[Federal Register Volume 59, Number 27 (Wednesday, February 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2912]
[[Page Unknown]]
[Federal Register: February 9, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9578, et al.]
Proposed Exemptions; Richmond, Fredericksburg and Potomac Railway
Company Employee Thrift and Investment Plan, et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register notice. Comments and
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Richmond, Fredericksburg and Potomac Railway Company Employee Thrift
and Investment Plan (the Plan) Located in Richmond, Virginia
[Application No. D-9578]
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 sale by the Plan of a guaranteed
investment contract, No. GA-5250 (the GIC) issued by Mutual Benefit
Life Insurance Company of New Jersey (Mutual Benefit) to the Richmond,
Fredericksburg & Potomac Corporation (RFP), a party in interest with
respect to the Plan; provided the following conditions are satisfied:
(1) The sale is a one-time transaction for cash; (2) the Plan receives
no less than the fair market value of the GIC at the time of the sale;
(3) the Plan's trustee, acting as independent fiduciary for the Plan,
has determined that the proposed sale price is not less than the
current fair market value of the GIC; and (4) the Plan's trustee has
determined that the proposed transaction is appropriate for and in the
best interests of the Plan and its participants and beneficiaries.
Summary of Facts and Representations
1. The Plan is a defined contribution individual-account plan with
provisions for salary reduction contributions. As of June 30, 1993, the
Plan had total assets of approximately $10,796,703. The Plan had 130
participants as of December 31, 1992. The Plan is sponsored by the
Richmond, Fredericksburg and Potomac Railway Company (the Rail
Company), a Delaware Corporation with its principal place of business
in Richmond, Virginia. Investment decisions with respect to Plan assets
are made by the individual participants, who direct the investment of
their Plan accounts among investment options chosen by an investment
committee (the Committee) comprised of three employees of the Rail
Company. The custodial trustee of the Plan is NationsBank of Virginia,
N.A. (the Trustee).
2. RFP is a Virginia corporation with its principal place of
business in Richmond, Virginia. RFP formerly owned and operated a
railroad, which was sold to the Rail Company effective October 10,
1991. When RFP sold the railroad, most RFP employees engaged in the
railroad operations were hired by the Rail Company. In addition, the
section 401(k) profit sharing plan (the Previous Plan) which RFP had
maintained for its employees was adopted and renamed the Plan's current
name by the Rail Company when it bought the railroad.1
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\1\The applicant has informed the Department that all
participants in the Previous Plan, including RFP employees who were
not hired by the Rail Company when it bought the railroad, became
participants in the Plan and all assets of the Previous Plan became
assets of the Plan when the Rail Company bought the railroad. RFP
has subsequently established a new 401(k) Plan for its employees.
Consequently, immediately following the purchase of the GIC by RFP,
the Plan will transfer to RFP's new 401(k) plan the amounts credited
to the accounts of participants who have continued in RFP's employ.
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3. Under the Previous Plan, participants were offered several
options for the investment of the salary reduction contributions in
their accounts, including a ``guaranteed fund'' (the G Fund) which
invested primarily in guaranteed investment contracts issued by
insurance companies, as selected by the Committee. The assets in the G
Fund, now included among the assets of the Plan, included the GIC,
contract No. GA-5250 issued by Mutual Benefit on January 1, 1991. RFP
represents that the GIC is a guaranteed investment contract bearing
interest on deposits at the rate of 8% per annum for three years.
4. On July 16, 1991, Mutual Benefit was placed into rehabilitation
proceedings by the New Jersey Commissioner of Insurance. As a result of
these proceedings, payments on Mutual Benefits group annuity contracts,
including the GIC held by the Plan, have been suspended
indefinitely.2 On July 18, 1991, the Committee directed the
Trustee to discontinue deposits under the GIC. The Committee also
notified Plan participants that until further notice, withdrawals from
the G Fund are limited to the participants' interests in G Fund assets
other than the GIC. RFP represents that it is uncertain whether or to
what extent Mutual Benefit will be able to make any further payments or
honor any withdrawal requests pursuant to the terms of the GIC.
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\2\The Department notes that the decisions to acquire and hold
the GIC are governed by the fiduciary responsibility requirements of
Part 4, Subtitle B, Title I of the Act. In this regard, the
Department is not herein proposing relief for any violations of Part
4 which may have arisen as a result of the acquisition and holding
of the GIC issued by Mutual Benefit.
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RFP represents that it wishes to enter into the proposed
transaction in order to protect the accounts of Plan participants and
beneficiaries from the effects of a prolonged rehabilitation process
and from any potential loss if, as anticipated, the assets of Mutual
Benefit are not sufficient to meet its obligations under the GIC.3
RFP also represents that the proposed purchase of the GIC would make
funds available to the Plan which are currently due under the terms of
the contract. RFP represents that the Plan will not incur any expenses
with respect to the sale of the GIC.
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\3\RFP previously applied for, and received, an administrative
exemption allowing for an extension of credit from RFP to the Plan
which would enable the Plan to make distributions to Plan
participants. RFP represents that the extension of credit never
occurred because RFP never received approval from the Internal
Revenue Service for the proposed loan.
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5. RFP proposes to protect the interests of the affected
participants by purchasing the GIC from the Plan at its accumulated
book value. The accumulated book value is defined as the sum of all
amounts deposited under the terms of the GIC, plus accrued interest,
less any amounts withdrawn from the GIC by the Plan. Accrued interest
is calculated at the contract rate of 8% until December 31, 1993, the
maturity date. For the period beginning on January 1, 1994 and ending
on the purchase date, interest will be credited at a rate equal to
3.5%. The proposed rate of interest for periods after the maturity date
are the rates that would apply to the GIC for those periods according
to the proposed plan of rehabilitation set forth by the Superior Court
of New Jersey. RFP represents that a request for a closing agreement
has been filed with the Internal Revenue Service pursuant to Internal
Revenue Procedure 92-16.4
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\4\Internal Revenue Procedure 92-16 provides for a temporary
closing agreement program to settle certain tax liabilities that
arise out of transactions between an employer-sponsor and the trust
of a qualified defined contribution plan.
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6. The Trustee, acting as the Plan's independent fiduciary with
respect to this transaction, has reviewed the proposed transaction on
behalf of the Plan. The Trustee represents that it has determined that
the proposed purchase price for the GIC is at least equal to the fair
market value of the GIC. In addition, the Trustee represents that it
has determined that the proposed transaction is appropriate for the
Plan and in the best interests of its participants and beneficiaries.
Immediately prior to the actual sale of the GIC to RFP, the Trustee
will re-examine the appropriateness of the proposed transaction for the
Plan, including the fair market value of the GIC.
7. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) The Plan will receive cash for the GIC in the amount of
the accumulated book value of the Guaranteed Investment Contract, which
the Plan's independent fiduciary has determined to be not less than the
fair market value of the GIC; (2) the transaction will enable the Plan
and its participants and beneficiaries to avoid any risk associated
with the continued holding of the GIC, and to exercise all of their
rights under the Plan to request distributions, loans, withdrawals and
investment transfers with respect to amounts currently invested in the
GIC; (3) the Plan's Trustee, acting as the Plan's independent
fiduciary, has determined that the sale at the proposed price is in the
best interests of the participants and beneficiaries of the Plan; and
(4) immediately prior to the sale, the Trustee will determine if the
proposed transaction is appropriate for and in the best interests of
the Plan and its participants and beneficiaries.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within 5 days of the publication of the notice of proposed
exemption in the Federal Register. The notice will include a copy of
the notice of proposed exemption as published in the Federal Register
and it will be provided to all participants and beneficiaries by first
class mail. The notice will inform interested persons of their right to
comment on and/or to request a hearing with respect to the proposed
exemption. Written comments and requests for a public hearing are due
within 35 days of publication of the notice of proposed exemption in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Virginia J. Miller of the
Department, telephone (202) 219-8971. (This is not a toll-free number.)
Stroh Brewery Company, Inc. Salaried Employees' Thrift Plan (the Plan)
Located in Detroit, Michigan
[Application No. D-9580]
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, 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 cash sale (the Sale) of
certain pooled fund units from the Plan to Stroh Brewery Company, Inc.,
a party in interest with respect to the Plan.
This proposed exemption is conditioned upon the following
requirements: (1) All terms and conditions of the Sale are at least as
favorable to the Plan as those obtainable in an arm's-length
transaction; (2) the Sale is a one-time cash transaction; (3) the Plan
is not required to pay any commissions, costs or other expenses in
connection with this transaction; and (4) the Plan receives a sales
price equal to the fair market value of its residual interest in the
Convertibles Fund.
Effective Date: This exemption, if granted, would be effective as
of December 31, 1993.
Summary of Facts and Representations
1. The Plan is a 401(k) plan sponsored by the Stroh Brewery
Company, Inc., (the Employer), an Arizona corporation engaged in the
business of brewing beverages. As of July 31, 1993, the Plan had total
assets of $73,440,876 and 589 participants.
2. The Plan is comprised of three funds--the equity fund, the fixed
investment fund and the balanced fund. In 1973, the Plan's equity fund
commenced participation in the Morgan Guaranty Trust Company of New
York Convertibles Fund (the Convertibles Fund), which is a pooled asset
fund. The Convertible Fund has traditionally been comprised of limited
partnerships and convertible securities, principally debt instruments
convertible into equity. From 1973 until the current time, various
amounts have been invested in and withdrawn by the Plan from the
Convertible Fund. The cumulative annual rate of return for the
Convertibles Fund has been 10.96 percent.
In late 1990, three large investors (the Investors) in the
Convertibles Fund sought to withdraw their investment from the
Convertibles Fund. Because of the lack of new investors, the Investor's
withdrawal would have left virtually no liquidity in the Convertibles
Fund. Therefore, Morgan determined that all investors would be required
to remain in the Convertibles Fund until it could be completely
liquidated. In February 1991, Morgan Guaranty Trust Company of New York
(Morgan) commenced liquidation of the Convertibles Fund. At the current
time, Morgan has liquidated all of the Convertibles Fund's underlying
assets which were readily disposable on a recognized market. The
remaining assets in the Convertibles Fund include miscellaneous items
such as private placements and limited partnership interests which have
no readily discernable market. Morgan estimates that it will take three
to five years to liquidate these remaining assets in the Convertible
Fund.
Morgan values the Convertibles Fund monthly based upon: (1) Limited
partnerships: limited partnerships are valued based upon valuation
information obtained from the general partners; (2) public securities:
public securities are priced at market, with some discount taken for
liquidity; (3) bankrupt securities: bankrupt securities are currently
being carried and regularly priced at zero to ten percent of their
original value; and (4) private securities: private securities are
priced by determining the net present value of the projected stream of
cash flow, discounted for liquidity.
As of November 10, 1993, Morgan placed the fair market value of the
Convertibles Fund at $620.68 per unit. However in November of 1993,
Morgan split the Convertibles Fund's price per unit by ten. This was
done in an effort to facilitate an efficient liquidation of the
Convertibles Fund by allowing distributions of smaller amounts on a
more frequent basis. Therefore, the price per unit after the split was
$62.06 a unit. As of December 17, 1993, the Plan's residual investment
in the Convertibles Funds was 832 units (the Units). As of December 17,
1993, the applicant represents that Morgan valued the price per unit at
$64.63, making the total value of the Units equal to $53,772.
3. Effective January 1, 1994, Fidelity Management Trust Company
(Fidelity) will become the trustee of the Plan and intends to make the
Plan a section 404(c) plan within the meaning of regulation 29 CFR
2550.404(c)-1 of the Department and to comply with all the relevant
requirements of that regulation. However, this objective cannot be met
until the Units are converted into cash. Because Morgan cannot readily
liquidate the remaining units in the Convertibles Fund (see Paragraph
#2 above), the Plan proposes to sell the Units to the Employer for cash
for their fair market value. The Employer will then hold on to the
Units until the liquidation is completed. The fair market value will be
based on the most recent monthly valuation of the Convertibles Fund
provided by Morgan. The Sale will be a one-time cash transaction, and
the Plan will incur no expenses with respect to the transaction.
Accordingly, the Employer requests an administrative exemption from the
Department to permit the Sale from the Plan to the Employer under the
terms and conditions described herein.
5. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria for an exemption under
Section 408(a) of the Act because: (1) The terms of the Sale will be at
least as favorable as those the Plan could obtain in an arm's-length
transaction; (2) the Sale will be a one-time cash transaction; (3) the
Plan will not be required to pay any commissions, costs or other
expenses in connection with this transaction; and (4) the Plan will
receive a sales price equal to the fair market value of its residual
interest in the Convertibles Fund.
FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
CS Holding and Affiliates Located in New York, New York
[Application No. D-9605]
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, CS Holding and each of its affiliates (collectively, CS
Holding), except Banque Leu Luxembourg (BLL), shall not be precluded
from functioning as a ``qualified professional asset manager'' pursuant
to Prohibited Transaction Exemption 84-14 (PTE 84-14, 49 FR 9494, March
13, 1984) solely because of a failure to satisfy Section I(g) of PTE
84-14, as a result of affiliation with BLL, including any current or
future affiliate of CS Holding, other than BLL, which in the future may
become eligible to serve as a QPAM under PTE 84-14.
Effective Date: This exemption, if granted, will be effective as of
December 17, 1993.
Summary of Facts and Representations
1. CS Holding is a publicly-owned holding company organized under
Swiss law and located in Zurich, Switzerland. Through the international
operations of its affiliated components, CS Holding provides a variety
of financial services. Its affiliates include BLL, a financial
institution organized under the laws of the Grand Duchy of Luxembourg.
Prior to July 10, 1990 BLL was not affiliated with CS Holding or any of
its affiliates. On that date, Leu Holding, a subsidiary of CS Holding,
acquired the parent of BLL. BLL became a wholly-owned subsidiary of Leu
Holding in December 1990 as a result of corporate restructuring. CS
Holding currently owns approximately 96.8 percent of Leu Holding. BLL
engages primarily in private banking, investment counseling, and
portfolio management. CS Holding represents that BLL has not in the
past acted, nor is it presently acting or intending in the future to
act, as a fiduciary with respect to any employee benefit plans subject
to the Act or the Code.
2. On December 17, 1993, BLL entered a plea of guilty (the Plea) in
the U.S. District Court for the Northern District of California in
response to an information filed by the U.S. Attorney's Office (the
Information) charging BLL with one count of money laundering in
violation of 18 U.S.C. section 1957. The Information charges that
between February 20, 1989 and February 28, 1990, a BLL account officer
(the Officer) engaged in monetary transactions involving criminally
derived property by transferring cashier's checks from BLL in
Luxembourg to certain U.S. banks, on behalf of two related BLL customer
bank accounts. The Information charges that the Officer, who is no
longer employed by BLL, acted knowingly or with conscious avoidance of
knowledge that the checks represented proceeds of illegal activity. CS
Holding represents that the Plea represents BLL's acceptance of
responsibility for the isolated actions of a former employee, and that
in connection with the Plea, BLL has entered into a plea agreement (the
Plea Agreement) with the U.S. Attorney's Office which filed the
Information, obligating BLL to certain sanctions and certain corrective
measures, described below.
CS Holding notes that the Plea relates solely to BLL, which was not
an affiliate of CS Holding at the time of the Officer's actions
involved in the Information. CS Holding states that all of the facts
forming the factual basis of the Information occurred prior to the date
that CS Holding acquired control of BLL, and that neither CS Holding
nor any of its affiliates was aware of such facts until after CS
Holding acquired control of BLL. The transaction through which CS
Holding acquired an indirect interest in BLL (the Acquisition) was
consummated in July 1990, several months after the last illegal check
transfer involved in the Information. CS Holding represents that prior
to the Acquisition BLL operated independently of CS Holding, and that
officials of CS Holding did not become aware of the conduct described
in the Information until more than one year after CS Holding acquired
control of BLL.
6. CS Holding represents that although the Officer's actions did
not involve any investment management activities of BLL or any assets
of plans covered by the Act, the plea of guilty to the criminal
activities described above would preclude each component of CS Holding,
as an affiliate of BLL, from serving as a ``qualified professional
asset manager'' (QPAM) pursuant to sections I(g) and V(d) of PTE 84-14.
Section I(g) of PTE 84-14 precludes a person who otherwise qualifies as
a QPAM from serving as a QPAM if such person or an affiliate\5\
thereof has within the 10 years immediately preceding the transaction
been either convicted or released from imprisonment as a result of
certain criminal activity. CS Holding requests an exemption to enable
CS Holding affiliates to function as QPAMs despite their failure to
satisfy section I(g) of PTE 84-14 due to affiliation with BLL and the
Pleas entered by BLL.
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\5\For purposes of section I(g) of PTE 84-14, an ``affiliate''
of a person is defined, in relevant part, as ``any person directly
or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with the person * * *'' (PTE
84-14 section V(d)). As such, under this definition, CS Holding and
all its subsidiaries (collectively, CS Holding) would be considered
affiliates of BLL.
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7. The proposed exemption is requested on behalf of CS Holding
affiliates that are banks, investment banking firms, or registered
investment advisers, which are, or may become, eligible to serve as
QPAMs. The proposed exemption would also apply to CS Holding affiliates
that are acquired in the future. CS Holding represents that the
requested exemption, to enable access to the exemptive relief afforded
by PTE 84-14, is needed for CS Holding affiliates to engage in the full
range of transactions that can be executed by investment managers who
qualify as QPAMs. CS Holding represents that PTE 84-14 is not relevant
for most transactions involving the purchase or sale of U.S. exchange-
traded securities, securities lending, investment in short-term
instruments, or certain residential mortgage pools, since these
transactions may be effected pursuant to other applicable class
exemptions. However, CS Holding represents that PTE 84-14 is necessary
where the CS Holding affiliates have discretion over investments by
plans covered by the Act in real estate, mortgages fixed income
securities, foreign securities, derivatives, foreign currency and other
commodities, since there is no other class exemption permitting an
investment manager to purchase property from, sell or lease property
to, borrow money from, or engage in principal transactions in fixed
income securities , foreign currency and commodities with parties-in-
interest with respect to the investing employee benefit plans.
8. CS Holding represents that various measures have been taken to
ensure that conduct such as that involved in the Plea will not recur.
Among the steps taken by CS Holding are the following:
(A) Promptly after BLL learned of the investigation into this
matter, in November 1991, BLL terminated the employment of the
Officer.
(B) In November and December 1991, BLL conducted an extensive
internal review of its private banking accounts to determine if
there were any other accounts indicative of suspicious activity. A
follow-up investigation was conducted in February 1992. CS Holding
represents that the reviews conducted by BLL's internal audit
department found no evidence that any other accounts were being used
for money laundering activities.
(C) In January 1992, BLL adopted additional internal auditing
procedures for private banking activities, requiring monthly audits
of all new accounts. In addition, in February 1992, BLL issued new
instructions regarding business relationships with private banking
customers, including procedures for acceptance of deposits and
expanded reporting responsibilities of account officers.
(D) In February 1992 BLL elected to adopt the Swiss Federal Bank
Commission's guidelines for the prevention of money laundering. In
March 1992, BLL instituted an electronic data processing system
which automatically records all incoming and outgoing payments with
the time and date, facilitating the early recognition of possible
money laundering activities.
(E) Effective May 1, 1992, BLL established a new management
position responsible for the implementation and enforcement of anti-
money laundering procedures. A new managerial position also was
created effective June 1, 1992 to oversee back-office control
procedures, including supervision and inspection of payment traffic
and securities transactions.
(F) At the time of the Plea, BLL agreed, under the terms of the
Plea Agreement, (1) to forfeit $2.3 million to the United States,
(2) to pay a fine of $60,000, and (3) to retain Price Waterhouse to
prepare, and file with the U.S. Attorney's Office, annual Special
Purpose Reports to be issued on April 15, 1994, April 15, 1995, and
April 15, 1996. In addition, the Plea Agreement requires BLL to
prepare a monograph with yearly updates providing information about
money laundering laws, currency regulations, forfeiture laws, laws
prohibiting the structuring of transactions to avoid reporting
requirements, and methods of detecting and preventing illegal money
laundering, to be distributed to employees of BLL involved in
servicing customer accounts, all correspondent banks of BLL, and
various European financial institutions and regulatory bodies.
9. CS Holding asserts that failure to grant the requested exemption
will prohibit employee benefit plans for which CS Holding affiliates
act as investment managers from engaging in transactions with parties
in interest that would otherwise be permitted under PTE 84-14, and will
cause the plans to forego attractive investment opportunities, due to
the large number of service providers engaged by client plans, and the
wide array of services offered by CS Holding affiliates to plans. CS
Holding states that many of its affiliates would be deprived of their
abilities to offer and render the full range of specialized investment
advisory services demanded by employee benefit plans covered by the
Act. CS Holding notes that the actions involved in the Information did
not involve the operations of any CS Holding affiliates, other than BLL
prior to its affiliation with CS Holding, and that, accordingly, such
actions should not impair or relate to the abilities of CS Holding
affiliates to serve as QPAMs. CS Holding represents that many of the
employee benefit plans which are clients of CS Holding affiliates are
plans with assets in excess of $50 million, with a significant portion
of such plans having assets in excess of $100 million, and that such
plans benefit from the investment sophistication and access to
resources necessary to properly and independently monitor the
performance of investment managers engaged on their behalf. CS Holding
represents that the CS Holding affiliates which are eligible to serve
as QPAMs are subject to regulation under U.S. securities or banking
laws, and that the CS Holding affiliates serving as investment advisers
registered under the Investment Advisers Act of 1940 are subject to
that Act's substantive requirements and the jurisdiction of the
Securities and Exchange Commission, including unannounced audits and
annual disclosure requirements.
10. In summary the applicant represents that the proposed exemption
satisfies the criteria of section 408(a) of the Act for the following
reasons: (A) The criminal activity involved in the Plea occurred prior
to CS Holding's acquisition of any interest in BLL, and did not involve
any criminal charges against any affiliates of CS Holding other than
BLL; (B) CS Holding has taken substantial measures to prevent any
recurrence of the criminal activity; (C) CS Holding affiliates will be
able to engage in a broader variety of investment services on behalf of
employee benefit plans which demand such services; (D) The criminal
acts in question were neither authorized nor condoned by BLL or any
other component of CS Holding; and (E) The other conditions of PTE 84-
14, combined with the measures taken by CS Holding, afford ample
protection of the interests of participants and beneficiaries of
employee benefit plans.
For Further Information Contact: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Residential Funding Corporation (RFC), Residential Funding Mortgage
Securities, Inc. (RFMSI), Residential Funding Mortgage Exchange
Corporation (RFMEC), Residential Funding Securities Corporation (RFSC),
GMAC Auto Receivables Corporation (GMAC Auto), General Motors
Acceptance Corporation (GMAC), GMAC Mortgage Corporation (GMAC
Mortgage) and GMAC Mortgage Securities II, Inc. (GMAC Mortgage
Securities; together, the Applicants) Located in Minneapolis, Minnesota
(RFC, RFMSI, RFMEC and RFSC), Wilmington, Delaware (GMAC Auto), New
York, New York (GMAC), and Elkins Park, Pennsylvania (GMAC Mortgage and
GMAC Mortgage Securities)
[Application Nos. D-9112 and D-9113]
Proposed Exemption
I. Transactions
A. Effective June 9, 1992, 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.6
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\6\Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective June 9, 1992, the restrictions of sections 406(b)(1)
and 406(b)(2) of the Act and the taxes imposed by section 4975 (a) and
(b) of the Code by reason of section 4975(c)(1)(E) of the Code shall
not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) a plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.7 For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
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\7\For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii),
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B. (1) or (2).
C. Effective June 9, 1992, 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.8
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\8\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. Effective June 9, 1992, the restrictions of sections 406(a) and
407(a) of the Act, and the taxes imposed by sections 4975(a) and (b) of
the Code by reason of sections 4975(c)(1) (A) through (D) of the Code,
shall not apply to any transactions to which those restrictions or
taxes would otherwise apply merely because a person is deemed to be a
party in interest or disqualified person (including a fiduciary) with
respect to a plan by virtue of providing services to the plan (or by
virtue of having a relationship to such service provider described in
section 3(14) (F), (G), (H), or (I) of the Act or section 4975(e)(2)
(F), (G), (H), or (I) of the Code), solely because of the plan's
ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D & P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) a certificate
(a) that represents a beneficial ownership interest in the assets
of a trust;
(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; and
(c) with respect to which (i) one of the Applicants or any of their
affiliates is the sponsor, and an entity which has received from the
Department an individual prohibited transaction exemption relating to
certificates which is similar to this exemption is the sole underwriter
or the manager or co-manager of the underwriting syndicate or a selling
or placement agent; or (ii) one of the Applicants is the sole
underwriter or the manager or co-manager of the underwriting syndicate
or a selling or placement agent; 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
Code; and
(b) That is issued by and is an obligation of a trust with respect
to which (i) one of the Applicants or any of its affiliates is the
sponsor, and an entity which has received from the Department an
individual prohibited transaction exemption relating to certificates
which is similar to this exemption is the sole underwriter or the
manager or co-manager of the underwriting syndicate or a selling or
placement agent or (ii) one of the Applicants is the sole underwriter
or the manager or co-manager of the underwriting syndicate, or a
selling or placement agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) either
(a) secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property, (including obligations
secured by leasehold interests on commercial real property);
(d) obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) ``guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) property which had secured any of the obligations described in
subsection B.(1);
(3) undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to 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) any of the Applicants;
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
any of the Applicants;
(3) any member of an underwriting syndicate or selling group of
which any of the Applicants or a person described in (2) is a manager
or co-manager with respect to the certificates; or
(4) an entity which has received from the Department an individual
prohibited transaction exemption relating to certificates which is
similar to this exemption.
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 sub-servicer.
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 certificate from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(a) Which is secured by equipment which is leased;
(b) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(c) 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:
(a) The trust holds a security interest in the lease;
(b) The trust holds a security interest in the leased motor
vehicle; and
(c) 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.
Effective Date: This exemption, if granted, will be effective for
transactions occurring on or after June 9, 1992.
II. Summary of Facts and Representations
1. The Applicants can be described as follows:
(a) RFC. RFC is owned indirectly by General Motors Corporation
through a chain of wholly owned subsidiaries. RFC is an indirect wholly
owned subsidiary of GMAC Mortgage, which is a wholly owned subsidiary
of GMAC, which in turn is a wholly owned subsidiary of General Motors
Corporation. RFC buys conventional mortgage loans under several loan
purchase programs from mortgage loan originators or sellers nationwide
that meet its seller eligibility requirements and sells certain of the
loans either directly or through RFMSI in the secondary market. RFC
conducts operations from its headquarters in Minneapolis and from
offices located in California, Georgia, New York, Texas and Rhode
Island. In 1986, RFC commenced the master servicing of loans purchased
under its modified loan purchase programs. At August 30, 1993, RFC was
master servicing a loan portfolio of approximately $21.7 billion.
(b) RFMSI. RFMSI is a wholly owned subsidiary of GMAC Mortgage,
which is a wholly owned subsidiary of GMAC. RFMSI was organized for the
purpose of serving as a private secondary mortgage market conduit.
RFMSI purchases loans from RFC or other sellers, or exchanges
certificates for loans from sellers. RFMSI issued approximately $10.8
billion in conduit mortgage pass-through certificates during 1992.
RFMSI does not have, nor is it expected in the future to have, any
significant assets.
(c) RFMEC. RFMEC is an indirect wholly owned subsidiary of GMAC
Mortgage and a wholly owned subsidiary of RFC. RFMEC maintains its
principal office in Minneapolis, Minnesota. RFMEC does not have, nor is
it expected to have, any significant assets.
(d) RFSC. RFSC is a wholly owned subsidiary of an indirect parent
of RFMSI. RFSC was first registered as a broker-dealer on April 23,
1990, and a principal function of RFSC will be to sell conduit-mortgage
pass-through certificates of RFMSI.
(e) GMAC Auto. GMAC Auto, a wholly owned subsidiary of GMAC, was
organized for the limited purpose of purchasing receivables from GMAC,
transferring such receivables to third parties, and any activities
incidental to and necessary or convenient for the accomplishment of
such purposes.
(f) GMAC. GMAC, a wholly owned subsidiary of General Motors
Corporation, was incorporated in 1919 under the New York Banking Law
relating to investment companies. Operating directly and through
subsidiaries and associated companies in which it has equity
investments, GMAC provides a wide variety of automotive-related
financial services to and through franchised General Motors dealers in
many countries throughout the world. Other financial services include
insurance, mortgage banking, marine financing and investment services.
As of December 31, 1992, on a consolidated basis, GMAC had total assets
of $93.6 billion and total shareholder's equity of $8 billion. For the
year ended December 31, 1992, on a consolidated basis, GMAC had gross
revenues of $13.6 billion and net income of $936 million.
(g) GMAC Mortgage. GMAC Mortgage is a wholly owned subsidiary of
GMAC. Mortgage banking operations are conducted in the United States
through GMAC Mortgage and its subsidiaries. The mortgage banking
activity involves the origination and marketing to investors of single-
family and commercial mortgage loans and the subsequent servicing of
these loans on behalf of investors. GMAC also offers home equity loans
in selected states. Typically, GMAC Mortgage funds loans for 60 to 90
days, pending assembly and delivery to investors. Thereafter, GMAC
Mortgage earns an on-going fee for loan services including billing,
collecting and forwarding payments to investors, taxing authorities and
insurance companies.
(h) GMAC Mortgage Securities. GMAC Mortgage Securities, a wholly
owned subsidiary of GMAC Mortgage, was organized for the purpose of
purchasing mortgage loans and depositing such mortgage assets into
trust, and selling certificates representing interests in such trusts,
as well as any other activities incidental to or necessary or
convenient for the accomplishment of such purposes.
Trust Assets
2. The Applicants seek 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
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\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. The Applicants request relief for single-family residential
mortgages in this exemption because it would prefer one exemption
for all trusts of similar structure. However, the Applicants have
stated that they may still avail themselves of the exemptive relief
provided by PTE 83-1.
\1\0Guaranteed 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 applicants are requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts are plan assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mortgages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.
Trust Structure
4. Each trust is established under a pooling and servicing
agreement among 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.
Prior to or concurrently with 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. The certificates are either
publicly or privately offered. In certain cases, the certificates will
be represented by physical certificates registered in the name of a
depository entity or a nominee of the depository.
Certificateholders are 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. The
Applicants request 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.11
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\1\1It 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 certificates 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.12
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\1\2If a trust issues subordinate certificates, holders of such
subordinate certificates may not share in the amount distributed on
a pro rata basis. 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 limited time after the issuance of
trust certificates. Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
Parties to Transactions
7. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a homeowner or automobile
purchaser, or leases property to the lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies, for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
8. The sponsor will be RFC, RFMSI, RFMEC, GMAC Auto, GMAC, GMAC
Mortgage, GMAC Mortgage Securities or one of their brother or sister
affiliates. The sponsor may be the servicer. Where the sponsor is not
also the servicer, the sponsor's role will generally be limited to
acquiring the receivables to be included in the trust, establishing the
trust, designating the trustee, and assigning the receivables to the
trust.
9. The trustee of a trust is the legal owner of the obligations in
the trust. The trustee is also a party to or beneficiary of all the
documents and instruments deposited in the trust, and as such is
responsible for enforcing all the rights created thereby in favor of
certificateholders.
The trustee will be an independent entity, and therefore will be
unrelated to the trust sponsor, the servicer or underwriter or
placement agent. The Applicants represent 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 sponsor, servicer or out of trust assets. The method of
compensating the trustee will be specified in the pooling and servicing
agreement and disclosed in the prospectus or private placement
memorandum relating to the offering of the certificates.
10. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, it is common for the
receivables to be ``subserviced'' by their respective originators and
for a single entity to ``master service'' the pool of receivables on
behalf of the owners of the related series of certificates. Where this
arrangement is adopted, a receivable continues to be serviced from the
perspective of the borrower by the local subservicer, while the
investor's perspective is that the entire pool of receivables is
serviced by a single, central master servicer who collects payments
from the local subservicers and passes them through to
certificateholders.
In most cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (though they
themselves may be related) will be unrelated to the underwriter or
placement agent, although in some cases they will be related to RFSC,
which will sell conduit-mortgage pass-through certificates of RFMSI. In
certain cases, a depositary entity or its nominee will have the
certificates registered in its name, and will maintain procedures for
distribution of notices, reports, distributions and statements to
certificateholders.
Certificate Price, Pass-Through Rate and Fees
11. Where the sponsor of a trust is not the originator of
receivables included in a trust, the sponsor generally purchases the
receivables in the secondary market, either directly from the
originator or from another secondary market participant. The price the
sponsor pays for a receivable is determined by competitive market
forces, taking into account payment terms, interest rate, quality, and
forecasts as to future interest rates.
As compensation for the receivables transferred to the trust, the
sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates, or a combination of certificates and cash. If the sponsor
receives certificates from the trust, the sponsor sells all or a
portion of these certificates for cash to investors or securities
underwriters. In some transactions, the sponsor or an affiliate may
retain a portion of the certificate for its own account. The transfer
of the receivables to the trust by the sponsor, the sale of
certificates to investors, and the receipt of the cash proceeds by the
sponsor generally take place simultaneously.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on receivables included in the trust minus a specified servicing
fee.13 This rate is generally determined by the same market forces
that determine the price of a certificate. The price of a certificate
and its pass-through, or coupon, rate together determine the yield to
investors. If an investor purchases a certificate at less than par,
that discount augments the stated pass-through rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
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\1\3The pass-through rate on certificates representing interests
in trusts holding leases is determined by breaking down lease
payments into ``principal'' and ``interest'' components based on an
implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor, and receive fees for acting in
that capacity) will retain the difference between payments received on
the receivables in the trust and payments payable (at the pass-through
rate) to certificateholders, except that in some cases a portion of the
payments on receivables may be paid to a third party, such as a fee
paid to a provider of credit support. The servicer may receive
additional compensation by having the use of the amounts paid on the
receivables between the time they are received by the servicer and the
time they are due to the trust (which time is set forth in the pooling
and servicing agreement). The servicer will be required to pay the
administrative expenses of servicing the trust, including the trustee's
fee, out of its servicing compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is
established.
14. The servicer may be entitled to retain certain administrative
fees paid by a third party, usually the obligor. These administrative
fees fall into three categories: (a) Prepayment fees; (b) late payment
and payment extension fees; and (c) fees and charges associated with
foreclosure or repossession, or other conversion of a secured position
into cash proceeds, upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
15. Payments on receivables may be made by obligors to the servicer
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and
servicing agreement may permit the servicer to place these payments in
non-interest bearing accounts in itself or to commingle such payments
with its own funds prior to the distribution dates. In these cases, the
servicer would be entitled to the benefit derived from the use of the
funds between the date of payment on a receivable and the pass-through
date. Commingled payments may not be protected from the creditors of
the servicer in the event of the servicer's bankruptcy or receivership.
In those instances when payments on receivables are held in non-
interest bearing accounts or are commingled with the servicer's own
funds, the servicer is required to deposit these payments by a date
specified in the pooling and servicing agreement into an account from
which the trustee makes payments to certificateholders.
16. Participating underwriters or placement agents 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 such 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.
The arrangements among underwriters are typically set forth in an
``Agreement Among Underwriters'', which gives the managing underwriter,
as lead manager of the offering, the authority to act on behalf of all
the underwriters. This agreement also imposes customary restrictions on
the underwriters' dealings in the offered securities as are necessary
to comply with securities laws and to ensure the orderly distribution
of the offered securities.
Purchase of Receivables by the Servicer
17. The Applicants represent that as the principal amount of the
receivables in a trust is reduced by payment, 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 a
receivable included in the trust when the aggregate unpaid balance
payable on the receivables is reduced to a specified percentage
(usually between 5 and 10 percent) of the initial aggregate unpaid
balance. The terms of such repurchase are specified in the pooling and
servicing agreement and will be at least equal to the unpaid principal
balance on the receivables plus accrued interest, less any unreimbursed
advances of principal made by the servicer.
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 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). Typically, 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 itself) 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. In some transactions, 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. 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.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover defaulted
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the servicer out of future payments on receivables held
by the trust to the extent not covered by credit support. However,
where the master servicer provides credit support to the trust, there
are protections in place to guard against a delay in calling upon the
credit support to take advantage of the fact that the credit support
declines proportionally with the decrease in the principal amount of
the obligations in the trust as payments on receivables are passed
through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) In cases where the master servicer and the insurer are
affiliated or the same entity, 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. The
floor amount may be a fixed dollar amount or a multiple of the balance
of one or more of the largest obligations outstanding. Once the floor
amount has been reached, the servicer lacks an incentive to postpone
the recognition of credit losses because the credit support amount
becomes a fixed dollar amount, subject to reduction only for actual
draws. From the time that the floor amount is effective until the end
of the life of the trust, there are no proportionate reductions in the
credit support amount caused by reductions in the pool principal
balance. Indeed, where 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, a
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 l934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
l0-Q and Annual Reports on Form l0-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form l0-Q
and a modification of the disclosure requirements for annual reports on
Form l0-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 l934.
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. This report will
also provide to certificateholders (either by the trustee, the servicer
or, in certain cases, the depository of the certificates) a summary
statement of 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, a breakdown
of payments between principal and interest and other material
information concerning the underlying assets, including, where
applicable, information as to the number and amount of delinquent and
defaulted receivables. The summary statement provided to the
certificateholders will be part of the report to the trustee described
in this paragraph. If this information is to be furnished by the
depository of the certificates, the trustee and the servicer will have
no control over distribution to certificateholders.
Secondary Market Transactions
24. In general, it is the policy of many underwriters to attempt to
make a market for securities for which they are the lead or co-managing
underwriter. In general, it is also the policy of many placement agents
to facilitate sales by investors who purchase certificates if such
entity has acted as agent or principal in the original private
placement of the certificates and if such investors request such
entity's assistance.
Retroactive Relief
25. The Applicants do not believe that they have engaged in any
prohibited transactions that would be covered by the requested
exemption. However, it is possible that some transactions may have
occurred that would be prohibited. For example, because many
certificates are held in street or nominee name, it is not always
possible to identify whether the percentage interest of plans in a
trust is or is not ``significant'' for purposes of the Department's
regulation relating to the definition of plan assets (29 CFR 2510.3-
101(f)). These problems are compounded as transactions occur in the
secondary market. In addition, with respect to the ``publicly-offered
security'' exception contained in that regulation (29 CFR 2510.3-
101(b)), it is difficult to determine whether each purchaser of a
certificate is independent of all other purchasers. Therefore, the
relief requested herein is retroactive to June 9, 1992, which is the
date upon which the Applicants originally filed their exemption
application with the Department.
Summary
26. In summary, the Applicants represent 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 the Applicants and their affiliates
seek exemptive relief will be governed by the pooling and servicing
agreement, which is made available to, or described in the prospectus
or private placement memorandum 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) Many underwriters have made, and the Applicants anticipate that
such underwriters will continue to make, a secondary market in
certificates sponsored by RFC, RFMSI, RFMEC, GMAC Auto, GMAC, GMAC
Mortgage or GMAC Mortgage Securities.
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 Applicants 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.14
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\1\4In 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
The Applicants represent 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.15 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.16 Likewise, issues are
raised under section 406(a)(1)(D) of the Act where a plan fiduciary
causes a plan to purchase certificates where trust funds will be used
to benefit a party in interest.
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\1\5In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which the
Applicants or any of their affiliates are either (a) the sole
underwriter or manager or co-manager of the underwriting syndicate,
(b) a selling or placement agent, or (c) the sponsor, in which case
an entity which has received from the Department an individual
prohibited transaction exemption relating to certificates which is
similar to this exemption is the sole underwriter or the manager or
co-manager of the underwriting syndicate or a selling or placement
agent.
\1\6The Applicants represent that where a trust sponsor is one
of the Applicants or its affiliate, 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 none
of the Applicants is a fiduciary with respect to plan assets to be
invested in certificates.
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Additionally, the Applicants represent 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. The Applicants represent 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, the Applicants represent 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.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and 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 3rd day of February, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-2912 Filed 2-8-94; 8:45 am]
BILLING CODE 4510-29-P
