[Federal Register Volume 60, Number 98 (Monday, May 22, 1995)]
[Notices]
[Pages 27123-27140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12502]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09878, et al.]
Proposed Exemptions; Tenneco, Inc. Health Care Plan
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice [[Page 27124]] 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.
Tenneco, Inc. Health Care Plan (the Plan) Located in Houston, Texas
[Application No. D-09878]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act shall
not apply to the proposed contribution to the Plan of common stock (the
Stock) of Tenneco, Inc. (Tenneco) by Tenneco or any of its
subsidiaries, provided the following conditions are satisfied: (a) The
Plan will dispose of the Stock received within 2 business days of
receipt, either by sale on the open market or by sale to Tenneco; (b)
any sale of the Stock from the Plan to Tenneco will comply with
conditions (1) and (2) of section 408(e) of the Act; and (c) Tenneco
will pay any and all transactional costs for any sales by the Plan on
the open market.
Summary of Facts and Representations
1. Tenneco is a Fortune 50 company, the Stock of which is traded on
the New York Stock Exchange (the NYSE). The major businesses of Tenneco
include the transportation and sale of natural gas, the manufacture and
sale of farm and construction equipment, and the manufacture and sale
of automotive exhaust system parts. Tenneco is a Delaware corporation
which has its principal office in Houston, Texas.
2. The Plan is a voluntary employees' beneficiary association as
described in section 501(c)(9) of the Code. The Plan pays for medical
and dental benefits for employees and former employees of Tenneco and
its participating domestic subsidiaries. The Plan has never accumulated
reserves; benefits are paid by Tenneco through the Plan on a pay-as-
you-go basis.
3. In 1992, Tenneco created the Tenneco Inc. Stock Employee
Compensation Trust (the SECT). The SECT is not subject to the Act. The
purpose of the SECT is to hold Stock which may be used to defray
compensation and benefit obligations of Tenneco and its subsidiaries,
including medical and dental benefits. The applicant represents that
shares of Stock available under the SECT exceed the number of shares
that Tenneco had anticipated would be needed for compensation and
benefit purposes. The applicant represents that, for reasons of
Delaware corporate law, the SECT may not sell more than 10% of the
shares of Stock originally held by it. However, this limit applies only
to sales, and there is no limit to the amount of Stock in the SECT
which may be used for compensation and benefit purposes. The applicant
represents that if the Stock is contributed to the Plan which, in turn,
sells the Stock to Tenneco or on the open market, such transactions do
not cause a violation of the 10% limit imposed on the SECT.
4. Tenneco proposes to contribute Stock from the SECT to the Plan.
Upon such contribution, the Plan will immediately sell the Stock on the
open market or to Tenneco. The applicant represents that the Plan will
dispose of the Stock received within 2 business days of receipt. In
fact, it is Tenneco's intention that the Plan will dispose of the Stock
as soon as possible, which the applicant anticipates will generally be
a matter of hours or perhaps overnight after receipt.
5. If the Plan sells the Stock to Tenneco, the applicant represents
that the sale will be at a sale price equal to the price prevailing on
the NYSE at the time of the sale to Tenneco. If the Plan sells the
Stock on the open market, Tenneco will pay any and all transactional
costs associated with such sales. The Plan will use the cash it
receives for the Stock to pay medical and dental benefits under the
Plan. This transaction may be done as often as needed to pay benefits.
The applicant represents that it anticipates using approximately
691,000 shares of Stock for Plan expenses in 1995. It is anticipated
that contributions would be made by the SECT to the Plan either weekly
or bi-weekly, based upon projected expenses. In 1994, the average daily
volume of trading of Tenneco Stock was approximately 540,000 shares per
day. Because the number of shares of Stock involved in the proposed
transaction is small compared to the general trading volume of Tenneco
shares, the applicant represents that it anticipates there should be no
effect on the market price of the Stock as a result of the proposed
transaction.
6. The applicant represents that any sale of Stock by the Plan to
Tenneco will comply with conditions (1) and (2) of Act section 408(e),
because the sale will be for adequate consideration, and no commissions
will be charged in connection with the sale. However, the applicant
represents that the exemption proposed herein is needed for the subject
transaction because the Stock being contributed to the Plan will
constitute more than 10% of the Plan's assets in violation of sections
406(a)(2) and 407(a) of the Act. Tenneco represents that it could
contribute a small amount of cash to the Plan and make a succession of
small contributions of Stock by the SECT immediately followed by sales
thereof in such a manner that the Stock would never represent more than
10% of the assets of the Plan. The applicant believes that this would
be in compliance with Act section 407(a). However, such a procedure
would be burdensome, and it would be advantageous for Tenneco to be
able to make contributions of Stock to the Plan under the safeguards
proposed without regard to the 10% limit of section 407(a) of the Act.
7. In summary, the applicant represents that the proposed exemption
satisfies the criteria contained in section 408(a) of the Act because:
(a) The Plan will dispose of the Stock received within 2 business days
of receipt either by sale on the open market or to Tenneco; (b) any
sale of Stock by the Plan to Tenneco will comply with conditions (1)
and (2) of section 408(e) of the Act; and (c) Tenneco will pay any and
all transactional costs for any sales by the Plan on the open market.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 27125]]
Construction Laborers Pension Trust for Southern California (the Trust)
Located in El Monte, California
[Exemption Application No. D-09932]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a) 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 (D) of the Code, shall not
apply, effective December 22, 1989, to the leasing (the Lease) of space
in a commercial office building (the Property) owned by 4401 Santa
Anita Corporation (the Corporation), a corporation that is wholly-owned
by the Trust, to American Benefit Plan Administrators, Inc. (ABPA), a
party in interest with respect to the Trust.
This proposed exemption is conditioned on the following
requirements: (1) The terms of all such leasing arrangements have been,
and will remain, at least as favorable to the Trust as those obtainable
in an arm's length transaction with an unrelated party; (2) an
independent, qualified fiduciary determined, at the Lease's inception,
that it was in the best interests of the Trust and its participants and
beneficiaries; (3) An independent, qualified fiduciary has monitored
and will continue to monitor the Lease for the Trust and the terms and
conditions of the exemption; and (4) the rental charged by, and paid
to, the Corporation under the Lease has been, and will continue to be,
the fair market rental value of the premises as determined by an
independent, qualified appraiser.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
December 22, 1989.
Summary of Facts and Representations
1. The Trust is a multiemployer plan that covers employees of
construction contractors in Southern California. Such contractors
include developers, builders, construction managers and owner-builders.
The Trust is jointly-administered by sixteen trustees (the Trustees),
eight of whom are appointed by multiemployer trade associations
representing employers contributing to the Trust and eight of whom are
designated by the Southern California District Council of Laborers (the
Union). Since 1989, various investment managers have had investment
discretion over the assets of the Trust.
2. As of December 31, 1990, the Trust had approximately 20,000
participants and total assets of $671,079,119. The Trust is one of four
affiliated Laborer Trusts for Southern California (the Laborer Trusts).
The other affiliated Laborer Trusts include the Laborer's Health and
Welfare Trust for Southern California, the Construction Laborer's
Vacation Trust for Southern California (the Vacation Trust), and the
Laborer's Training and Retraining Trust for Southern California.
3. In an effort to relocate the Trusts' operations, Mitchell
Hutchins Institutional Investors, Inc. (MHII), as investment manager,
executed a purchase and sale agreement, on behalf of the Trust, with an
unrelated party to acquire the Property in 1989.1 The Trust's
purchase of the Property coincided with the expiration of several
leases of potential tenants, including various parties-in-interest.
These potential tenants/parties-in-interest consisted of ABPA, which
serves as the Trust's plan administrator, the Collection Office of the
Laborers' Trust Funds for Southern California (the Collection Office)
and the Union.2 Prospective additional tenants included the Joint
Apprenticeship Committee of the Laborers Training and Retraining Trust
for Southern California (the Apprenticeship Committee), an operation
newly-created through collective bargaining in 1988 and set to begin
operations in 1989, and the Center for Contract Compliance (the
Center), a jointly-trusteed, labor-management cooperation committee
established through collective bargaining in 1988 for the purpose of
monitoring employer compliance with the prevailing wage laws for public
works in Southern California. The Trustees overlap to some extent with
the trustees of the other trusts.
\1\ The Department expresses no opinion in this proposed
exemption as to whether plan fiduciaries violated any of the
fiduciary responsibility provisions of Part 4 of Title I of the Act
in acquiring and holding the Property.
\2\ The Collection Office is a combined delinquency collection
operation of the Laborer Trusts. Even though the Collection Office
is operated under the auspices of the Vacation Trust, it is, in all
respects, a shared administrative operation with the Laborer Trusts
participating in its costs and management on a pro-rata basis.
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4. The Property, located within the Airport Business Park at 4399
and 4401 Santa Anita Avenue in El Monte, California, consists of two
identical, 32,196 square foot, wood and steel frame office buildings
and the underlying land. John J. Archer, ASA, a independent real estate
appraiser located in Pasadena, California, appraised the Property prior
to its purchase (the Appraisal). Mr. Archer has been involved in
appraising all types of residential, commercial and industrial
properties since 1953. Mr. Archer also placed the fair market value of
the Property, as of February 9, 1989, at $6,800,000. In determining the
fair market value of the Property, Mr. Archer gave considerable weight
to the income approach of valuation due to the fact that the Property
is income producing real estate. Mr. Archer also placed the fair market
rental value of the Property for a net lease at $1.15 per square foot
per month. At the time of the Appraisal, the Property did not have
finished interior rental space.
5. Upon its acquisition, the Property became an asset of the
Corporation, which is wholly-owned by the Trust. Due to the unfinished
interior of the rental space, the officers of the Corporation, each of
whom has extensive experience in the construction industry, interviewed
potential construction managers and retained Gibeon, Inc., an unrelated
party, to oversee and assist the Corporation in the build-out of the
Property.
6. In early 1989, John S. Miller, Jr., Eva Marie Herhusky and John
Berry (the Negotiators), all of Los Angeles, California, represented
the Corporation in a series of negotiations with ABPA concerning the
Lease. ABPA's space needs were primarily related to its servicing of
the administrative needs of the Trust. However, its personnel also
administer certain other client trusts in the Los Angeles area and its
computer facility services all of its clientele nationwide.
7. Prior to the Lease negotiations, ABPA had been actively
soliciting new space for its operations and had settled upon space in
the Equitable Plaza (Equitable Plaza) on mid-Wilshire in Los Angeles.
ABPA's professional leasing agent had negotiated the terms and
conditions of a ten-year gross lease on an arm's length basis with the
owner of Equitable Plaza to the point that a letter of intent was ready
for execution. Such terms and conditions included the rental of
approximately 41,000 to 42,000 square feet at a rate of $21.60 per
square foot per annum for the first five years (or $1.80 per square
foot per month) and $24.00 per square foot per annum for the final five
years (or $2.00 per square foot per month) with tenant improvements
provided by the landlord at $35.00 per square foot. Additionally, the
landlord offered to provide twenty-four months free rent from the
commencement of the lease. This proposed lease required ABPA to share
[[Page 27126]] in any increases in the actual operating costs of the
building on a pro-rata basis.
8. In the Lease negotiations, ABPA, on one hand, was attempting at
a minimum to match the lease terms it had negotiated with Equitable
Plaza. ABPA contended that it should receive better terms from the
Corporation because the Equitable Plaza, a 35-story Los Angeles high
rise, was a higher quality, more valuable leasehold for ABPA than a
leasehold in the Airport Business Park, a low-rise facility in a
residential suburb outside Los Angeles. The Negotiators, on the other
hand, were attempting to obtain a lease that was at ``market rates''
for the area in which the Airport Business Park is located.
9. In negotiating the terms of the Lease, the Negotiators relied on
the Appraisal and two reports prepared by Mr. Archer which discussed
the general concessions and improvements which landlords would
typically offer to prospective tenants in order to secure a lease. Such
reports included detailed discussions of the common practice of
offering free rent for a period of time, the payment of utilities,
tenant improvement allowances and probable normal expenses. By letter
dated April 12, 1989, Mr. Archer opines that a typical owner of a new
office building which was of good quality would expend $20 to $22 per
square foot to finish out the building for tenant occupancy depending
generally on the size of the area finished at one time. The applicants
represent that this $20 to $22 per square foot cost estimate represents
the expenditure that landlords would typically invest out of their own
pockets without increasing their normal ``market rate of rent'' to a
given tenant. The applicants further represent that once this number is
exceeded, the landlord is likely to increase the normal rate of rent in
order to recoup the higher costs of preparing the space.
By letter dated September 14, 1989, Mr. Archer estimates that the
total operating and fixed expenses per annum would be $401,400 or $6.51
per square foot per annum (or 54.3 cents per square foot per month).
Mr. Archer prepared such estimate based upon data for suburban office
buildings from 50,000 to 100,000 square feet from the 1989 Building
Office Management Association (BOMA) Experience Exchange Report, a
compilation of office building data and surveys done for BOMA's
members.
10. The Negotiators represent that, during the Lease negotiations,
they used the tenant improvement allowance estimate of $20 to $22 per
square foot as a bench mark to determine whether the rate of rent
negotiated was at least equal to the market rate of rent for similar
buildings in similar areas. In addition, ABPA was negotiating for a
full service, gross lease, a lease in which all operating and fixed
expenses are paid by the landlord and passed through to the tenants in
the form of a higher rate of rent per square foot. In order to ensure
that the increased cost to the Corporation had been passed on to ABPA
through an appropriately higher rate of rent, the Negotiators used the
$6.51 per square foot per annum estimate as a basis to calculate the
annual cost of the total operating and fixed expenses for which the
Corporation would be assuming responsibility. The applicant represents
that eventually the Lease terms and conditions were finalized at market
levels.3
\3\ The Department notes that no relief is proposed herein for
the provision of services by ABPA to the Trust. The provision of
services would be exempt from the prohibitions of section 406(a)
provided the conditions of section 408(b)(2) are met. In this
regard, the Department notes that the Trust renegotiated its
administrative services contract with ABPA at approximately the same
time as the negotiation of the Lease. The Department further wishes
to point out that the proposal limits relief to the Lease
transaction. Thus, no relief is proposed for any transaction that is
part of a broader agreement, arrangement or understanding involving
the Lease in which a fiduciary caused plan assets to be used in a
manner designed to benefit a party in interest.
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Once this was accomplished, similar lease proposals were made to
the Collection Office, the District Council, the Apprenticeship
Committee and the Center.4
\4\ The applicant represents that Prohibited Transaction
Exemption (PTE) 76-1 and PTE 77-10 provide relief from 406 (a) and
(b)(2) for leasing of office space from multiemployer plans to a
participating employee organization, a participating employer or
employer association, or another multiemployer plan with common
trustees. The Department expresses no opinion in this proposed
exemption on whether the leasing of such office space satisfies the
terms and conditions of such exemptions.
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11. The primary provisions of the Lease include the rental of
approximately 43,246 square feet at a rate of $2.045 per square foot
per month for a term of ten years (or $24.54 per square foot per
annum). As a full service gross lease, the landlord remains responsible
for all fixed and operating expenses. However, the terms of Lease
provide that ABPA is required to share in any increases in the actual
operating costs of the Property on a pro-rata basis. In addition, the
Lease provides that if the Trust and ABPA cancel their administrative
contract at the end of the fifth year of the Lease or thereafter,
either party has the right to terminate the Lease with six months
written notice. Upon such termination, ABPA is to reimburse the
Corporation for the unamortized value of ABPA's special improvements
but such amount is not to exceed the lesser of $500,000 or one-half of
the unamortized value of ABPA specific improvements.
The Lease does not provide for a tenant improvement allowance;
however, the Corporation is required to construct all tenant
improvements, including the tenant-specific improvements. The cost of
such improvements is included in the Lease payments at a capitalization
rate of 9.5 percent over the term of the Lease or 23.5 cents per square
foot per month (or $2.82 per square foot per annum).
12. Prior to 1988 and through May 1990, MHII served as the
independent, qualified fiduciary for the Trust with respect to the
Lease (MHII's Fiduciary Period). By letter dated December 30, 1993, C.
Gary Morris, Vice President of MHII, represents that MHII was an
investment manager with the meaning of Section 3(38) of the Act. Mr.
Morris represents that both he and MHII were unrelated to, and
independent of, ABPA during MHII's Fiduciary Period. Mr. Morris states
that MHII understood and acknowledged its duties, responsibilities, and
liabilities in acting as a fiduciary with respect to the Trust.
Mr. Morris represents that MHII was familiar with the terms of the
Lease and all of the documents and relevant information in connection
with the Lease, including the Appraisal. Mr. Morris states that the
terms of the Lease compared favorably with the terms of similar
transactions between unrelated parties and was an arm's length
transaction as evidenced by the Appraisal.
MHII reviewed the investment portfolio of the Trust as well as its
diversification and liquidity needs. Based on this analysis, Mr. Morris
represents that MHII believed that the Lease was in the best interests
of the Trust and its participants and beneficiaries. Mr. Morris states
MHII considered the Lease as an appropriate and desirable investment
for the Trust, based on the Lease's rate of return, the stability of
the tenant, the character and diversification of the Trust's other
assets, and the projected liquidity needs of the Trust.
MHII was responsible for monitoring the Lease throughout MHII's
Fiduciary Period and was willing to take any appropriate action
necessary to protect the interests of the Trust and its participants
and beneficiaries.
From July 1990 to July 1991, Am Cal served as the independent,
qualified fiduciary for the Trust with respect to the Lease (Am Cal's
Fiduciary Period). By letter dated April 1, 1993, James Mc
[[Page 27127]] Kenna, Executive Vice President of American Realty
Advisors, represents that prior to 1992, that he was the president and
a director of Am Cal, an independent real estate investment advisory
service. Mr. Mc Kenna further represents that Am Cal was an investment
manager with the meaning of Section 3(38) of the Act. Mr. Mc Kenna
represents that both he and Am Cal were unrelated to, and independent
of, ABPA during Am Cal's Fiduciary Period. Mr. Mc Kenna states that Am
Cal understood and acknowledged its duties, responsibilities and
liabilities in acting as a fiduciary with respect to the Trust.
Mr. Mc Kenna represents that once Am Cal became the investment
manager for the Trust, it reviewed all the assets and investments of
the Trust which included the Lease. Am Cal engaged Crane Realty
Services (Crane), local commercial property manager, who further
reviewed the terms of the Lease and other leases on the Property. Crane
advised Mr. Mc Kenna that all of the leases of the Property, including
the Lease, were ``at market.'' Additionally, Am Cal discussed the
Property, the Lease and the other leases with the Negotiators to
ascertain how the Property had been acquired and built out and how the
Lease terms and conditions had been negotiated. In addition, Am Cal
reviewed the Appraisal and the two reports prepared by Mr. Archer.
After obtaining the above information, Mr. Mc Kenna represents that
Am Cal reviewed the terms of the Lease and all of the documents and
relevant information in connection with the Lease. Mr. Mc Kenna states
that the terms of the Lease compared favorably with the terms of
similar transactions between unrelated parties and would be an arm's
length transaction as evidenced by the information provided by Crane,
the Negotiators, Am Cal's knowledge of commercial leasing conditions in
Los Angeles County, the Appraisal and the two reports prepared by Mr.
Archer.
Am Cal reviewed the investment portfolio of the Trust and
considered the diversification of the Trust's assets as well as the
liquidity needs of the Trust. Based on this analysis, Mr. Mc Kenna
represents that Am Cal determined that the Lease was in the best
interests of the Trust and its participants and beneficiaries. Mr. Mc
Kenna states that Am Cal considered the Lease an appropriate and
desirable investment for the Trust, based on the Lease's rate of
return, the stability of the tenant, the character and diversification
of the Trust's other assets, and the projected liquidity needs of the
Trust. Mr. Mc Kenna represents that Am Cal, with the aide of Crane,
monitored the Lease throughout Am Cal's Fiduciary Period.
During Am Cal's Fiduciary Period, Mr. Archer, by letter dated
October 15, 1991, reviewed the Lease and the draft report on the
factors considered in the Lease negotiations for Am Cal. Taking into
consideration not only the rental, but other terms of the Lease which
would typically be found in a lease entered into by unrelated parties
in arm's length negotiations, Mr. Archer opined that the Lease was at
fair market rent as of December of 1989, the commencement of the Lease.
Mr. Archer stated that although he did not directly participate in the
negotiation of the Lease or any of its particular terms, he did provide
advice to Mr. Berry and Mr. Miller concerning the calculation of rent
under a gross rental lease and on customary provisions and practices in
office space leases.
Since July 1991, TDA, Inc. (TDA) has served as the independent,
qualified fiduciary for the Trust with respect to the Lease. By letter
dated November 11, 1992, Wayne Turner, a principal in TDA, represents
that TDA is an investment manager with the meaning of Section 3(38) of
the Act. Mr. Turner represents that both he and TDA are unrelated to,
and independent of, ABPA. Mr. Turner states that TDA understands and
acknowledges its duties, responsibilities and liabilities in acting as
a fiduciary with respect to the Trust.
Mr. Turner represents that TDA has reviewed the terms of the Lease
and all of the documents and relevant information in connection with
the Lease. Mr. Turner states that the terms of the Lease compare
favorably with the terms of similar transactions between unrelated
parties and is an arm's length transaction as evidenced by the
negotiations.
TDA has reviewed the current investment portfolio of the Trust as
well as its diversification and liquidity needs. Based on this
analysis, Mr. Turner represents that TDA believes that the Lease is in
the best interests of the Trust and its participants and beneficiaries.
Mr. Turner states that TDA considers the Lease to be an appropriate and
desirable investment for the Trust.
Mr. Turner represents that TDA has monitored and will continue to
monitor the Lease throughout its entire duration and will take any
appropriate action necessary to protect the interests of the Trust and
its participants and beneficiaries.
13. In summary, it is represented that the Lease transaction
satisfies the statutory criteria for an exemption under section 408(a)
of the Act because: (a) The terms of the Lease have been, and will
remain, at least as favorable to the Trust as those obtainable in an
arm's length transaction with an unrelated party; (b) MHII, as
independent, qualified fiduciary believed, prior to its commencement,
that the Lease was in the best interests of the Trust and its
participants and beneficiaries; (c) MHII, Am Cal, and TDA as
independent, qualified fiduciaries have monitored and TDA will monitor
the Lease on behalf of the Trust as well as the terms and the
conditions of the exemption at all times; and (d) the rental charge by
the Corporation under the Lease has and continues to be based upon the
fair market rental value of the premises as determined by an
independent, qualified appraiser.
FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
United Food and Commercial Workers Union Local 789 and St. Paul Food
Employers Health Care Plan (the Plan) Located in Bloomington, Minnesota
[Application No. L-09933]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(a) of the Act shall not apply to the proposed purchase
of prescription drugs, at discount prices, by Plan participants and
beneficiaries, from Supervalu Pharmacies, Inc. (SPI) and Cub Foods
(Cub), parties in interest with respect to the Plan, provided the
following conditions are satisfied: (a) The terms of the transaction
are at least as favorable to the Plan as those the Plan could obtain in
a similar transaction with an unrelated party; (b) any decision by the
Plan to enter into agreements governing the subject purchases will be
made by Plan fiduciaries independent of SPI and Cub; and (c) at least
50% of the preferred providers participating in the Preferred Pharmacy
Network (PPN) which will be selling prescription drugs to the Plan's
participants and beneficiaries will be unrelated to SPI and Cub.
Summary of Facts and Representations
1. The Plan is a multiemployer welfare benefit plan which has been
in existence since 1966. The Plan was [[Page 27128]] established to
provide health and welfare benefits including life, sickness, accident
and other benefits for participants and their beneficiaries. The Plan
is directed by a joint board of trustees composed of five individuals
selected to represent the United Food and Commercial Workers Union
Local 789 (the Union) and five individuals selected to represent the
retail food employers. The Plan currently has approximately 3,135
participants and beneficiaries, and $2,209,380 in total assets.
2. SPI is a wholly owned subsidiary of Supervalu, Inc. (Supervalu),
a large retail grocer in Minnesota. Cub, another wholly owned
subsidiary of Supervalu, is also a large retail grocer with stores
located primarily throughout the Twin City Metropolitan Area. SPI's are
located in Cub stores. The applicant represents that Supervalu and Cub
are both parties in interest to the Plan because they make
contributions to the Plan on behalf of their employees that are
participants in the Plan.
3. Under the Plan, participants have two alternative ways to
receive the prescription drug benefit. One, a participant may have a
prescription filled at an out-of-network pharmacy, pay the pharmacy's
charge for the prescription at the time of dispensing, and submit a
reimbursement claim to the Plan Administrator. The Plan would then
reimburse the participant in full for the pharmacy's charge for the
prescription, less the $5.00 participant co-payment. Two, a participant
may have a prescription filled at a pharmacy within a preferred
network, and pay only the $5.00 co-payment. The pharmacy then submits
the claim for the remaining agreed-upon cost for the prescription
directly to the Plan Administrator.
4. Effective January 1, 1994, the trustees of the Plan implemented
the Plan's first prescription drug PPN in order to manage prescription
drug price and utilization, manage related costs, provide ready
participant access to courteous and reliable pharmacy services and
professional advice, and to minimize or eliminate eligibility policing
problems. The first Preferred Provider Agreement (the Agreement), the
result of arm's-length negotiations, is between the Plan and Snyder
Drug Stores, Inc. (Snyder). Snyder is not a party in interest with
respect to the Plan.
5. Under the Agreement, Snyder agrees to provide prescription drugs
to the Plan participants and their beneficiaries consistent with the
Plan document and the Agreement at a specified reduced cost in exchange
for the potential to realize an expanded customer base due to its
status as a preferred pharmacy with respect to the Plan. The material
elements of the Agreement are as follows:
(1) Snyder agrees to dispense covered prescription drugs, using
generic drugs when available, within prescribed dosage units for one
dispensing fee;
(2) The agreed upon dispensing fee is:
(a) The lesser of:
(i) The Usual and Customary charge for such prescription drug, or
(ii) The sum of the Drug Acquisition Cost plus the Professional
Dispensing Fee.
The Drug Acquisition Cost for each prescription drug provided by
the Pharmacy to an Eligible Person shall be defined to be the lesser of
the following amounts:
(a) 90% of the AWP (average wholesale price) for such prescription
drug; or
(b) The lowest stated maximum allowable cost (MAC) for such
prescription drug on the most recently published pharmaceutical
industry maximum allowable cost list, however, in no event will the MAC
price exceed the Federal Upper Limits (as published by the Federal
Government under the Federal Medical Entitlement Program).
The Professional Dispensing Fee shall equal $2.45 for each
dispensing of a prescription drug in accordance with the Plan and the
Agreement.
(3) Neither the Plan nor the participant is liable for the cost of
any prescription drug dispensed contrary to the Agreement;
(4) Snyder will provide eligibility identification cards, maintain
a current computerized eligibility list, and verify eligibility prior
to dispensation;
(5) The Plan receives 67\1/2\ percent of formulary rebates received
by Snyder based on the dispensing of each manufacturer's formulary
drugs under the Plan and the Agreement. The Plan also receives
quarterly formulary reports of formulary drugs dispensed and rebates
received;
(6) The Plan has the right to inspect Snyder's records to audit
claims and formulary rebates;
(7) Snyder must provide monthly prescription drug utilization
reports; and
(8) The Plan has the right to terminate the Agreement upon a
maximum of 60 days written notice.
6. The Plan's trustees have also negotiated an identical Agreement
with SPI, thereby significantly expanding the PPN by including the
pharmacies located in Cub stores. The terms of the SPI Agreement are
identical to those of the Snyder Agreement. The applicant represents
that the fees are determined by a combination of amounts objectively
established by reference to industry resources and beyond the control
or manipulation of SPI.
7. The applicant represents that the Plan wishes to enter the
Agreement with SPI to maximize the benefits that can be provided to
participants and their beneficiaries. Reducing the cost paid by the
Plan for prescription drugs will enable the Plan to maintain its
current level of benefits to the participants and their beneficiaries.
Expanding the PPN to include SPI, thereby increasing the utilization of
the PPN, will enable the Plan to obtain additional discounts on
prescriptions currently dispensed out-of-network. The Plan will be able
to receive even greater savings due to the negotiated fees rather than
the usual and customary billing of out-of-network pharmacies. The
applicant represents that it is projected that the Plan will realize an
additional 14% reduction of its prescription drug expenses over last
year by the addition of SPI to the PPN. The requested exemption is also
in the interest of the Plan because preferred pharmacies will be more
conveniently located as a result of the expanded PPN.
8. The applicant represents that the PPN will be at least 50%
composed of preferred providers that are not affiliated with Supervalu
or Cub. In addition, the applicant represents that one of the current
trustees of the Plan, Mr. Markwell, is an employee of Cub. The
applicant further represents that to address the potential conflict of
interest, Mr. Markwell has in the past and will continue in the future,
to recuse himself from all discussions and/or votes that relate to the
operation or maintenance of the PPN. Thus, all Plan decisions with
respect to the PPN, including any decision to enter into the Agreement
with SPI, will be made by Plan fiduciaries unrelated to Supervalu or
Cub.
9. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 408(a) of the
Act for the following reasons: (a) The terms of the transaction are at
least as favorable to the Plan as those the Plan could obtain in an
arm's-length transaction with an unrelated party; (b) any decision made
by the Plan with respect to the Agreement with SPI will be made by Plan
fiduciaries independent of SPI and Cub; and (c) at least 50% of the
preferred providers participating in the PPN which will be selling
prescription drugs to the Plan's participants and beneficiaries will be
unrelated to SPI and Cub.
[[Page 27129]] FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of
the Department, telephone (202) 219-8881. (This is not a toll-free
number.)
The General Motors Hourly-Rate Employees' Pension Plan (the GM Hourly
Plan); The General Motors Retirement Program for Salaried Employees
(the GM Salaried Plan); The Saturn Individual Retirement Plan for
Represented Team Members (the SIRP); The Saturn Personal Choices
Retirement Plan for Non-Represented Team Members (the SPCRP;) and The
Employees' Retirement Plan for GMAC Corporation (the GMAC Plan; all
Five Plans Collectively, the GM Plans); The AT&T Pension Plan; and the
AT&T Management Pension Plan (the AT&T Management Plan; Together, the
AT&T Plans; all Seven Plans Collectively, the Plans) Located in
Detroit, Michigan (the GM Plans), and in New York, New York (the AT&T
Plans)
[Application Nos. D-09964 through D-09968]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a) 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 (D) of the Code, shall not
apply to (1) the proposed granting to The Industrial Bank of Japan,
Limited, New York Branch (IBJ), as the representative of lenders (the
Lenders) participating in a credit facility (the Facility), of security
interests in limited partnership interests in The Morgan Stanley Real
Estate Fund II, L.P. (the Partnership) owned by the Plans with respect
to which some of the Lenders are parties in interest; and (2) the
proposed agreements by the Plans to honor capital calls made by IBJ in
lieu of the Partnership's general partner; provided that (a) the
proposed grants and agreements are on terms no less favorable to the
Plans than those which the Plans could obtain in arm's-length
transactions with unrelated parties; and (b) the decisions on behalf of
each Plan to invest in the Partnership and to execute such grants and
agreements in favor of IBJ are made by a fiduciary which is not
included among, and is independent of, the Lenders and IBJ.
Summary of Facts and Representations
1. The Partnership is a Delaware limited partnership the general
partner of which is MSREF II, L.P. (the General Partner), a Delaware
limited partnership the general partner of which is MSREF II, Inc., a
wholly owned subsidiary of Morgan Stanley Group, Inc. or one or more of
its affiliates. The Partnership is organized under an agreement (the
Agreement) dated December 29, 1994. The Partnership has a term expiring
on December 31, 2004, subject to extension by the General Partner for
up to three successive one-year terms. The Partnership has been
organized to make investments, including leveraged equity investments,
in undervalued or inappropriately capitalized real estate assets and
portfolios, and corporate real estate. Proceeds from the sale or
refinancing of properties generally will not be reinvested, but will be
distributed to the limited partners, so that the Partnership will be
self-liquidating.
2. After execution of the Agreement, the General Partner sought
capital commitments through private placement and has obtained, as a
result, irrevocable, unconditional capital commitments in excess of
$350,000,000 from 18 purchasers of limited partnership units (the
Limited Partners). The Agreement requires Limited Partners to make
capital contributions upon receipt of notice from the General Partner.
Under the Agreement, the General Partner may make a call for cash
contributions, also known as a ``drawdown'', up to the total amount of
the Limited Partner's capital commitment upon 15 days notice, with some
limitations. The Partners' capital commitments are structured as
irrevocable, unconditional and binding commitments to contribute equity
when capital calls are made by the General Partner. The obligation of
each Limited Partner to contribute the full amount of its capital
commitment is secured by a security interest granted to the Partnership
in the Limited Partner's partnership interest.
3. In the ordinary course of its business operations, it is
contemplated that the Partnership will incur indebtedness in connection
with many of its investments. This on-going need for credit will be
provided by the Facility, a three-year arrangement for $300 million in
revolving credit which will enable the Partnership to consummate
investments quickly without the delay of separate arrangements for
interim or permanent financing for each investment. The Facility is
funded by the Lenders, represented by IBJ, which is also a
participating Lender. IBJ serves as administrative agent for the
Facility. The Facility is a non-recourse obligation of the Partnership
which matures November 18, 1998 and which is secured by a security
interest in the Limited Partners' capital commitments, the General
Partner's right to make drawdowns and the Partnership's lien and
security interest in each Limited Partner's partnership interest. As
additional security, the Facility will require each Limited Partner to
execute an agreement (the Security Agreement) granting to IBJ, for the
benefit of each Lender, a security interest and lien in the Limited
Partner's partnership interest, and covenanting with IBJ, for the
benefit of the Lenders, that such Limited Partner will unconditionally
honor any drawdown made by IBJ in accordance with the Agreement in lieu
of the General Partner to the full extent of the Limited Partner's
unfunded capital commitment.
4. The trusts which hold assets of the Plans (the Trusts) own
limited partnership interests as Limited Partners in the Partnership.
Some of the Lenders may be parties in interest with respect to some of
the Plans in the Trusts by virtue of such Lenders' (or their
affiliates') provisions of fiduciary services to such Plans with
respect to Trust assets other than the Partnership interests. IBJ is
requesting an exemption to permit the Trusts to enter into the Security
Agreements under the terms and conditions described herein. The Plans
and the other Limited Partners with the largest interests in the
Partnership and the extent of their respective capital commitments to
the Partnership are described as follows:
(a) The GM Hourly Plan, a defined benefit plan with 599,262
participants as of September 30, 1993, and assets with a total value of
approximately 21.6 billion dollars on that date. Assets of the GM
Hourly Plan are held in the Third Plaza Trust (the TP Trust), of which
Mellon Bank, N.A. is the trustee. Assets of the SIRP (a defined benefit
plan with 7,178 participants as of September 30, 1993), the SPCRP (a
defined benefit plan with 1,435 participants as of September 30, 1993),
and the GMAC Plan (a defined benefit plan with 2,761 participants as of
June 21, 1994), are also held in the TP Trust. The TP Trust has
undertaken a total capital commitment of $75,000,000 to the
Partnership.
(b) The GM Salaried Plan, a defined benefit pension plan with
223,262 participants as of September 30, 1993, and assets with a total
value of approximately 20.8 billion dollars as of [[Page 27130]] that
date. Assets of the GM Salaried Plan are held in the Fourth Plaza Trust
(the FP Trust), of which Mellon Bank, N.A. is the trustee. The FP Trust
has undertaken a total capital commitment of $75,000,000 to the
Partnership. The fiduciary responsible for authorizing and overseeing
the GM Plans' investment in the Partnership and, subsequently, for
monitoring such investment, is the General Motors Investment Management
Corporation.
(c) The AT&T Pension Plan, a defined benefit pension plan with
261,788 participants as of December 31, 1993, and with assets of
approximately 18.21 billion dollars as of that date, and the AT&T
Management Plan, with 180,452 participants as of December 31, 1993 and
with assets of approximately 20.03 billion dollars as of that date.
Assets of the AT&T Plans are held in the AT&T Master Pension Trust (the
AT&T Trust), of which State Street Bank and Trust Company is the
trustee. The AT&T Trust has undertaken a total capital commitment of
$150,000,000 to the Partnership. The fiduciary responsible for
reviewing and authorizing the investment in the Partnership by the AT&T
Plans is David Feldman, Corporate Vice President, American Telephone &
Telegraph Company Investment Management Organization.
(d) Limited Partners which are not ERISA-covered plans include:
(i) Wells Fargo & Company, which has undertaken a total capital
commitment of $15,000,000.
(ii) Allstate Insurance Company, which has undertaken a total
capital commitment of $40,000,000.
(iii) Morstar Realty, N.V., which has undertaken a total capital
commitment of $15,000,000.
5. IBJ represents that the Partnership has obtained an opinion of
counsel that the Partnership will constitute an ``operating company''
under the Department's plan asset regulations [29 CFR 2510.3-101(c)] if
the Partnership is operated in accordance with the Agreement and the
offering memorandum (the Offering) distributed in connection with the
private placement of the limited partnership interests.5
\5\ The Department expresses no opinion herein as to whether the
Partnership will constitute an operating company under the
regulations at 29 CFR 2510.3-101.
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6. IBJ represents that the Security Agreement constitutes a form of
credit security which is customary among financing arrangements for
real estate limited partnerships, wherein the financing institutions do
not obtain security interests in the real property assets of the
partnership. IBJ also represents that the obligatory execution of the
Security Agreement by the Limited Partners for the benefit of the
Lenders was fully disclosed in the Offering as a requisite condition of
investment in the Partnership during the private placement of the
limited partnership interests. IBJ represents that the only direct
relationship between any of the Limited Partners and any of the Lenders
is the execution of the Security Agreements. All other aspects of the
transaction, including the negotiation of all terms of the Facility,
are exclusively between the Lenders and the Partnership. IBJ represents
that the proposed executions of the Security Agreements will not affect
the abilities of the Trusts to withdraw from investment and
participation in the Partnership. The only Plan assets to be affected
by the proposed transaction are each Plan's limited partnership
interests in the Partnership and the related Plan obligations as
Limited Partners to respond to drawdowns up to the total amount of each
Plan's capital commitment to the Partnership.
7. IBJ represents that neither it nor any Lender acts or has acted
in any fiduciary capacity with respect to any Trust's investment in the
Partnership and that IBJ is independent of and unrelated to those
fiduciaries (the Trust Fiduciaries) responsible for authorizing and
overseeing the Trusts' investments in the Partnership. Each Trust
Fiduciary represents independently that its authorization of Trust
investment in the Partnership was free of any influence, authority or
control by the Lenders. The Trust Fiduciaries represent that the
Trust's investments in and capital commitments to the Partnership were
made with the knowledge that each Limited Partner would be required
subsequently to grant a security interest in the Partnership to the
Lenders and to honor drawdowns made on behalf of the Lenders without
recourse to any defenses against the General Partner. Each Trust
Fiduciary individually represents that it is independent of and
unrelated to IBJ and the Lenders and that the investment by the Trust
for which that Trust Fiduciary is responsible continues to constitute a
favorable investment for the Plans participating in that Trust and that
the execution of the Security Agreement is in the best interests and
protective of the participants and beneficiaries of such Plans.
8. In summary, the applicants represent that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) The Plans' investments in the Partnership were
authorized and are overseen by the Trust Fiduciaries, which are
independent of the Lenders; (2) None of the Lenders have any influence,
authority or control with respect to the Plans' investments in the
Partnership or the Plans' executions of the Security Agreements; and
(3) The Trust Fiduciaries invested in the Partnership on behalf of the
Plans with the knowledge that the Security Agreements are required of
all Limited Partners investing in the Partnership.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Eaton Corporation Share Purchase and Investment Plan (the Plan) Located
in Cleveland, Ohio
[Application No. D-09978]
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: (1) The proposed extension of credit by
Eaton Corporation (Eaton) to the Plan in the form of loans (the Loans)
with respect to certain guaranteed investment contracts (collectively,
the GICs); and (2) the repayment (the Repayments) by the Plan of all or
a portion of amounts advanced to the Plan by Eaton on the terms
described in the agreement governing such Loans, provided: (a) All
terms of such transactions are no less favorable to the Plan than those
which the Plan could obtain in arm's-length transactions with unrelated
parties; (b) no interest or other expenses will be incurred by the Plan
in connection with the Loans; (c) the Loans would be made only when,
and to the extent needed, to avoid penalties that would otherwise be
incurred if the liquidation of one or more of the GICs is required, as
determined by the Corporate Compensation Committee (the Plan
Committee); (d) Repayments will be made only from payments made to the
Plan as the GICs mature (the GIC Proceeds); (e) the Repayments will not
exceed the total amount of the Loans; and (f) the Repayments will be
waived to the extent that the Loans exceed the GIC Proceeds.
[[Page 27131]] EFFECTIVE DATE: If this proposed exemption is granted,
it will be effective July 5, 1995.
Summary of Facts and Representations
1. Eaton, an Ohio corporation headquartered in Cleveland, is the
Plan sponsor. The Plan is a defined contribution plan that had
approximately 23,500 participants and assets of $731,839,175 as of
December 30, 1993. The participants of the Plan are employees of Eaton
or its subsidiaries. Contributions to the Plan are made by Eaton and by
participants. Participant contributions are made pursuant to before-tax
salary reduction agreements and/or after-tax payroll deduction
agreements. Effective July 5, 1989, the portion of the Plan that is
attributable to Eaton contributions is designed to be invested
primarily in Eaton securities and constitutes an employee stock
ownership plan (ESOP) within the meaning of Act section 407(d)(6). The
Plan Committee is responsible for the general administration of the
Plan, and the Plan's Investment Committee (the Investment Committee)
has the exclusive authority to select the Plan's investment options and
the underlying investment vehicles.
2. The Plan allows individual investment direction for that portion
of participants' accounts which derives from participant contributions.
Participants may direct the investment of that portion of their
accounts into one or more of several investment funds maintained by the
Plan. Currently, the funds available include the Fixed Income Fund, the
Aggressive Growth Fund, the Balanced Fund, the Equity Fund, the
International Fund, the Stock Index Fund and the Eaton Common Shares
Fund (which invests primarily in Eaton securities). Participants may
transfer their account balances among the investment funds once every
30 days. The Fixed Income Fund has its assets invested primarily in
guaranteed investment contracts with insurance companies. The remainder
of the Fixed Income Fund's assets are invested in government securities
and corporate debt instruments. As of December 30, 1993, the Fixed
Income Fund had assets of $127,881,436 and comprised 17.47% of the
total assets of the Plan. Key Trust Company of Ohio, N.A. (Key Trust)
currently serves as the trustee holding all assets of the Plan. Key
Trust has been appointed by the Investment Committee as the Investment
Manager of the Fixed Income Fund and the Stock Index Fund.
3. Among the guaranteed investment contracts currently held by the
Fixed Income Fund are the GICs, which can be described as follows:
(a) Effective January 20, 1994, the Plan purchased Guaranteed
Investment Contract No. GA 322 GIC (GIC-1) from Life Insurance Company
of Georgia. The Plan purchased GIC-1 for $5 million. GIC-1 provides an
annual guaranteed interest rate of 5.0% and matures on January 20,
1998.
(b) Effective November 20, 1992, the Plan purchased Guaranteed
Investment Contract No. GA 299 GIC (GIC-2) from Life Insurance Company
of Georgia. The Plan purchased GIC-2 for $10 million. GIC-2 provides an
annual guaranteed interest rate of 6.15% and matures on November 20,
1996.
(c) Effective February 18, 1992, the Plan purchased Guaranteed
Investment Contract No. GA-5265 (GIC-3) from Allstate Life Insurance
Company. The Plan purchased GIC-3 for $10 million. GIC-3 provides an
annual guaranteed interest rate of 7.65% and matures on April 1, 1997.
(d) Effective August 13, 1990, the Plan purchased Guaranteed
Investment Contract No. GB 10020 (GIC-4) from Massachusetts Mutual Life
Insurance Company. The Plan purchased GIC-4 for $20 million. GIC-4
provides an annual guaranteed interest rate of 9.37% and matures on
August 16, 1995.
The GICs are valued at $47,605,741 and constitute 37.23% of the
Fixed Income Fund's $127,881,436 of assets.6 At maturity, the
current accumulated book value of the GICs (Accumulated Book Value),
defined as the initial deposit, plus interest at the contract rate,
less any withdrawals during the term of the GIC, is to be paid to the
Plan. All of the four GICs provide for a penalty upon early withdrawal.
Of the Fixed Income Fund's assets, $55,267,367 (43.22%) are invested in
other guaranteed investment contracts which do not impose penalties for
early withdrawal.
\6\ These valuation figures were calculated using the contract
value of the GICs, i.e., contributions made under the GICs plus
interest at the contracts' stated rates, less Plan expenses directly
attributable to the holding of the GICs. The figures were taken from
the December 30, 1993 audited financial statements and therefore do
not include the value of GIC-1, which was purchased effective
January 20, 1994.
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4. Eaton has determined that Plan participants should be provided
expanded investment options under the Plan. Eaton plans to allow each
participant to transfer all or a portion of his/her account balance
subject to participant direction into a new money market fund, the
Money Market Fixed Income Fund, to be selected by the Investment
Committee. The addition of this fund not only will provide participants
with an alternative to the Fixed Income Fund, but will provide a
mechanism for easing the transfer of account balances into and out of
other funds available under the Plan. There is concern, however, that
participants may be subject to adverse financial consequences if the
amount of Plan assets transferred from the Fixed Income Fund exceeds
the availability of assets in that Fund that can be liquidated without
penalty. If that situation arises, the Plan would be forced to
liquidate one or more of the GICs prior to maturity, thus triggering
financial penalties and causing potential losses to Plan participants.
5. Accordingly, Eaton proposes to advance funds to the Plan up to
the Accumulated Book Value of the GICs, as of July 5, 1995 (see rep. 7,
below), plus additional interest at the contract rate that accrues
through the date of any Loans that Eaton makes to the Plan. The Plan
proposes to accept such Loans in order to enable participants to
transfer their account balances currently invested in the Fixed Income
Fund into the Money Market Fund, or any other fund, without incurring a
penalty for premature liquidation of one or more of the GICs. The Loans
would be non-interest bearing and would be available under a line of
credit running from Eaton to the Plan. The Loans would be made only
when, and to the extent, needed to avoid penalties that would otherwise
be incurred if the liquidation of one or more of the GICs is required,
as determined by the Plan Committee. The Plan will agree to repay the
Loans to Eaton, without interest, only from the GIC Proceeds. No
collateral would be required or given, and no other Plan assets would
be used to make the Repayments.
6. To the extent that Eaton and the Plan ultimately recoup less
than the amount of the Loans, Repayment would be waived. If GIC
Proceeds remain after full Repayment of the Loans following maturity of
the affected GICs, those amounts will be allocated on a proportional
basis to any participant who then has an account in the Plan.
7. The Investment Committee proposes to add the Money Market Fund
effective July 5, 1995, and accordingly expects to receive a
significant quantity of participant requests to transfer into that fund
as of that date. The Loans may therefore be required as of July 5, 1995
to avoid adverse financial consequences to participants if the demand
for transfers out of the Fixed Income Fund for the period commencing
July 5, 1995 and ending January 20, 1998 (when the last GIC matures)
exceeds the Fixed [[Page 27132]] Income Fund's access to unrestricted
assets. Thus, Eaton has requested that the exemption proposed herein be
made effective July 5, 1995.
8. In summary, the applicant represents that the proposed
transactions satisfy the criteria contained in section 408(a) of the
Act because: (a) All terms of the transactions will be no less
favorable to the Plan than those obtainable in arm's-length terms with
unrelated parties; (b) the Plan will pay no interest or other expenses
in connection with the Loans; (c) the Loans will enable Plan
participants to transfer their account balances out of the Fixed Income
Fund without incurring penalties for premature liquidation of the GICs;
(d) Repayments will be made only from GIC Proceeds; (e) the Repayments
will not exceed the total amount of the Loans; and (f) the Repayments
will be made waived to the extent that the Loans exceed the GIC
Proceeds.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Rothschild, Incorporated (Rothschild) Located in New York, New York
[Application No. D-09993]
Proposed Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975 (a) and (b) of the Code by reason of
section 4975(c)(1) (A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A. (1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded
Plan.7
\7\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act
and the taxes imposed by section 4975 (a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) a plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.8 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;
\8\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B. (1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975 (a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust,
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.9
\9\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. 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
[[Page 27133]] favorable to the plan as they would be in an arm's-
length transaction with an unrelated party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D&P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) a certificate--
(a) that represents a beneficial ownership interest in the assets
of a trust; and
(b) that entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) a certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) that is issued by and is an obligation of a trust;
with respect to certificates defined in (1) and (2) above for which
Rothschild or any of its affiliates is either (i) the sole underwriter
or the manager or co-manager of the underwriting syndicate, or (ii) a
selling or placement agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either
(a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T.);
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property);
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U.);
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) Property which had secured any of the obligations described in
subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to 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) Rothschild;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
Rothschild; or
(3) Any member of an underwriting syndicate or selling group of
which Rothschild or a person described in (2) is a manager or co-
manager with respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust. [[Page 27134]]
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services loans contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(1) Which is secured by equipment which is leased;
(2) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) With respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust holds a security interest in the lease;
(2) The trust holds a security interest in the leased motor
vehicle; and
(3) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
Summary of Facts and Representations
1. Rothschild and its affiliates provide a broad range of financial
services, including mergers and acquisitions, restructuring, asset
management and a variety of specialist financial services for both
domestic and international clients. Rothschild conducts operations from
its executive office in New York City. The applicant represents that
several of Rothschild's officers have had extensive experience in the
fields of mortgage-backed and asset-backed securities.
When acting as lead managing underwriter or placement agent,
Rothschild will conduct extensive due diligence with respect to each
offering of certificates. In general, Rothschild's due diligence
efforts will concern four basic areas: first, the originator's or
unrelated lender's underwriting policies and procedures for originating
or purchasing receivables; second, the validity and enforceability of
the secured claim or lien on the underlying collateral as represented
by the receivable; third, the originator's or unrelated lender's
recordkeeping systems; and fourth, the originator's or unrelated
lender's documents kept on file with respect to each receivable.
In general, Rothschild's procedures are as follows: Rothschild
conducts an extensive examination of the originator [[Page 27135]] or
unrelated lender's underwriting practices to ensure that they conform
with stated policies and procedures, and that there are periodic
reviews of those practices by the originator's or unrelated lender's
auditors. Rothschild's examination includes a review of written
materials and interviews with the officers in charge of administrating
the underwriting policies and procedures. Rothschild and/or its
attorneys will also review the legal documentation creating the
security interest in each underlying collateral asset. Rothschild's
analysts will examine the originator's or unrelated lenders
recordkeeping systems to verify, among other things, its capabilities
with respect to the collection of amounts due and payable for the
receivables sold to investors. In most cases, Rothschild also examines
receivable files, selected at random, to verify that files are complete
and the dates in the file conform to the recordkeeping systems.
Trust Assets
2. Rothschild seeks exemptive relief to permit plans to invest in
pass-through certificates representing undivided interests in the
following categories of trusts: (1) single and multi-family residential
or commercial mortgage investment trusts; 10 (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.11
\10\ 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. Rothschild requests relief for single-family residential
mortgages in this exemption because it would prefer one exemption
for all trusts of similar structure. However, Rothschild has stated
that it may still avail itself of the exemptive relief provided by
PTE 83-1.
\11\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mortgages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.12
\12\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. The sponsor or
servicer of a trust selects assets to be included in the trust. These
assets are receivables which may have been originated by a sponsor or
servicer of the trust, an affiliate of the sponsor or servicer, or by
an unrelated lender and subsequently acquired by the trust sponsor or
servicer.
On or prior to the closing date, the sponsor acquires legal title
to all assets selected for the trust, establishes the trust and
designates an independent entity as trustee. On the closing date, the
sponsor conveys to the trust legal title to the assets, and the trustee
issues certificates representing fractional undivided interests in the
trust assets. Rothschild, alone or together with other broker-dealers,
acts as underwriter or placement agent with respect to the sale of the
certificates. The majority of the public offerings of certificates made
to date have been underwritten on an agency basis. However, Rothschild
may in the future become involved in public offerings of certificates
underwritten on either a firm commitment or a best efforts basis. In
addition, Rothschild anticipates that it may privately place
certificates on both a firm commitment and an agency basis. Rothschild
may also act as the lead underwriter for a syndicate of securities
underwriters. Rothschild may also act as the servicer or seller to the
trust of the receivables or the trust sponsor.
Certificateholders are entitled to receive monthly, quarterly or
semi-annually installments of principal and/or interest, or lease
payments due on the receivables, adjusted, in the case of payments of
interest, to a specified rate--the pass-through rate--which may be
fixed or variable.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
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.
Rothschild requests exemptive relief for two types of multi-class
certificates: ``Strip'' certificates and ``fast-pay/slow-pay''
certificates. Strip certificates are a type of security in which the
stream of interest payments on receivables is split from the flow of
principal payments and separate classes of certificates are
established, each representing rights to disproportionate payments of
principal and interest.13
\13\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(1)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. In certain transactions of
this type, interest and/or principal payments received on the
underlying receivables are distributed first to the class of
certificates having the earliest stated maturity of principal,
[[Page 27136]] and/or earlier payment schedule, and only when that
class of certificates has been paid in full (or has received a
specified amount) will distributions be made with respect to the second
class of certificates. Distributions on certificates having later
stated maturities will proceed in like manner until all the
certificateholders have been paid in full. The only difference between
this multi-class pass-through arrangement and a single-class pass-
through arrangement is the order in which distributions are made to
certificateholders. In each case, certificateholders will have a
beneficial ownership interest in the underlying assets. In neither case
will the rights of a plan purchasing a certificate be subordinated to
the rights of another certificateholder in the event of default on any
of the underlying obligations. In particular, if the amount available
for distribution to certificateholders is less than the amount required
to be so distributed, all senior certificateholders then entitled to
receive distributions will share in the amount distributed on a pro
rata basis.14
\14\ If a trust issues subordinated certificates, holders of
such subordinated certificates may not share in the amount
distributed on a pro rata basis with the senior certificateholders.
The Department notes that the exemption does not provide relief for
plan investment in such subordinated certificates.
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6. For tax reasons, the trust must be maintained as an essentially
passive entity. Therefore, both the sponsor's discretion and the
servicer's discretion with respect to assets included in a trust are
severely limited. Pooling and servicing agreements provide for the
substitution of receivables by the sponsor only in the event of defects
in documentation discovered within a short time after the issuance of
trust certificates. Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
Parties to Transactions
7. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a homeowner or automobile
purchaser, or leases property to the lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
8. The sponsor will be one of three entities: (i) A special-purpose
corporation unaffiliated with the servicer, (ii) a special-purpose or
other corporation affiliated with the servicer, or (iii) the servicer
itself. Where the sponsor is not also the servicer, the sponsor's role
will generally be limited to acquiring the receivables to be included
in the trust, establishing the trust, designating the trustee, and
assigning the receivables to the trust.
9. The trustee of a trust is the legal owner of the obligations in
the trust. The trustee is also a party to or beneficiary of all the
documents and instruments deposited in the trust, and as such is
responsible for enforcing all the rights created thereby in favor of
certificateholders.
The trustee will be an independent entity, and therefore will be
unrelated to Rothschild, the trust sponsor or the servicer. Rothschild
represents that the trustee will be a substantial financial institution
or trust company experienced in trust activities. The trustee receives
a fee for its services, which will be paid by the servicer, sponsor or
the trust as specified in the pooling and servicing agreement. The
method of compensating the trustee which is specified in the pooling
and servicing agreement will be disclosed in the prospectus or private
placement memorandum relating to the offering of the certificates.
10. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, it is common for the
receivables to be ``subserviced'' by their respective originators and
for a single entity to ``master service'' the pool of receivables on
behalf of the owners of the related series of certificates. Where this
arrangement is adopted, a receivable continues to be serviced from the
perspective of the borrower by the local subservicer, while the
investor's perspective is that the entire pool of receivables is
serviced by a single, central master servicer who collects payments
from the local subservicers and passes them through to
certificateholders.
In some cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (though they
themselves may be related) will be unrelated to Rothschild. In other
cases, however, affiliates of Rothschild may originate or service
receivables included in a trust, or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. Where the sponsor of a trust is not the originator of
receivables included in a trust, the sponsor generally purchases the
receivables in the secondary market, either directly from the
originator or from another secondary market participant. The price the
sponsor pays for a receivable is determined by competitive market
forces, taking into account payment terms, interest rate, quality, and
forecasts as to future interest rates.
As compensation for the receivables transferred to the trust, the
sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates. If the sponsor receives certificates from the trust, the
sponsor sells all or a portion of these certificates for cash to
investors or securities underwriters. In some transactions, the sponsor
or an affiliate may retain a portion of the certificates for its own
account. In addition, in some transactions the originator may sell
receivables to a trust for cash. At the time of the sale, the trustee
would sell certificates to the public or to underwriters and use the
cash proceeds of the sale to pay the originator for receivables sold to
the trust. The transfer of the receivables to the trust by the sponsor,
the sale of certificates to investors, and the receipt of the cash
proceeds by the sponsor generally take place simultaneously.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and [[Page 27137]] 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.15 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.
\15\ The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor, and receive fees for acting in
that capacity) will retain the difference between payments received on
the receivables in the trust and payments payable (at the pass-through
rate) to certificateholders, except that in some cases a portion of the
payments on receivables may be paid to a third party, such as a fee
paid to a provider of credit support. The servicer may receive
additional compensation by having the use of the amounts paid on the
receivables between the time they are received by the servicer and the
time they are due to the trust (which time is set forth in the pooling
and servicing agreement). The servicer may be required to pay the
administrative expenses of servicing the trust, including the trustee's
fee, out of its servicing compensation, or it may be reimbursed for all
or a portion of its expenses by the trust.
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 maintained with itself or to commingle
such payments with its own funds prior to the distribution dates. In
these cases, the servicer would be entitled to the benefit derived from
the use of the funds between the date of payment on a receivable and
the pass- through date. Commingled payments may not be protected from
the creditors of the servicer in the event of the servicer's bankruptcy
or receivership. In those instances when payments on receivables are
held in non-interest bearing accounts or are commingled with the
servicer's own funds, the servicer is required to deposit these
payments by a date specified in the pooling and servicing agreement
into an account from which the trustee makes payments to
certificateholders.
16. Rothschild and any other participating underwriter will receive
a fee in connection with the securities underwriting or private
placement of certificates. In a firm commitment underwriting, this fee
would normally consist of the difference between what Rothschild
receives for the certificates that it distributes and what it pays the
sponsor for those certificates. In a private placement, the fee may
also take the form of an agency commission paid by the sponsor. Such
fees are negotiated at arm's-length with the sponsor, originator or
unrelated lender and are affected by fees in comparable offerings.
Purchase of Receivables by the Servicer
17. The applicant represents that as the principal amount of the
receivables in a trust is reduced by payments, the cost of
administering the trust generally increases, making the servicing of
the trust prohibitively expensive at some point. Consequently, the
pooling and servicing agreement generally provides that the servicer
may purchase the receivables remaining in the trust when the aggregate
unpaid balance payable on the receivables is reduced to a specified
percentage (usually 5 to 10 percent) of the initial aggregate unpaid
balance.
The purchase price of a receivable is specified in the pooling and
servicing agreement and will be at least equal to: (1) The unpaid
principal balance on the receivable plus accrued interest, less any
unreimbursed advances of principal made by the servicer; or (2) the
greater of (a) the amount in (1) or (b) the fair market value of such
obligations in the case of a REMIC, or the fair market value of the
certificates in the case of a trust that is not a REMIC.
Certificate Ratings
18. The certificates will have received one of the three highest
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance
or other credit support (such as surety bonds, letters of credit,
guarantees, or the creation of a class of certificates with
subordinated cash flow) will be obtained by the trust sponsor to the
extent necessary for the certificates to attain the desired rating. The
amount of this credit support is set by the rating agencies at a level
that is a multiple of the worst historical net credit loss experience
for the type of obligations included in the issuing trust.
Provision of Credit Support
19. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust (i.e. act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) out of liquidation proceeds, (c) from the
credit support provider (which may be itself) or, (d) in the case of a
trust that issues subordinated certificates, from amounts otherwise
distributable to holders of subordinated certificates, and the master
servicer will advance such funds in a timely manner. When the servicer
is the provider of the credit support and provides its own funds to
cover defaulted payments, it will do so either on the initiative of the
trustee, or on its own initiative on behalf of the trustee, but in
either event it will provide such funds to cover payments to the full
extent of its obligations under the credit support mechanism. In some
cases, however, the master servicer may not be obligated to advance
funds but instead would be called upon to provide funds to cover
defaulted payments to the full extent of its obligations as insurer.
However, a master servicer typically can recover advances either from
the provider of credit support or from future payments on the affected
assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to [[Page 27138]] enforce the
certificateholders' rights, as both a party to the pooling and
servicing agreement and the owner of the trust estate, including rights
under the credit support mechanism. Therefore, the trustee, who is
independent of the servicer, will have the ultimate right to enforce
the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the servicer out of future payments on receivables held
by the trust to the extent not covered by credit support. However,
where the master servicer provides credit support to the trust, there
are protections in place to guard against a delay in calling upon the
credit support to take advantage of the fact that the credit support
declines proportionally with the decrease in the principal amount of
the obligations in the trust as payments on receivables are passed
through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount thereafter is subject
to reduction only for actual draws. From the time that the floor amount
is effective until the end of the life of the trust, there are no
proportionate reductions in the credit support amount caused by
reductions in the pool principal balance. Indeed, since the floor is a
fixed dollar amount, the amount of credit support ordinarily increases
as a percentage of the pool principal balance during the period that
the floor is in effect.
Disclosure
20. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
(c) Identification of the independent trustee for the trust;
(d) A description of the receivables contained in the trust,
including the types of receivables, the diversification of the
receivables, their principal terms, and their material legal aspects;
(e) A description of the sponsor and servicer;
(f) A description of the pooling and servicing agreement, including
a description of the seller's principal representations and warranties
as to the trust assets and the trustee's remedy for any breach thereof;
a description of the procedures for collection of payments on
receivables and for making distributions to investors, and a
description of the accounts into which such payments are deposited and
from which such distributions are made; identification of the servicing
compensation and any fees for credit enhancement that are deducted from
payments on receivables before distributions are made to investors; a
description of periodic statements provided to the trustee, and
provided to or made available to investors by the trustee; and a
description of the events that constitute events of default under the
pooling and servicing contract and a description of the trustee's and
the investors' remedies incident thereto;
(g) A description of the credit support;
(h) A general discussion of the principal federal income tax
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
(i) A description of the underwriters' plan for distributing the
pass-through securities to investors; and
(j) Information about the scope and nature of the secondary market,
if any, for the certificates.
21. Reports indicating the amount of payments of principal and
interest are provided to certificateholders at least as frequently as
distributions are made to certificateholders. Certificateholders will
also be provided with periodic information statements setting forth
material information concerning the underlying assets, including, where
applicable, information as to the amount and number of delinquent and
defaulted loans or receivables.
22. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates. While the Securities and Exchange Commission's
interpretation of the periodic reporting requirements is subject to
change, periodic reports concerning a trust will be filed to the extent
required under the Securities Exchange Act of 1934.
23. At or about the time distributions are made to
certificateholders, a report [[Page 27139]] will be delivered to the
trustee as to the status of the trust and its assets, including
underlying obligations. Such report will typically contain information
regarding the trust's assets, payments received or collected by the
servicer, the amount of prepayments, delinquencies, servicer advances,
defaults and foreclosures, the amount of any payments made pursuant to
any credit support, and the amount of compensation payable to the
servicer. Such report also will be delivered to or made available to
the rating agency or agencies that have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the servicer,
paying agent or trustee summarizing information regarding the trust and
its assets. Such statement will include information regarding the trust
and its assets, including underlying receivables. Such statement will
typically contain information regarding payments and prepayments,
delinquencies, the remaining amount of the guaranty or other credit
support and a breakdown of payments between principal and interest.
Secondary Market Transactions
24. It is Rothschild's normal policy to facilitate sales,
including, without limitation, sales made in accordance with Rule 144A
under the Securities Act of 1933, by investors who purchase
certificates if Rothschild has acted as agent or principal in the
original private placement of the certificates and if such investors
request Rothschild's assistance. In the case of a trust that offers and
sells certificates in a registered public offering, it is anticipated
that Rothschild would generally attempt to make a market for securities
for which it is lead or co-managing underwriter.
Discussion of Proposed Exemption
I. Differences Between Proposed Exemption and Class Exemption PTE 83-1
The exemptive relief proposed herein is similar to that provided in
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts, amended and
restated as PTE 83-1 [48 FR 895, January 7, 1983].
PTE 83-1 applies to mortgage pool investment trusts consisting of
interest-bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property. The exemption
provides relief from sections 406(a) and 407 for the sale, exchange or
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406 (b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406 (a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (1) The proposed exemption
provides individual exemptive relief rather than class relief; (2) The
proposed exemption covers transactions involving trusts containing a
broader range of assets than single-family residential mortgages; (3)
Instead of requiring a system for insuring the pooled receivables, the
proposed exemption conditions relief upon the certificates having
received one of the three highest ratings available from S&P's,
Moody's, D&P or Fitch (insurance or other credit support would be
obtained only to the extent necessary for the certificates to attain
the desired rating); and (4) The proposed exemption provides more
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
After consideration of the representations of the applicant and
information provided by S&P's, Moody's, D&P and Fitch, the Department
has decided to condition exemptive relief upon the certificates having
attained a rating in one of the three highest generic rating categories
from S&P's, Moody's, D&P or Fitch. The Department believes that the
rating condition will permit the applicant flexibility in structuring
trusts containing a variety of mortgages and other receivables while
ensuring that the interests of plans investing in certificates are
protected. The Department also believes that the ratings are indicative
of the relative safety of investments in trusts containing secured
receivables. The Department is conditioning the proposed exemptive
relief upon each particular type of asset-backed security having been
rated in one of the three highest rating categories for at least one
year and having been sold to investors other than plans for at least
one year.16
\16\ In referring to different ``types'' of asset-backed
securities, the Department means certificates representing interests
in trusts containing different ``types'' of receivables, such as
single family residential mortgages, multi-family residential
mortgages, commercial mortgages, home equity loans, auto loan
receivables, installment obligations for consumer durables secured
by purchase money security interests, etc. The Department intends
this condition to require that certificates in which a plan invests
are of the type that have been rated (in one of the three highest
generic rating categories by S&P's, D&P, Fitch or Moody's) and
purchased by investors other than plans for at least one year prior
to the plan's investment pursuant to the proposed exemption. In this
regard, the Department does not intend to require that the
particular assets contained in a trust must have been ``seasoned''
(e.g., originated at least one year prior to the plan's investment
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
Rothschild represents that in some cases a trust sponsor, trustee,
servicer, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates may be a pre-existing party
in interest with respect to an investing plan.17 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 [[Page 27140]] the Act.18 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.
\17\ In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which Rothschild
or any of its affiliates is either (a) the sole underwriter or
manager or co-manager of the underwriting syndicate, or (b) a
selling or placement agent.
\18\ The applicant represents that where a trust sponsor is an
affiliate of Rothschild, 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 Rothschild is
not a fiduciary with respect to plan assets to be invested in
certificates.
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Additionally, Rothschild represents that a trust sponsor, servicer,
trustee, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates representing an interest in
a trust may be a fiduciary with respect to an investing plan.
Rothschild represents that the exercise of fiduciary authority by any
of these parties to cause the plan to invest in certificates
representing an interest in the trust would violate section 406(b)(1),
and in some cases section 406(b)(2), of the Act.
Moreover, Rothschild represents that to the extent there is a plan
asset ``look through'' to the underlying assets of a trust, the
investment in certificates by a plan covering employees of an obligor
under receivables contained in a trust may be prohibited by sections
406(a) and 407(a) of the Act.
After consideration of the issues involved, the Department has
determined to provide the limited sections 406(b) and 407(a) relief as
specified in the proposed exemption.
NOTICE TO INTERESTED PERSONS: The applicant represents that because
those potentially interested participants and beneficiaries cannot all
be identified, the only practical means of notifying such participants
and beneficiaries of this proposed exemption is by the publication of
this notice in the Federal Register. Comments and requests for a
hearing must be received by the Department not later than 30 days from
the date of publication of this notice of proposed exemption in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 17th day of May, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-12502 Filed 5-19-95; 8:45 am]
BILLING CODE 4510-29-P
