pursuant to a purchase and
sale agreement related to the specific offering of certificates. In
other cases, the sponsor will originate the receivables itself.
As compensation for the receivables transferred to the trust, the
sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates. If the sponsor receives certificates from the trust, the
sponsor sells all or a portion of these certificates for cash to
investors or securities underwriters.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on receivables included in the trust minus a specified servicing
fee.14 This rate is generally determined by the same market forces
that determine the price of a certificate. The price of a certificate
and its pass-through, or coupon, rate together determine the yield to
investors. If an investor purchases a certificate at less than par,
that discount augments the stated pass-through rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
14 The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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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''
[[Page 5583]]
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 the creation of a class of certificates with
subordinated cash flow) will be obtained by the trust sponsor to the
extent necessary for the certificates to attain the desired rating. The
amount of this credit support is set by the rating agencies at a level
that is a multiple of the worst historical net credit loss experience
for the type of obligations included in the issuing trust.
Provision of Credit Support
19. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust (i.e. act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) from the credit support provider (which
may be the master servicer or an affiliate thereof) or, (c) in the case
of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates, and
the master servicer will advance such funds in a timely manner. When
the servicer is the provider of the credit support and provides its own
funds to cover defaulted payments, it will do so either on the
initiative of the trustee, or on its own initiative on behalf of the
trustee, but in either event it will provide such funds to cover
payments to the full extent of its obligations under the credit support
mechanism. In some cases, however, the master servicer may not be
obligated to advance funds but instead would be called upon to provide
funds to cover defaulted payments to the full extent of its obligations
as insurer. Moreover, a master servicer typically can recover advances
either from the provider of credit support or from future payments on
the affected assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the trust as payments on
receivables are passed through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time
[[Page 5584]]
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 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 First Union in connection with the offering of any certificates, but
First Union may contemplate entering into such commitments. The utility
of forward delivery commitments has been
[[Page 5585]]
recognized with respect to offering similar certificates backed by
pools of residential mortgages, and First Union may find it desirable
in the future to enter into such commitments for the purchase of
certificates.
Secondary Market Transactions
25. It is First Union's normal policy to attempt to make a market
for securities for which it is lead or co-managing underwriter. First
Union anticipates that it will make a market in certificates.
Summary
26. In summary, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute receivables
contained in the trust once the trust has been formed;
(b) Certificates in which plans invest will have been rated in one
of the three highest rating categories by S&P's, Moody's, D&P or Fitch.
Credit support will be obtained to the extent necessary to attain the
desired rating;
(c) All transactions for which First Union 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) First Union 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
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
After consideration of the representations of the applicant and
information provided by S&P's, Moody's, D&P and Fitch, the Department
has decided to condition exemptive relief upon the certificates having
attained a rating in one of the three highest generic rating categories
from S&P's, Moody's, D&P or Fitch. The Department believes that the
rating condition will permit the applicant flexibility in structuring
trusts containing a variety of mortgages and other receivables while
ensuring that the interests of plans investing in certificates are
protected. The Department also believes that the ratings are indicative
of the relative safety of investments in trusts containing secured
receivables. The Department is conditioning the proposed exemptive
relief upon each particular type of asset-backed security having been
rated in one of the three highest rating categories for at least one
year and having been sold to investors other than plans for at least
one year.15
\15\ In referring to different ``types'' of asset-backed
securities, the Department means certificates representing interests
in trusts containing different ``types'' of receivables, such as
single family residential mortgages, multi-family residential
mortgages, commercial mortgages, home equity loans, auto loan
receivables, installment obligations for consumer durables secured
by purchase money security interests, etc. The Department intends
this condition to require that certificates in which a plan invests
are of the type that have been rated (in one of the three highest
generic rating categories by S&P's, D&P, Fitch or Moody's) and
purchased by investors other than plans for at least one year prior
to the plan's investment pursuant to the proposed exemption. In this
regard, the Department does not intend to require that the
particular assets contained in a trust must have been ``seasoned''
(e.g., originated at least one year prior to the plan's investment
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
First Union represents that in some cases a trust sponsor, trustee,
servicer, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates may be a pre-existing party
in interest with respect to an investing plan.16 In these cases, a
direct or indirect sale of certificates by that party in interest to
the plan would be a prohibited sale or exchange of property under
section 406(a)(1)(A) of the Act.17 Likewise, issues are raised
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a
plan to
[[Page 5586]]
purchase certificates where trust funds will be used to benefit a party
in interest.
\16\ In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which First Union
or any of its affiliates is either (a) the sole underwriter or
manager or co-manager of the underwriting syndicate, or (b) a
selling or placement agent.
\17\ The applicant represents that where a trust sponsor is an
affiliate of First Union, 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 First Union
is not a fiduciary with respect to plan assets to be invested in
certificates.
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Additionally, First Union 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. First Union 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, First Union represents that to the extent there is a plan
asset ``look through'' to the underlying assets of a trust, the
investment in certificates by a plan covering employees of an obligor
under receivables contained in a trust may be prohibited by sections
406(a) and 407(a) of the Act.
After consideration of the issues involved, the Department has
determined to provide the limited sections 406(b) and 407(a) relief as
specified in the proposed exemption.
NOTICE TO INTERESTED PERSONS: The applicant represents that because
those potentially interested participants and beneficiaries cannot all
be identified, the only practical means of notifying such participants
and beneficiaries of this proposed exemption is by the publication of
this notice in the Federal Register. Comments and requests for a
hearing must be received by the Department not later than 30 days from
the date of publication of this notice of proposed exemption in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
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 accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 2nd day of February, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 96-3117 Filed 2-12-96; 8:45 am]
BILLING CODE 4510-29-P
