[Federal Register Volume 63, Number 130 (Wednesday, July 8, 1998)]
[Notices]
[Pages 36946-36958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18012]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10438, et al.]
Proposed Exemptions; Toyota Motor Credit Corporation
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
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
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ____, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Toyota Motor Credit Corporation and Certain of its Affiliates,
Located in Torrance, California
[Application No. D-10438]
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
[[Page 36947]]
forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
Section I--Transactions
A. If the proposed exemption is granted, 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 as of September 1, 1997, 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 Section 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, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of that Excluded Plan.1
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\1\ 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. If the proposed exemption is granted, 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 as of September 1, 1997, 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,
as defined in Section III.L., 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.2 For purposes of
this paragraph B.(1)(iv) only, an entity shall not be considered to
service assets contained in a trust if it is merely a subservicer of
that trust;
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\2\ 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 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 Section I.B.(1) or (2).
C. If the proposed exemption is granted, the restrictions of
sections 406(a), (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 as of September 1, 1997 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 Agreement; 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.3
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\3\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, Section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed by reason of section 4975(c) of the Code, for the
receipt of a fee by the 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. below.
D. If the proposed exemption is granted, 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 as of September 1, 1997, to
any transaction 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 as 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.
Section II--General Conditions
A. The relief provided under Section I will be available only if
the following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as such terms 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 Ratings
Services, Moody's Investor Service, Inc., Duff & Phelps Inc., or Fitch
Investors Service, Inc. (collectively, the Rating Agencies);
(4) The trustee is not an affiliate of any other member of the
Restricted Group. However, the trustee shall not be
[[Page 36948]]
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 the 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 or retained by the sponsor pursuant to the assignment of obligations
(or interest therein) to the trust represents not more than the fair
market value of such obligation (or interest); 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;
(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;
(7) To the extent that the pool of leases used to create a
portfolio for a trust is not closed on the date of the issuance of
certificates by the trust, additional leases may be added during a
period of no more than 15 consecutive months from the closing date used
for the initial allocation of leases that was made to create such
portfolio, provided that:
(a) all such additional leases meet the same terms and conditions
for eligibility as the original leases used to create the portfolio (as
described in the prospectus or private placement memorandum for such
certificates), which terms and conditions have been approved by the
Rating Agencies. Notwithstanding the foregoing, the terms and
conditions for an ``eligible lease'' (as defined in Section III.X
below) may be changed if such changes receive prior approval either by
a majority vote of the outstanding certificateholders or by the Rating
Agencies; and
(b) such additional leases do not result in the certificates
receiving a lower credit rating from the Rating Agencies, upon
termination of the period during which additional leases may be added
to the portfolio, than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(8) Any additional period described in Section II.A.(7) must be
described in the prospectus or private placement memorandum provided to
investing plans;
(9) The average annual percentage lease rate (the Average Lease
Rate) for the pool of leases in the portfolio for the trust, after the
additional period described in Section II.A.(7), shall not be more than
200 basis points greater than the Average Lease Rate for the original
pool of leases that was used to create such portfolio for the trust;
(10) For the duration of the additional period described in Section
II.A.(7), principal collections that are reinvested in additional
leases are first reinvested in the ``eligible lease contract'' (as
defined in Section III.X. below) with the earliest origination date,
then in the ``eligible lease contract'' with the next earliest
origination date, and so forth, beginning with any lease contracts that
have been reserved specifically for such purposes at the time of the
initial allocation of leases to the pool of leases used to create the
particular portfolio, but excluding those specific lease contracts
reserved for allocation to or allocated to other pools of leases used
to create other portfolios;
(11) The trustee of the trust (or the agent with which the trustee
contracts to provide trust services) is a substantial financial
institution or trust company experienced in trust activities and is
familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, enforces all the rights created in favor of
certificateholders of such trust, including employee benefit plans
subject to the Act;
(12) The Pooling and Servicing Agreement and other governing
documents require that funds collected by the servicer with respect to
trust assets be deposited on a monthly basis in a trust account, even
though distributions on the certificates may be scheduled to be made
less frequently than monthly, and invested in certain highly rated debt
instruments known as ``permitted investments'; and
(13) The Pooling and Servicing Agreement expressly provides that
funds collected by the servicer with respect to trust assets are
required to be deposited in a trust account within two business days
after such collection, if TMCC's short-term unsecured debt is no longer
rated P-1 by Moody's Investors Service and A-1 by Standard & Poor's
Ratings Services (or successors thereto), unless such Rating Agencies
accept an alternative arrangement.
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 Section I, if the provision in Section II.A.(6) above is
not satisfied for the 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 shall be required to
make a written representation regarding compliance with the condition
set forth in Section II.A.(6).
C. Toyota Motor Credit Corporation (TMCC) and its Affiliates abide
by all securities and other laws applicable to any offering of
interests in securitized assets, such as certificates in a trust as
described herein, including those laws relating to disclosure of
material litigation, investigations and contingent liabilities.
Section III--Definitions
For purposes of this proposed 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
(except during the period described in Section II.A.(7), if any),
interest, and/or other payments made in connection with the assets of
such trust; or
(2) A certificate denominated as a debt instrument that is issued
by and is an obligation of a trust;
With respect to certificates defined in Section III.A.(1) and (2)
above, the underwriter shall be an entity which has received from the
Department an individual prohibited transaction exemption relating to
certificates which is substantially similar to this proposed exemption
(as noted below in Section III.C.) and shall be either (i) the sole
underwriter or the manager or co-manager of the underwriting syndicate,
or (ii) a selling or placement agent.
[[Page 36949]]
For purposes of this proposed 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) Qualified motor vehicle leases (as defined in Section III.T.);
or
(b) Fractional undivided interests in a trust containing assets
described in paragraph (a) of this Section III.B.(1), where such
fractional interest is not subordinated to any other interest in the
same pool of qualified motor vehicle leases held by such trust;
4
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\4\ It is the Department's view that the definition of ``Trust''
contained in Section III.B. includes a two-tier trust structure
under which certificates issued by the first trust, which contains a
pool of receivables described above, are transferred to a second
trust which issues certificates that are sold to plans. However, the
Department is of the further view that, since the exemption provides
relief for the direct or indirect acquisition or disposition of
certificates that are not subordinated, no relief would be available
if the certificates held by the second trust were subordinated to
the rights and interests evidenced by other certificates issued by
the first trust.
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(2) Property which has secured any of the obligations described in
Section III.B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders, except during the period described in
Section II.A.(7) above when temporary investments are made until such
cash can be reinvested in additional leases described in paragraph (a)
of this Section III.B.(1); and
(4) Rights of the trustee under the Pooling and Servicing
Agreement, and rights under motor vehicle dealer agreements, any
insurance policies, third-party guarantees, contracts of suretyship and
other credit support arrangements for any obligations described in
Section III.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 categories by the Rating
Agencies 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 any investment banking firm that has
received an individual prohibited transaction exemption from the
Department that provides relief for so-called ``asset-backed''
securities that is substantially similar in format and structure to
this proposed exemption (the Underwriter Exemptions); 5 or
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with such investment
banking firm; and any member of an underwriting syndicate or selling
group of which such firm or person described above is a manager or co-
manager with respect to the certificates.
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\5\ For a listing of the Underwriter Exemptions, see the
description provided in the text of the operative language of
Prohibited Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21,
1997).
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D. ``Sponsor'' means an entity affiliated with Toyota Motor
Corporation that organizes a trust by depositing obligations therein in
exchange for certificates.
E. ``Master Servicer'' means TMCC or an entity affiliated with TMCC
that is a party to the Pooling and Servicing Agreement relating to
trust assets and is fully responsible for servicing, directly or
through subservicers, the assets of the trust.
F. ``Subservicer'' means TMCC or an entity affiliated with TMCC
which, under the supervision of and on behalf of the master servicer,
services leases contained in the trust, but is not a party to the
Pooling and Servicing Agreement.
G. ``Servicer'' means TMCC or an entity affiliated with TMCC which
services leases contained in the trust, including the master servicer
and any subservicer.
H. ``Trustee'' means an entity that is independent of TMCC and its
Affiliates which is the trustee of the trust. In the case of
certificates which are denominated as debt instruments, ``trustee''
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. In
addition, a person is not an insurer if such person merely provides:
(1) property damage or liability insurance to an Obligor with respect
to a lease or leased vehicle; or (2) property damage, excess liability
or contingent liability insurance to any lessor, sponsor or servicer,
if such entities are included in the same insurance policy, with
respect to a lease or leased vehicle.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments for a lease 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 and at
the end of the period described in Section II.A.(7); 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 shall 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 assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in Section III.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
[[Page 36950]]
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 proposed
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 for 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 shall not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust owns or holds a security interest in the lease;
(2) The trust owns or holds a security interest in the leased motor
vehicle; and
(3) The trust's interest in the leased motor vehicle is at least as
protective of the trust's rights as the trust would receive under a
motor vehicle installment loan contract.
U. ``Pooling and Servicing Agreement'' means, collectively, (i) the
securitization trust agreement between a sponsor and the trustee
establishing a trust, (ii) the trust and servicing agreement relating
to an origination trust and the servicing supplement thereto, and (iii)
the supplemental agreement establishing a beneficial interest in
certain specified origination trust assets (referred to herein as a
``special unit of beneficial interest'' or ``SUBI''). 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.
V. ``Lease Rate'' means an implicit rate in each lease calculated
as an annual percentage rate on a constant yield basis, based on the
capitalized cost of the leased vehicle as determined under the
particular lease contract for the vehicle. With respect to the
determination of a ``Lease Rate'', each lease will provide for equal
monthly payments such that at the end of the lease contract term the
capitalized cost will have been amortized to an amount equal to the
residual value of the leased vehicle established at the time of
origination of such contract. The amount to which the capitalized cost
has been amortized at any point in time will be the outstanding
principal balance for the lease.
W. ``Average Lease Rate'' means the average annual percentage lease
rate, as defined in Section III.V. above, for all leases included at
any particular time in a portfolio used to create a trust from which
certificates are issued.
X. ``Eligible Lease'' or ``Eligible Lease Contract'' means a
Qualified Motor Vehicle Lease, as defined in Section III.T. above,
which meets the eligibility criteria established for, among other
things, the term of the lease, place of origination, date of
origination, and provisions for default, as described in the particular
prospectus or private placement memorandum for the certificates
provided to investors, if such terms and conditions have been approved
by the Rating Agencies prior to the issuance of such certificates.
Y. ``Permitted Investments'' means investments which: (i) are
direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency
or instrumentality thereof, provided that such obligations are backed
by the full faith and credit of the United States, or (ii) have been
rated (or the obligor has been rated) in one of the three highest
generic rating categories by a Rating Agency; are described in the
pooling and servicing agreement; and are permitted by the Rating
Agency.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
Effective Date: This proposed exemption, if granted, will be
effective for all transactions described herein which occur on or after
September 1, 1997.
Summary of Facts and Representations
1. TMCC is a California corporation that has 34 branches in various
locations in the United States. TMCC's primary business is providing
retail leasing, retail and wholesale financing and certain other
financial services to authorized Toyota and Lexus vehicle and Toyota
industrial equipment dealers and their customers in the United States
(excluding Hawaii). TMCC is a wholly-owned subsidiary of Toyota Motor
Sales, U.S.A., Inc. (TMS), which is primarily engaged in the wholesale
distribution of automobiles, light duty trucks, industrial equipment
and related replacement parts and accessories throughout the United
States (excluding Hawaii). Substantially all of TMS's products are
either manufactured by its Affiliates or are purchased from Toyota
Motor Corporation (TMC), which indirectly wholly owns TMS, or its
Affiliates.
Toyota Leasing, Inc. (TLI) will be formed as a California
corporation, and will be a wholly-owned, special purpose subsidiary of
TMCC.
2. TMCC and its Subsidiaries,6 including TLI
(collectively, the Applicant) seek an exemption to permit employee
benefit plans to invest in certificates indirectly representing
undivided interests in a trust which contains motor vehicle leases and
the motor vehicles related to those leases. The exemption TMCC seeks is
substantially similar to the Underwriter Exemptions granted by the
Department to various broker-dealers and banks to permit investments
in, among other things, motor vehicle receivable investment trusts. In
the exemption sought by TMCC, the primary asset of the trust in which
investors have beneficial interests (i.e. the Securitization Trust) is
a special unit of beneficial interest (SUBI) in a separate trust that
actually holds the motor vehicle leases and related motor vehicles
(i.e., the Origination Trust). The Underwriter Exemptions may also
include such a two-tier trust structure (as noted above in Footnote 4).
However, unlike the trusts described in the Underwriter Exemptions, the
Securitization Trusts established by TMCC will not contain beneficial
interests in fixed pools of assets (i.e. qualified motor vehicle leases
and related motor vehicles) for at least a
[[Page 36951]]
year, as discussed further below. TMCC states that the Securitization
Trusts meet all other requirements of the Underwriter Exemptions. Such
requirements include: (i) that investor certificates covered by the
exemption have received a rating from one of the Rating Agencies that
is in one of the three highest generic rating categories; (ii) that
there be no subordination of investor certificates purchased by
employee benefit plans to the rights and interests evidenced by other
certificates of the same trust; and (iii) that there be a pass-through
of principal, interest and other payments received by the trust
relating to the receivables beneficially owned by the trust, less
certain specified servicing fees which are disclosed and approved by
the investors prior to the acquisition of any trust certificates.
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\6\ For purposes hereof, the term ``Subsidiary'' means any
corporation, partnership or other business entity controlled by
TMCC.
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3. The Origination Trust is formed pursuant to a trust agreement
between the sponsor of the Origination Trust and its trustee (the
Origination Trustee). The sponsor of the Origination Trust is currently
TLI, but could be another entity affiliated with TMC. The Origination
Trustee is a wholly-owned subsidiary of an independent entity qualified
to provide trust services, and in fact provides such services to the
Origination Trust under contract with its subsidiary (i.e. the Trust
Agent). TMCC represents that the Trust Agent will be a financial
institution that is not affiliated in any way with TMCC, other than as
a service provider. TMCC or an Affiliate acts as servicer (the
Servicer) for all of the leases and leased vehicles owned by the
Origination Trust, pursuant to an amended and restated trust and
servicing agreement (the Origination Trust Agreement) with the
Origination Trustee and one or more servicing supplements to the
Origination Trust Agreement (collectively, the Servicing Agreement).
4. The assets of the Origination Trust include retail closed-end
automobile and light-duty truck lease contracts assigned to the
Origination Trust by certain dealers, the automobiles and light duty
trucks relating thereto, all proceeds thereof (including any sale of
such vehicles), payments made under certain insurance policies relating
to such leases or the related lessees or leased vehicles, and all
security deposits with respect to such lease contracts to the extent
due to the lessor thereunder. TMCC is the initial holder of a sole
beneficial interest (i.e. the ``Undivided Trust Interest'' or ``UTI'')
in the Origination Trust.
The Origination Trust is open-ended; that is, as leases are
originated by dealers, they will be assigned by the dealers directly to
the Origination Trust and the Origination Trust will be listed as the
owner of the related vehicles on the related certificates of title.
When the aggregate dollar amount of leases and leased vehicles in the
Origination Trust grows large enough to justify a securitization, TMCC,
as holder of the UTI, may direct the trustee of the Origination Trust
to segregate from among all the leases and leased vehicles within the
Origination Trust a specified portfolio of leases and related leased
vehicles. Pursuant to a supplement to the Origination Trust Agreement
(known as a ``SUBI'' Supplement), the trustee then issues to TMCC a
separate certificate representing a ``Separate Unit of Beneficial
Interest'' or ``SUBI'' in that segregated portfolio. It is this SUBI
that becomes the basis for a securitization and the creation of a
separate Securitization Trust.
Any leases and leased vehicles held by the Origination Trust that
are not included in a SUBI portfolio at the time of such segregation,
as well as any new leases and related vehicles acquired subsequent to
the specified date on which the new SUBI portfolio is identified,
remain part of the UTI portfolio, and the original UTI continues to
represent a beneficial interest therein.
New leases and related leased vehicles are added to the SUBI's
segregated portfolio by TMCC in an aggregate amount approximately equal
to principal collections on the leases and leased vehicles already
allocated to the SUBI,7 for a fixed period (which will be no
more than fifteen consecutive months) after the closing date used for
the initial allocation of leases made to create the SUBI portfolio.
(This period is referred to hereafter as the ``revolving period''). The
applicant represents that this fixed ``revolving period'' for principal
collections on the leases and leased vehicles is established so that
the investor certificates issued by the Securitization Trust are
treated as debt for Federal and state income tax purposes, but does not
affect the characterization of those certificates as beneficial
interests in the Securitization Trust property for accounting and other
state law purposes.
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\7\ TMCC represents that the aggregate amount of new leases
added to a SUBI portfolio is approximately equal, rather than
exactly equal, to principal collections on the existing leases
because, when additional leases are added, the outstanding principal
balance of the new leases is not always equal to the principal
collections available for reinvestment. The uninvested principal
amounts are held by the Securitization Trust in a cash account and
temporarily invested in short-term investments, with interest
thereon accruing to the Securitization Trust, until such amounts can
be reinvested in additional leases for the SUBI portfolio. TMCC
states that any uninvested principal amounts, and interest on such
amounts, held by the Securitization Trust are distributed to the
certificateholders once principal payments on the leases in the SUBI
portfolio are passed-through to investors.
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After the ``revolving period'', the pool of leases and leased
vehicles allocated to the SUBI (i.e. the SUBI portfolio) remains fixed.
Any leases which are added to the SUBI portfolio during the ``revolving
period'' must meet the same terms and conditions for eligibility as the
original leases in the portfolio, as described in the prospectus or
private placement memorandum, which terms and conditions have been
approved by the Rating Agencies prior to the ``revolving period''.
However, TMCC states that the terms and conditions for an ``eligible
lease'' (as defined in Section III.X above) may be changed if such
changes receive prior approval either by a majority vote of the
outstanding certificateholders or by the Rating Agencies. Further,
under the conditions of the proposed exemption, TMCC must ensure that
the additional leases added to the SUBI portfolio do not result in the
certificates receiving a lower credit rating from the Rating Agencies
at the end of the ``revolving period'' than the rating that was
obtained at the time of the initial issuance of the certificates by the
trust (see Section II.A.(7)(b) above).
TMCC states that for the duration of the ``revolving period'',
principal collections that are reinvested in additional leases are
first reinvested in the ``eligible lease contract'' (as defined in
Section III.X. above) with the earliest origination date, then in the
``eligible lease contract'' with the next earliest origination date,
and so forth (i.e. on a ``FIFO basis), beginning with any lease
contracts that have been reserved by TMCC specifically for such
purposes at the time of the initial allocation of leases to the
particular SUBI portfolio. However, those lease contracts reserved for
allocation to, or actually allocated to, other pools of leases (i.e.
other SUBI portfolios used to create different trusts) will be excluded
from the available additional leases to be added to the particular SUBI
portfolio. TMCC states that no adverse selection procedures may be
employed in selecting leases during the ``revolving period''. Thus,
TMCC represents that it will not be able to manipulate the order in
which leases are added to a particular SUBI portfolio during the
``revolving period'' in order to improve its economic position with
respect to the assets held in a particular SUBI portfolio. TMCC states
further that at all times there will be a clear identification within
the Origination Trust of which leases and leased
[[Page 36952]]
vehicles belong in each SUBI portfolio and which belong in the UTI or
``residual'' portfolio. The holders of beneficial interests in each
SUBI have also agreed in writing to rely solely upon the assets
contained within their respective portfolios to satisfy any payment
obligations.
This ``revolving period'' arrangement differs from the arrangements
considered in the Underwriter Exemptions wherein each trust contains a
``fixed pool'' of assets and substitution of receivables by the trust
sponsor is permitted only in the event of defects in documentation
discovered within a limited time after the issuance of trust
certificates. The Applicant states that during any ``revolving
period'', the outstanding principal balance of the SUBI's portfolio of
leases remains unchanged and the certificateholders receive only
interest payments with respect to their certificates. Once the
``revolving period'' ends, principal payments are no longer reinvested
but rather are paid out to certificateholders.
To the extent that leases added to the SUBI portfolio during the
``revolving period'' have a higher Lease Rate (as defined in Section
III.V. above) than do the original leases in the SUBI portfolio at the
time of the initial offering of the certificates to investors, total
returns on the ultimate lease pool in excess of that promised to
investors on the trust certificates may inure to affiliates of the
Servicer. However, TMCC states that the Average Lease Rate (as defined
in Section III.W. above) for the pool of leases allocated to a SUBI
portfolio owned by a particular Securitization Trust, after accounting
for all the leases added to the SUBI portfolio during the ``revolving
period'', shall not be more than 200 basis points (i.e. 2 percent)
greater than the Average Lease Rate for the leases in the SUBI
portfolio on the closing date used for the initial allocation of leases
to the SUBI portfolio owned by the Securitization Trust.
The Average Lease Rate for the leases in the trust at the time of
the initial offering of the certificates is described in the prospectus
or offering memorandum provided to investors. The Applicant represents
that changes to the Average Lease Rate based on new leases added to a
trust during the ``revolving period'' depend on current interest rates
and market conditions as well as the amount of lessee prepayments and
repossessions on the leased vehicles. Thus, potential plan investors at
the time of the initial offering of trust certificates know the total
dollar amount of leases in the trust, the Average Lease Rate on those
leases, the fact that principal received by the trust during the
``revolving period'' is used to invest in additional leases, and the
length of the ``revolving period''. Under the terms of the proposed
exemption, potential plan investors shall also be provided with a
statement disclosing the fact that the relief provided by the exemption
shall be available to the Servicer and its affiliates only if the
additional leases do not cause the Average Lease Rate for the leases in
the pool after the ``revolving period'' to increase by more than 200
basis points.
5. Pursuant to the Servicing Agreement, TMCC, acting as Servicer on
behalf of the Origination Trustee, selects the assets to be represented
by each SUBI (as discussed above). Certificates representing the entire
beneficial interest in each SUBI are issued to the sponsor of the
Securitization Trust. The sponsor will be TLI, or another wholly-owned
subsidiary of TMC (or a limited liability company or partnership in
which a TMC subsidiary is a member). The sponsor creates the
Securitization Trust and transfers a certificate representing the
beneficial interest in the SUBI to the Securitization Trust, pursuant
to a trust agreement between the sponsor and the trustee of the
Securitization Trust (the Securitization Trustee).8 The
Securitization Trustee is an unrelated commercial institution with
trust powers, meeting certain specified requirements. In addition,
pursuant to the Securitization Trust Agreement, the Securitization
Trust issues to its sponsor investor certificates representing
fractional undivided interests in the Securitization Trust, the assets
of which include the SUBI, which itself represents a beneficial
interest in a portfolio of motor vehicle leases and related leased
motor vehicles held by the Origination Trust.
---------------------------------------------------------------------------
\8\ TMCC or an affiliate retains a de minimis interest in each
SUBI portfolio, which represents a subordinated interest in the
portfolio, under requirements established by the Rating Agencies, in
order to meet certain Federal tax code objectives.
---------------------------------------------------------------------------
6. The sponsor of the Securitization Trust sells the investor
certificates to various outside investors, including employee benefit
plans subject to the Act. In order to achieve the desired rating for
such certificates, the sponsor may retain a subordinated interest in
the Securitization Trust, as required by the Rating Agencies, so that
unanticipated losses with the SUBI portfolio will first by borne by
TMCC. With respect to the certificates sold to outside investors, there
may be two or more classes of securities. The investor certificates are
either publicly or privately offered.9 Except under rare
circumstances, physical certificates will not be issued to investors in
a public senior class of certificates. Instead, the Securitization
Trust will use a book-entry registration system through the Depository
Trust Company (DTC), a limited-purpose trust company organized under
New York law, which is a member of the Federal Reserve System, and a
clearing agency under Section 17A of the Securities Exchange Act of
1934.
---------------------------------------------------------------------------
\9\ TMCC is not requesting an exemption for the purchase of any
subordinated class of certificates by employee benefit plans.
However, the applicant is requesting relief for prohibited
transactions that may occur as a result of the investments in a
trust made by an insurance company's general account which are
considered to be ``plan assets'' under the recent U.S. Supreme Court
decision in John Hancock Mutual Life Insurance Co. v. Harris Trust &
Savings Bank, 114 S.Ct. 517 (1993) (Harris Trust). As a result of
the decision in Harris Trust and the Department's plan assets
regulation (see 29 CFR 2510.3-101), an insurance company investing
general account assets could be viewed as a ``benefit plan
investor'' for purposes of calculating the 25 percent significant
participation test in section 2510. 3-101(f)(1) of the regulation.
The Department notes that Section III of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts
(PTE 95-60, 60 FR 35925, July 12, 1995) provides an exemption for
transactions in connection with the operation of asset pool
investment trusts notwithstanding that the certificates acquired by
the general account are subordinated to the rights and interests
evidenced by other certificates of the same trust. In this regard,
the Department has included a paragraph at the end of the operative
language of the proposed exemption which states that this exemption,
if granted, will be included within the definition of the term
``Underwriter Exemption'' under Section V(h) of PTE 95-60.
Therefore, the exemptive relief provided by PTE 95-60 will be
available for subordinated investments in a trust described herein
by insurance company general accounts.
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Investors are entitled to receive periodic payments of interest at
a fixed certificate rate, and after the ``revolving period'' described
above, payments of principal. Principal payments on the investor
certificates will be made on each distribution date (i.e., monthly,
quarterly, semi-annually or annually), based on formulas allocating
among the classes of certificates the maximum amount distributable
thereto on each such date and in each case subject to the amount
actually collected on the receivables. All net collections collected
for the assets underlying each SUBI, including all net proceeds from
the sale of a vehicle upon repossession, early lease termination or
maturity of the related lease, and, if so specified in the governing
documents, earnings derived from temporary investment of trust funds
prior to the next scheduled distribution date, are available to make
payments on the investor certificates.
The price of the investor certificates, both in the initial
offering and in the secondary market, is affected by market forces
including investor demand. Certificate interest rates are set at the
[[Page 36953]]
time of the pricing of each securitization. While the Average Lease
Rate for the particular lease portfolio is a factor in the interest
rates a Securitization Trust will be able to pay, the actual interest
rate set for the certificates issued is determined by a combination of
additional factors. Specifically, these factors include: (a) the then-
current yields on U.S. Treasury Notes with a remaining term equivalent
to the anticipated average life of the particular Securitization Trust,
and (b) the then-current ``spreads'' on similarly-rated competitive
investments available in the marketplace, as determined by the Rating
Agencies. Once the certificate rate is set for the certificates issued
by the Securitization Trust, that rate remains fixed for its duration,
regardless of any changes to the Average Lease Rate of the SUBI
portfolio occurring during the ``revolving period''. The price of an
investor certificate and the certificate rate together determine the
yield to investors. If an investor purchases a certificate at less than
par, that discount augments the certificate rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
7. TMCC represents that the certificates issued by a Securitization
Trust may involve multi-class certificates. Such multi-class
certificates may be one of two types: (i) ``strip'' certificates; and
(ii) ``fast-pay/slow-pay'' certificates.
``Strip'' certificates are a type of security in which the stream
of interest payments on the underlying 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.
``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. The only difference
between these multi-class certificates and the single-class
certificates is the order in which distributions are made to
certificateholders.
The Applicant represents that any ``strip'' or ``fast-pay/slow-
pay'' certificates issued by a trust will be the same as the type
described in the Underwriter Exemptions previously granted by the
Department. TMCC emphasizes that the rights of a plan purchasing such
certificates will not be subordinated to the rights of another
certificateholder in the event of default on any payment obligations
for the certificates. With respect to ``fast-pay/slow-pay''
certificates, TMCC states that 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 would share in the amount distributed on a pro rata
basis. Thus, if a trust issues subordinate certificates, holders of
such subordinate certificates would not be able to share in the amount
distributed on a pro rata basis.10
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\10\ In this regard, the Department notes that although it
believes that either the ``strip'' or the ``fast-pay/slow-pay''
certificates described above are included within the scope of the
proposed exemption, it further notes that no relief is provided
under the exemption for plan investments in subordinate certificates
(other than as permitted herein for certain insurance company
general accounts). In addition, the Department notes that the
conditions of the exemption would require that any ``strip'' or
``fast-pay/slow-pay'' certificates receive one of the three highest
ratings available from the Rating Agencies and that such
certificates not receive a lower credit rating upon termination of
the period during which additional leases may be added to the SUBI
portfolio.
The Department cautions plan fiduciaries to fully understand the
risks involved with either ``strip'' or ``fast-pay/slow-pay''
certificates prior to any acquisitions of such certificates, and to
make prudent determinations as to whether such certificates would
adequately meet the investment objectives and liquidity needs of the
plan.
---------------------------------------------------------------------------
8. TMCC enters into arrangements with certain dealers allowing it
to cause the assignment of leases and related vehicles originated by
those dealers either directly to TMCC or to any other specified entity,
including the Origination Trust. Once such leases and related vehicles
are assigned to the Origination Trust for ultimate inclusion in a
portfolio of SUBI assets for securitization as described above, TMCC is
able to go to the capital markets directly for financing through the
sale of certificates.
TMCC and/or one or more wholly-owned subsidiaries of TMCC, or
limited liability companies or partnerships in which such a wholly-
owned subsidiary is a member, are responsible for creating each SUBI,
creating the Origination Trust and each Securitization Trust, and
designating the Trust Agent and the Securitization Trustee.
The Trust Agent, its subsidiary the Origination Trustee, and the
Securitization Trustee, are each independent entities, unrelated to
TMCC, the underwriter or placement agent. The Origination Trustee is
the legal owner of the motor vehicle leases and related leased motor
vehicles allocated to a SUBI. The Securitization Trustee is the legal
owner of the obligations in the Securitization Trust and is responsible
for enforcing all the rights created thereby in favor of
certificateholders, whether independently or through the Origination
Trustee. The Applicant represents that each Securitization Trustee and
Trust Agent are substantial financial institutions or trust companies
experienced in trust activities. The Trust Agent and Securitization
Trustee will receive a fee for their services, which will be paid out
of assets of the Origination Trust or the Securitization Trust, as
applicable. The method of compensating each for its service related to
a SUBI is specified in the Servicing Agreement or Securitization Trust
Agreement, as applicable, and disclosed in the prospectus or private
placement memorandum relating to the offering of the investor
certificates.
9. The Servicer administers the leases on behalf of the beneficial
owners of the Origination Trust, including the holders of SUBI
certificates and, indirectly, the holders of the investor certificates.
The Servicer's functions involve monitoring of leases, maintenance of
records, institution of proceedings in the event of default, and sale
of vehicles after lease maturity, as well as certain functions relating
to the qualifications and permits required to be obtained by the
Origination Trustee.11 The Servicer, the sponsor of the
Origination Trust, and the sponsor of the Securitization Trust are
unrelated to the underwriter and to DTC. DTC has public senior investor
certificates registered in its name (or that of its nominee) and
maintains procedures for the distribution of notices, reports,
distributions and statements to certificateholders.
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\11\ TMCC states that these functions are necessary since, as
noted in Paragraph 4 above, the Origination Trust is the owner of,
and holds title to, the vehicle unless the lessee chooses to
purchase such vehicle under the terms of the lease.
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As compensation for performing its servicing duties for the
Origination Trust, the Servicer is paid a fee equal to a specified
percentage (usually no more than one percent) of the balance of the
leases it services, including those leases allocated to the SUBI. The
Servicer may receive additional compensation related to the SUBI in the
form of interest on various accounts of the Origination Trust and/or
the Securitization Trust containing proceeds of the leases and related
leased motor vehicles allocated to each SUBI as well as interest on
certain cash deposits. The Servicer is required to pay the
administrative expenses of servicing the Origination Trust out of its
servicing compensation.
The Servicer is also compensated to the extent it may provide
credit enhancement to the Securitization Trust or otherwise arranges to
obtain credit support from another party. This ``credit support fee''
may be aggregated with
[[Page 36954]]
other servicing fees, and may be either paid out of the income received
on the leases in excess of the certificate rate or paid in a lump sum
at the time the Securitization Trust is established. The Servicer may
be entitled to retain certain administrative fees paid by a third
party, usually the obligor under a lease, provided that such fees are
``qualified administrative fees'' as defined under Section III.S. These
administrative fees fall into four categories: (a) late payment fees;
(b) acquisition fees; (c) deferral fees; and (d) other administrative
fees or similar charges under the leases.
Payments on leases may be made by lessees to the Servicer at
various times during the period preceding any date on which payments to
the Origination Trust are due. In some cases, the Servicing Agreement
may permit the Servicer to place these payments in non-interest bearing
accounts in itself or to commingle such payments with its own funds
prior to the distribution dates. In these cases, the Servicer would be
entitled to the benefit derived from the use of the funds between the
date of payment on a lease and the date payment is due to the
Origination Trust. 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 leases are held in
non-interest bearing accounts or are commingled with the Servicer's own
funds, the Servicer is required to deposit these payments into an
Origination Trust account by a date specified in the Servicing
Agreement. TMCC states that the Servicing Agreement will require that
payments into an Origination Trust account will be made monthly, even
in cases where the certificates provide for distributions to be made
quarterly, semi-annually or annually. Once funds are deposited in the
Origination Trust account, such funds are required to be invested in
highly rated debt instruments of the type described in the governing
documents as ``permitted investments''.
TMCC represents that the Pooling and Servicing Agreement used in
the transactions described herein will require that in the event that
the rating for TMCC's short-term debt is reduced below a level
specified by the Rating Agencies after the sale of the certificates,
TMCC (as servicer) will be required to commence depositing collections
with respect to trust assets in a trust account on a daily basis within
two business days after collection, unless the applicable Rating
Agencies have agreed in writing to an alternative arrangement to
protect the interests of certificateholders.12
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\12\ TMCC states that its short-term unsecured debt is currently
rated P-1 by Moody's Investors Service and A-1 by Standard and
Poor's Ratings Services.
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All compensation payable to the Servicer with regard to the leases
allocated to a SUBI is set forth or referred to in the Servicing
Agreement, and described in reasonable detail in the prospectus or
private placement memorandum relating to the investor certificates.
10. Participating underwriters or placement agents receive a fee in
connection with the securities underwriting or private placement of
investor certificates. In a firm commitment underwriting, this fee
would consist of the difference between what such underwriter receives
for the certificates that it distributes and what it pays the sponsor
of the Securitization Trust for those certificates.13 In a
private placement, the fee normally takes the form of an agency
commission paid by the sponsor of the Securitization Trust.
---------------------------------------------------------------------------
\13\ TMCC represents that a ``best efforts'' underwriting would
not ordinarily be used for the investor certificates.
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The arrangements among underwriters typically are set forth in an
``Agreement Among Underwriters'', which gives the managing underwriter,
as lead manager of the offer, the authority to act on behalf of all the
underwriters. This agreement also imposes customary restrictions on the
underwriters' dealings in the offered securities as are necessary to
comply with securities laws and to ensure the orderly distribution of
the offered securities.
11. TMCC represents that as the principal amount of the leases
allocated to a SUBI is reduced by payments thereon and recoveries on
the disposition of leased vehicles, the cost of separately
administering the assets allocated to that SUBI generally increases,
making the servicing of those assets prohibitively expensive at some
point. Consequently, the Securitization Trust Agreement generally
provides that the sponsor of the Securitization Trust may repurchase
the SUBI when the aggregate principal balance of the investor
certificates is reduced to a specified percentage (usually between 5
and 10 percent) of the initial aggregate investor certificate balance.
The terms of such repurchase are specified therein and are at least
equal to the unpaid principal balance on the investor certificates plus
accrued interest. The supplement to the Origination Trust Agreement
generally provides that upon such a repurchase of the Securitization
Trust's interest in the SUBI by its sponsor, the Origination Trust may
repurchase the entire SUBI from the sponsor and thereby terminate the
SUBI. The terms of such repurchase are specified therein and generally
are at least equal to the value of the pool of leases and leased
vehicles allocated to the SUBI.
12. The senior class of investor certificates must receive a rating
that is in one of the three highest generic rating categories available
from one of the Rating Agencies. To attain the desired rating, the
sponsor or its affiliates may establish a reserve fund for the benefit
of certificateholders; retain or sell to third parties one or more
classes of subordinated certificates; retain another subordinated
interest in the trust; and/or obtain other forms of credit support from
third parties. The amount of this credit support is set by the Rating
Agencies at a level expected to be a multiple of the worst historical
net credit loss experience for leases of automobiles and light-duty
trucks such as those allocated to the SUBI.
TMCC states that the Rating Agencies, before granting AAA/Aaa
ratings for the publicly issued securitization certificates, review the
underlying portfolio of assets securing payment to the investors to
determine, among other things, if (a) the principal value of the assets
is sufficiently greater than the aggregate face amount of the investor
certificates as to provide protection against defaults or losses, and
(b) there is a sufficient ``spread'' between the overall yield, based
on the Average Lease Rate (as adjusted by the discounting procedure
described below), being earned on the portfolio and the certificate
rate to cover servicing costs, expenses and losses. In the case of its
public offerings of certificates, TMCC currently anticipates that (i)
the face value of public investor senior certificates will not exceed a
specified percentage (e.g. 92.5 percent) of the principal value of the
underlying assets, and (ii) the ``spread'' between the overall yield,
based on the Average Lease Rate (as adjusted by the discounting
procedure described below), of the SUBI portfolio and the certificate
rate will be approximately 100 to 300 basis points. Thus, for example,
if the targeted ``spread'' were 200 basis points, a SUBI portfolio with
a principal value of $100,000,000 would support the issuance of
certificates with a face value of only $92,500,000, and a certificate
rate of 6 percent per annum would require an overall yield, based on
the Average Lease Rate (as adjusted by the discounting procedure
described below), for that SUBI portfolio of approximately 8 percent
per annum.
[[Page 36955]]
TMCC states that the Rating Agencies will always require a specific
``spread'' between the certificate rate and the overall yield for
leases in the particular SUBI portfolio before providing their initial
credit ratings for the certificates. TMCC must maintain this ``spread''
when leases are added to the SUBI portfolio during the ``revolving
period'' or risk a lower credit rating for the certificates (see
Section II.A.(7)(b) above).
For purposes of the securitization described above, TMCC represents
that each individual lease should yield a rate of return, based on the
Lease Rate (as defined in Section III.V. above), which is at least
equal to the certificate rate plus the targeted spread. However, where
the targeted spread is not met as to any lease based solely on the
Lease Rate, the principal value of that lease will be discounted so
that such lease is treated as having a ``net investment value'' less
than its actual outstanding principal balance. In such instances, the
lease is discounted to a level at which the actual lease charges to be
collected under the lease (including expected principal payments) would
yield, on a percentage basis, an overall rate of return which exceeds
the certificate rate by the targeted spread. Thus, for each individual
lease included in a securitization, its principal value is either: (a)
its outstanding principal balance, if its Lease Rate is equal to or
greater than the targeted spread; or (b) its discounted net investment
value, if its Lease Rate is less than the targeted
``spread''.14 TMCC states that the use of discounted
aggregate net investment values in measuring the ratio of certificate
face values to the discounted principal balance of the SUBI portfolio
can only further assure that investors are paid interest and principal
on their certificates on a timely basis.
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\14\ For example, if the certificate rate for a transaction were
8 percent and the targeted spread were 200 basis points, then, in
determining the aggregate face value amount of certificates that
could be issued with respect to a given SUBI portfolio, TMCC could
include each lease with a Lease Rate of 10 percent or more at its
current outstanding principal balance without any discounting.
However, if the portfolio included individual leases each with
outstanding principal balances of $20,000 and Lease Rates of only 5
percent, then TMCC would have to ``discount'' the value of each such
lease for purposes of the securitization to a low enough net
investment value (approximately $18,000) so that the same overall
monthly lease payment for each lease would now yield a Lease Rate of
10 percent. TMCC notes that any ``discounting'' of leases added to
the SUBI portfolio during the ``revolving period'' will result in
more leases being added to the portfolio in order to maintain a
constant outstanding principal balance during such period. Thus,
when interest rates used to determine the Lease Rate for leases
added to a SUBI portfolio are declining, the ``discounting'' of
leases adds more ``collateral'' to secure payments of the
certificate rate.
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13. In many cases, the Servicer may provide cash flow support to
the trust pursuant to a contractual obligation to advance funds to the
trust to the full extent that it determines that such advances are
recoverable (a) out of late payments by the lessees, (b) from a
permanent credit support provider (which may be itself) or, (c) in the
case of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates. The
Servicer would advance such funds in a timely manner. When the Servicer
temporarily advances funds, the amount so advanced is recoverable by
the Servicer out of future payments on or for leases or leased vehicles
allocated to the SUBI to the extent that such amounts are not covered
by the other sources described above, including payments from a
permanent credit support provider.
If the Servicer fails to advance funds to the extent required by
the applicable agreements, fails to call upon a credit support
mechanism to provide funds to cover defaulted payments, or otherwise
fails in its duties, the Securitization Trustee would be required to
enforce the investor certificateholders' rights, in its capacity as a
third-party beneficiary of the Servicing Agreement, as owner of the
estate of the Securitization Trust, and as an indirect beneficial owner
of the Origination Trust assets allocated to a SUBI (including rights
under any credit support mechanism). Therefore, the Securitization
Trustee, who is independent of the Servicer, ultimately has the right
to enforce any credit support arrangement.
14. TMCC represents that 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 leases allocated to a SUBI as
payments for these leases and the related vehicles are used to make
payments to the Securitization Trust, as holder of an interest in the
SUBI, and then to investors. These safeguards include the following:
(a) There is a disincentive to postponing credit losses because the
sooner repossession or sale activities are commenced, the more value
generally will be realized on the leased vehicle.
(b) The Servicer has servicing guidelines which include a general
policy as to the allowable delinquency period after which a lessee's
obligations ordinarily are deemed uncollectible. The Servicing
Agreement requires the Servicer to follow its normal servicing
guidelines. In addition, the Servicing Agreement sets forth the
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 investor certificates
(monthly, quarterly, semi-annually, or annually, as set forth in the
Securitization Trust Agreement), the Servicer is required to report to
the Securitization 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 leases, recoveries on the related leased
vehicles, and draws upon the credit support. Further, the Servicer is
required to deliver to the trustee annually a certificate from an
executive officer of the Servicer stating that a review of the
servicing activities has been made under such officer's supervision,
and either stating that the Servicer has fulfilled all of its
obligations under the Servicing Agreement or, if the Servicer has
defaulted under any of its obligations, specifying any such default.
The Servicer's reports are reviewed at least annually by independent
accountants to ensure that the Servicer is following its normal
servicing standards and that the reports conform to the Servicer's
internal account records. The results of the independent accountants'
review are delivered to the Securitization Trustee.
(d) In cases where the Servicer and an insurer providing credit
support are affiliated or are the same entity, the credit support has a
``floor'' dollar amount that protects investors against the possibility
that a large number of credit losses might occur towards the end of the
life of the SUBI, whether due to Servicer advances or any other cause.
The floor amount may be a fixed dollar amount or a specified formula
amount. Once the floor amount has been reached, the Servicer lacks an
incentive to postpone the recognition of credit losses because the
credit support amount becomes a fixed dollar amount, subject to
reduction only for actual draws on such amount. 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 principal balance of the leases allocated to the
SUBI. The Applicant states that where the floor is a fixed dollar
amount, the amount of credit support ordinarily would increase as a
percentage of the declining principal balance during the period that
the floor is in effect.
15. In connection with the original issuance of investor
certificates, a
[[Page 36956]]
prospectus or private placement memorandum is furnished to all
investors including investing plans. The prospectus or private
placement memorandum contains information material to a plan
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 Origination Trust and Securitization Trust
as legal entities and a description of how they were formed by their
respective sponsors;
(c) Identification of the Trust Agent, Origination Trustee and
Securitization Trustee;
(d) A description of the leases and related leased vehicles
allocated to each SUBI, including the diversification of the leases and
vehicles, the principal terms of the leases, and their material legal
aspects;
(e) A description of the sponsors of the Origination Trust and the
Securitization Trust, and of the Servicer;
(f) A description of the servicing arrangements set forth in the
Servicing Agreement, and the agreements governing the Origination Trust
and the Securitization Trust, including a description of the Servicer's
principal representations and warranties as to the leases and leased
vehicles allocated to each SUBI and the remedies for any breach
thereof;
(g) A description of the procedures for collection of payments on
or for leases and related leased vehicles and for making distributions
to the Securitization Trust, as holder of an interest in the SUBI, and
then to investor certificateholders, and a description of the accounts
into which such payments are deposited and from which such
distributions are made;
(h) Identification of the servicing compensation and any fees for
credit support that are deducted from payments on or for leases or
related leased vehicles before distributions are made to investors;
(i) A description of periodic statements provided to the
Securitization Trustee, and such statements that are provided or made
available to investors by the Securitization Trustee;
(j) A description of the events that constitute events of default
under the Servicing Agreement and a description of the Securitization
Trustee's and the investors' remedies incident thereto;
(k) A description of any credit support;
(l) A general discussion of the principal Federal income tax
consequences of the purchase, ownership and disposition of the investor
certificates by a typical investor;
(m) A description of the underwriters' or placement agents' plan
for distributing the certificates to investors; and
(n) Information about the scope and nature of the secondary market,
if any, for the certificates.
Reports indicating the amount of payments of principal and interest
are provided to investors as frequently as distributions are made to
investors. Investors are also provided with periodic information
statements setting forth material information concerning the leases and
related vehicles allocated to each SUBI, including information as to
the amount and number of delinquent and defaulted leases.
16. In the case of the offer and sale of investor certificates in a
registered public offering, the Securitization Trustee, the Servicer or
the sponsor of the Securitization Trust will file periodic reports as
required by the Securities Exchange Act of 1934 (the 1934 Act). A
Securitization Trust and its sponsor may, in some cases, discontinue
making filings under the 1934 Act if permitted to do so under the
provisions of that Act by exemptions contained therein.
At the time distributions are made to certificateholders, a report
is delivered to the trustee as to the status of the Securitization
Trust and each SUBI, including the assets allocated to the SUBI. Such
report contains information regarding, among other things, the leases
and related vehicles allocated to the SUBI, 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 is also delivered to
or made available to the Rating Agency or Agencies that have rated the
investor certificates. A statement based on this report is also
provided to certificateholders either by the Securitization Trustee,
the Servicer, or DTC as depository of the investor certificates,
including a summary statement regarding the Securitization Trust and
the assets allocated to the SUBI. The statement contains information
regarding payments and prepayments, delinquencies, the remaining amount
of credit support, a breakdown of payments between principal and
interest and other information concerning the leases and leased
vehicles allocated to the SUBI.
With respect to payments on the certificates, TMCC states that such
payments are legally obligated to be made by the Securitization Trustee
to DTC, the record owner of the certificates. TMCC represents that DTC
makes payments to the beneficial owners of the certificates as required
by New York Stock Exchange Regulations, SEC Regulations and the rules
of the U.S. Federal Reserve Board.
17. In general, it is the policy of many underwriters to make a
market for securities for which they are the lead or co-managing
underwriter. It is also the policy of many placement agents to
facilitate sales by investors who purchase certificates if the
placement agent has acted as a principal or agent in the original
private placement of the certificates and if the investors request the
placement agent's assistance. In this regard, TMCC anticipates that
underwriters will make a secondary market in investor certificates of
trusts that are sponsored by TMCC and its Subsidiaries.
18. TMCC and its Subsidiaries represent that they will abide by all
securities and other laws applicable to any offering of interests in
securitized assets, such as certificates in a trust as described
herein, including those laws relating to disclosure of material
litigation, investigations and contingent liabilities.
TMCC has requested the relief proposed herein because, under the
Department's regulation defining ``plan assets'' for investment
purposes (see 29 CFR 2510.3-101), there could be a ``look-through'' to
the underlying assets of the trust issuing certificates purchased by
employee benefit plans when there is significant participation by
benefit plan investors in a particular offering and the certificates
are not considered to be ``publicly-offered'' securities. In this
regard, TMCC states that many certificates are held by investors in
street or nominee name. Thus, TMCC states that it is not always
possible to identify whether the percentage interest in a trust held by
benefit plan investors is or is not ``significant'' (29 CFR 2510.3-
101(f)). TMCC states further that these problems are compounded as
transactions occur in the secondary market. In addition, with respect
to the ``publicly-offered security'' exception contained in the
Department's regulation (29 CFR 2510.3-101(b)), TMCC states that it is
difficult to determine whether each purchaser of a certificate is
independent of all other purchasers or whether there are at least 100
independent investors
[[Page 36957]]
which would make the certificates a ``widely-held'' class of securities
(as required therein).
TMCC has requested that the proposed exemption be effective as of
September 1, 1997, in order to cover any securitizations of motor
vehicle leases and related vehicles since that time which may have
involved significant participation by benefit plan investors.
19. In summary, the Applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act because:
(a) The Securitization Trust holds an interest in a SUBI, which
generally represents beneficial interests in a ``fixed pool'' of leases
and related leased vehicles, other than the obligation to reinvest
principal collections on the leases and leased vehicles in additional
qualifying leases and leased vehicles during a fixed ``revolving
period'' of no more than 15 months.
(b) The Average Lease Rate for the leases in the portfolio used to
create a trust, after accounting for all leases added to such portfolio
during the ``revolving period'', will not exceed by more than 200 basis
points the Average Lease Rate for the original portfolio of leases used
to create the trust.
(c) Certificates in which employee benefit plans invest have been
rated in one of the three highest rating categories by the Rating
Agencies. To achieve the desired rating, one or more types of credit
support are provided by the sponsor or its affiliates or are obtained
from third parties. In addition, leases added to a trust portfolio
during the ``revolving period'' will not result in the certificates
receiving a lower credit rating from the Rating Agencies, at the end of
the ``revolving period'', than the rating that was obtained at the time
of the initial issuance of the certificates by the trust.
(d) All transactions for which TMCC seeks exemptive relief are
governed by the Origination Trust Agreement, the SUBI Supplement, the
Servicing Agreement and the Securitization Trust Agreement. These
agreements as well as the prospectus or private placement memorandum
are made available to plan fiduciaries for their review prior to the
plan's investment in the certificates.
(e) The Pooling and Servicing Agreement expressly provides that
funds collected by TMCC, as the servicer for trust assets, are required
to be deposited in a trust account within two business days after such
collection, if TMCC's short-term unsecured debt no longer continues to
be rated P-1 by Moody's Investors Service and A-1 by Standard & Poor's
Ratings Services (or successors thereto), unless such Rating Agencies
accept an alternative arrangement.
(f) Exemptive relief from sections 406(b) and 407(a) of the Act for
sales to employee benefit plans is substantially limited.
(g) The Applicant anticipates that underwriters will make a
secondary market in investor certificates sponsored by TMCC and its
Subsidiaries.
For Further Information Contact: Mr. E. F. Williams of the
Department, telephone (202) 219-8194. (This is not a toll-free number.)
Kilpatrick Investment Company Employee's Pension Plan (the Plan);
Located in Oklahoma City, Oklahoma
[Application No.: D-10607]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836,32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a) and 406(b)(1) and (2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of 4975(c)(1)(A) through (E) of the Code,
shall not apply to the past sale (the Sale) of improved real property
(the Property) by the Plan to the Kilpatrick Investment Company (the
Company), a party in interest with respect to the Plan provided the
following conditions were met at the time of the Sale: (1) the terms of
the Sale were at least as favorable as those the Plan could have
obtained in an arm's length transaction with an unrelated party; (2)
the fair market value of the Property was determined by an independent
and qualified real estate appraiser; (3) the Sale price was equal to
the greater of the fair market value of the Property at the time of the
Sale or $134,600 which represents the price the Plan originally paid
for the Property plus the holding costs incurred by the Plan during the
Plan's ownership of the Property; and (4) the Plan paid no commissions
or expenses associated with the Sale.
Effective Date: If granted, this proposed exemption will be
effective as of April 15, 1998.
Summary of Facts and Representations
1. The Plan is a defined benefit plan having six participants and
beneficiaries as of February 19, 1998. The aggregate fair market value
of the Plan's assets is $884,543 which is based upon the 1996 Plan's
actuarial report. John Kilpatrick is the Plan trustee and owner of the
Company.
2. The Property is a sixty year old industrial facility located on
a 476,725 square foot site located at 800 N.W. 3rd Street, Moore,
Oklahoma. The Plan purchased the Property from an unrelated third party
on January 31, 1978 for $95,000 representing land cost of $15,000 and
building cost $80,000. Since this time, the Plan has paid approximately
$7,000 in land repairs, $15,900 in improvements and $16,555 ad valorem
taxes. The warehouse portion of the Property has been leased to Show
Productions, an unrelated third party for an annual rent of $6,000.
3. On February 4, 1998, the Property was appraised by Stephen V.
Greer Company, Real Estate Appraisers and Consultants. The fair market
value of the Property was calculated to be $78,500. In his appraisal
report, Mr. Greer defined market value as the probable price which a
property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller, each acting
prudently, knowledgeably and assuming the price is not affected by
undue stimulus. Mr. Greer noted that the overall quality of the
building improvements of the Property is fair and the general condition
of the Property is fair to poor. The useful economic life of these
improvements is nearing its end. Redevelopment will be required to
maximize the value of the site.
4. The Plan proposed to sell the Property in order to diversify its
assets and invest in more liquid investments.15 In February
1998, the Company applied for an exemption to permit a proposed sale of
the Property by the Plan to the Company at the fair market value of the
Property. However, during the Department's consideration of the
exemption request, it became apparent to the Plan trustee that the Plan
had invested significantly more in the Property than its appraised
value. Thus, the Company proposed to purchase the Property at a price
greater than the fair market value of the Property which represented an
amount equal to the Plan's acquisition cost plus the holding costs of
the Property totaling $134,600.
[[Page 36958]]
The Company stated that it would be in the position to purchase the
Property at this price due to the fact that the Company had recently
sold another piece of property for $150,000 with respect to which the
Company was trying to complete a Code section 1031 like-kind exchange.
The Company further states that based upon the section 1031
requirements, the like-kind exchange had to be completed by April 15,
1998, and the Company determined that due to the notice requirements of
the exemption process, the exemption would not be granted before this
date. Accordingly, the Company purchased the Property from the Plan on
April 15, 1998. The applicant represents that the Sale was in the
interest of the Plan because it permitted the Plan to fully recover the
money it invested in the Property, and it appeared highly unlikely that
the Plan could sell the Property to a third party in its current
condition at such a price. In addition, the Plan incurred no expenses
as a result of the Sale.
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\15\ As of February 1998, the Plan's total investment in real
estate accounted for 93% of the value of plan assets. The Department
is expressing 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
such real estate. Section 404(a)(1)(C) states that a fiduciary shall
discharge his duties with respect to a plan solely in the interest
of the participants and beneficiaries by diversifying the
investments of the plan so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do so.
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5. In summary, the applicant represents that the transaction
satisfies the statutory criteria of the section 408(a) of the Act and
section 4975(c)(2) of the Code because: (1) the Sale was a one-time
transaction for cash; (2) the Plan paid no expenses associated with the
Sale; and (3) the Plan received the greater of the fair market value as
determined by an independent, qualified appraiser of the Property or
$134,600 which represents the Plan's total investment in the Property.
For Further Information Contact: Allison Padams Lavigne of the
Department, telephone (202)219-8971. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 1st day of July, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-18012 Filed 7-7-98; 8:45 am]
BILLING CODE 4510-29-P
