[Federal Register Volume 60, Number 155 (Friday, August 11, 1995)]
[Notices]
[Pages 41118-41136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19871]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09940, et al.]
Proposed Exemptions; Morgan Stanley & Co. Incorporated (MS&Co)
and Morgan Stanley Trust Company (MSTC)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and request
[[Page 41119]]
for a hearing should state: (1) The name, address, and telephone number
of the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing. A request
for a hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Morgan Stanley & Co. Incorporated (MS&Co) and Morgan Stanley Trust
Company (MSTC) Located in New York, New York
[Application No. D-09940]
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)(1)(A) through (D) 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 section
4975(c)(1)(A) through (E) of the Code, shall not apply to the lending
of securities to Morgan Stanley & Co., Incorporated (MS&Co) and to any
other U.S. registered broker-dealers affiliated with Morgan Stanley
Trust Company (the Affiliated Broker-Dealer, collectively, the MS
Group) by employee benefit plans for which Morgan Stanley Trust Company
(MSTC) acts as directed trustee or custodian and securities lending
agent and to the receipt of compensation by MSTC in connection with
these transactions, provided that the following conditions are met:
1. Neither MS&Co nor MSTC has discretionary authority or control
over a client-plan's assets involved in the transaction or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets;
2. Any arrangement for MSTC to lend plan securities to the MS Group
will be approved in advance by a plan fiduciary who is independent of
MSTC and the MS Group;
3. A client-plan may terminate the arrangement at any time without
penalty on five business days notice;
4. The client-plans will receive collateral consisting of cash,
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities, bank letters of credit or other collateral
permitted under PTE 81-6, from the MS Group by physical delivery, book
entry in a securities depository, wire transfer or similar means by the
close of business on or before the day the loaned securities are
delivered to the MS Group;
5. The market value of the collateral will initially equal at least
102 percent of the market value of the loaned securities and, if the
market value of the collateral falls below 100 percent, the MS Group
will deliver additional collateral on the following day such that the
market value of the collateral will again equal 102 percent;
6. All procedures regarding the securities lending activities will
at a minimum conform to the applicable provisions of Prohibited
Transaction Exemptions (PTEs) 81-6 and 82-63;
7. MS&Co will indemnify each lending client-plan against any losses
incurred by such plan in connection with the lending of securities to
the MS Group;
8. The client-plan will receive the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions;
9. Only plans with total assets having an aggregate market value of
at least $50 million will be permitted to lend securities to the MS
Group;
10. With regard to the ``exclusive borrowing'' agreement (as
described below), MS&Co will directly negotiate the agreement with a
plan fiduciary who is independent of the MS Group and MSTC, and such
agreement may be terminated by either party to the agreement at any
time; and
11. Prior to any plan's approval of the lending of its securities
to the MS Group, a copy of this exemption, if granted, (and the notice
of pendency) will be provided to the plan.
Summary of Facts and Representations
1. MS&Co, a wholly owned subsidiary of Morgan Stanley Group Inc.,
is an investment services firm which is a member of the New York Stock
Exchange and other principal securities exchanges in the United States
and a member of the National Association of Securities Dealers. MS&Co
is one of the largest investment firms in the United States. As of
January 31, 1994, MS&Co's parent, Morgan Stanley Group Inc., had
consolidated capital of over $9.8 billion.
2. MS&Co and its Affiliated Broker-Dealers (collectively, the MS
Group), acting as principal, borrows securities from institutions and
either utilizes such securities to satisfy its own needs or re-lends
these securities to brokerage firms and other entities which need a
particular security for a certain period of time. Borrowers often need
securities to satisfy deliveries in cases of short sales or where a
broker fails to receive securities it is required to deliver. The MS
Group, which borrows and lends
[[Page 41120]]
securities equal in value to approximately $37 billion on an average
daily basis, is among the largest institutional securities borrowers
and lenders in the United States. In making such loans, the MS Group
carefully reviews the credit worthiness of its counterparties.
3. MSTC is a wholly owned subsidiary of Morgan Stanley Group Inc.
and an affiliate of MS&Co. MSTC is organized as a trust company in New
York and provides a variety of services to its clients, including
services as custodian and clearing agent and in the future may provide
services as trustee.
4. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or bank in order to earn
a fee in addition to any interest, dividends or other distributions
paid on those securities. The lender generally requires that the
security loans be fully collateralized, and the collateral usually is
in the form of cash or high quality liquid securities such as U.S.
Government or Federal Agency obligations or certain bank letters of
credit. When cash is the collateral, the lender generally invests the
cash and rebates a portion of the earnings on the collateral to the
borrower. The ``fee'' received by the lender would then be the
difference between the earnings on the collateral and the amount of
rebate paid to the borrower. When a loan of securities is
collateralized with Government or Federal Agency securities or bank
letters of credit, a fee is paid directly by the borrower to the
lender. Institutional investors often utilize the services of an agent
in the performance of their securities lending transactions. The
lending agent is paid a fee for its services which may be calculated as
a percentage of the income earned by the investor from its securities
lending activity. The applicants believe that the essential functions
which define a securities lending agent are the identification of
appropriate borrowers of securities and the negotiation of the terms of
a loan to the borrowers. There are services ancillary to securities
lending which include monitoring the level of collateral and the value
of the loaned securities and investing the collateral in some
instances.
5. MSTC and MS&Co request an exemption for the lending of
securities owned by certain pension plans (client-plans) for which MSTC
will serve as directed trustee or custodian to the MS Group, following
disclosure of MSTC's affiliation with the MS Group, under either of the
two arrangements described as Plan A and Plan B and for the receipt of
compensation in connection with such transactions. However, because
MSTC under the proposed arrangements will have discretion with respect
to whether there is a loan of plan securities to the MS Group, the
lending of securities to the MS Group by plans may be outside the scope
of relief provided by PTE 81-6 1 and PTE 82-63.2
\1\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR
18754, May 19, 1987) provides an exemption under certain conditions
from section 406(a)(1) (A) through (D) of ERISA and the
corresponding provisions of section 4975(c) of the Code for the
lending of securities that are assets of an employee benefit plan to
certain broker dealers or banks which are parties in interest.
\2\ PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption
under specified conditions from section 406(b)(1) of ERISA and
section 4975(c)(1)(E) of the Code for the payment of compensation to
a plan fiduciary for services rendered in connection with loans of
plan assets that are securities. PTE 82-63 permits the payment of
compensation to a plan fiduciary for the provision of securities
lending services only if the loan of securities itself is not
prohibited under section 406(a) of ERISA.
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6. When a loan is collateralized with cash, MSTC, at the plan's
direction, will either transfer such cash collateral to the client-plan
or its designated agent for investment or shall invest the cash in
short-term securities or interest-bearing accounts and, in either case,
will rebate a portion of the earnings on such collateral to the MS
Group on behalf of the client-plan. The MS Group will pay a fee to the
client-plan based on the value of the loaned securities where the
collateral consists of obligations other than cash. Under Plan A and,
in some instances, under Plan B (see paragraph 27 regarding the types
of lending services which may be provided to plans by MSTC under Plan
B), the client-plan will pay a fee to MSTC for providing lending
services to the plan which will reduce the income earned by the client-
plan from the lending of securities to the MS Group. The client-plan
and MSTC will agree in advance to this fee which will represent a
percentage of the income the client-plan earns from its lending
activities. Several safeguards, described more fully below, are
incorporated in the application in order to ensure the protection of
the client-plan assets involved in the transactions. In addition, the
applicants represent that each of the two arrangements incorporates the
relevant conditions contained in PTE 81-6 and PTE 82-63.
7. Plan A. A fiduciary of a client-plan who is independent of MSTC
and The MS Group will sign a securities lending authorization (the
Authorization) before the client-plan may participate in MSTC's
securities lending program. This Authorization describes the operation
of the lending program and allows MSTC to lend securities held by the
client-plan to securities brokers, including the MS Group, as selected
by MSTC. The Authorization also sets forth, in an attachment, the basis
and rate for MSTC's compensation from the client-plan for the
performance of securities lending services.
8. The independent fiduciary also must sign an Affiliated Broker-
Dealer Lending Authorization before MSTC may include security loans to
the MS Group in the lending activities of the client-plan. The
Affiliated Broker-Dealer Lending Authorization will specify, in an
attached exhibit, the method of determining the daily securities
lending rates (fees and rebates), the minimum lending fees payable by
the MS Group and the maximum rebate rate payable to the MS Group. A
client-plan may terminate both the Authorization and the Affiliated
Broker-Dealer Lending Authorization at any time.
9. MSTC, as securities lending agent, will negotiate a Customer
Securities Loan Agreement (Basic Loan Agreement) with the MS Group on
behalf of its client-plans. An independent fiduciary of the client-plan
will approve the form of the agreement before that fiduciary executes
the Affiliated Broker-Dealer Lending Authorization. The Basic Loan
Agreement will specify, among other things, the right of the client-
plan to terminate a loan at any time (subject to the customary
notification period) and the client-plan's rights in the event of any
default by the MS Group. The agreement will explain the basis for
compensation to the client-plan for lending securities to the MS Group
under each category of collateral. The agreement will also contain a
requirement that the MS Group must pay all transfer fees and transfer
taxes related to the security loans.
10. Before entering into the Basic Loan Agreement, the MS Group
will furnish its most recent publicly available audited and unaudited
financial statements to MSTC, who, in turn, will provide such
statements to a client-plan before the plan is asked to approve the
terms of the Basic Loan Agreement. The Basic Loan Agreement will
contain a requirement that the MS Group must give prompt notice at the
time of a loan of any material adverse changes in its financial
condition since the date of the most recently furnished financial
statements. If any such changes have taken place, MSTC will request
that an independent fiduciary of the client-plan approve the loan in
view of the changed financial condition.
[[Page 41121]]
11. The client-plan and MSTC will agree to the fee MSTC will
receive for its services as lending agent prior to the commencement of
any lending activity. The agreement by MSTC to provide securities
lending services to a client-plan will be in writing and subject to the
prior written approval of a fiduciary of the client-plan who is
independent of the MS Group and MSTC.3 The Basic Loan Agreement
will allow termination by the client-plan without penalty to the plan
within five business days of written notice. Before entering into an
agreement, MSTC will provide the client-plan with any reasonably
available information which it believes is necessary for the plan to
make a determination whether to enter into or renew the agreement and
such other information as the plan may request.
\3\ This closely parallels conditions c and d of PTE 82-63 which
require that the payment of compensation to a ``lending fiduciary''
is made under a written instrument and is subject to prior written
authorization of an independent ``authorizing fiduciary''.
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12. Each time a client-plan loans securities to the MS Group
pursuant to the Basic Loan Agreement, the MS Group will execute a
designation letter specifying the material terms of the loan, including
the securities to be loaned, the required level of collateral, the fee
or rebate payable, and any special delivery instructions. The terms of
each loan will be at least as favorable to the client-plan as those of
a comparable arm's-length transaction between unrelated parties.
13. MSTC will credit to the account of the client-plan all
interest, dividends and the like received on the loaned securities
during the loan period, including distributions and rights of any kind.
The Basic Loan Agreement will provide that the client-plan may
terminate any loan at any time. Upon a termination, the MS Group will
return the loaned securities to the client-plan within five business
days of written notification. If the MS Group fails to return the
securities within the designated time, the client-plan has certain
rights that it may exercise under the Basic Loan Agreement.
14. MSTC will establish each day separate written schedules of
lending fees and rebate rates to assure uniformity of treatment among
borrowing brokers and to limit the discretion MSTC would have in
negotiating securities loans to the MS Group. Loans to all borrowers of
a given security on that day will be made at rates or lending fees on
the relevant daily schedules or at rates or lending fees which may be
more advantageous to the client-plans. In no case will loans be made to
the MS Group at rates or lending fees less advantageous to the client-
plan than those on the schedule. The daily schedule of rebate rates
will be based on the current value of the clients' reinvestment
vehicles and on market conditions, as reflected by demand for
securities by borrowers other than the MS Group. As with rebate rates,
the daily schedule of lending fees will also be based on market
conditions, as reflected by demand for securities by borrowers other
than the MS Group, and will generally track the rebate rates with
respect to the same security or class of securities.
15. MSTC will adopt maximum daily rebate rates for cash collateral
payable to the MS Group on behalf of a lending plan. Separate maximum
daily rebate rates will be established with respect to loans of
designated classes of securities such as U.S. government securities,
U.S. equities and corporate bonds, international fixed income
securities and international equities. With respect to each designated
class of securities, the maximum rebate rate will be the lower of (i)
the 7 day LIBOR rate, minus a stated percentage of such LIBOR rate and
(ii) the client's actual reinvestment rate for the relevant cash
collateral, minus a stated percentage of such reinvestment rate, as
pre-approved by the independent fiduciary. Thus, when cash is used as
collateral, the daily rebate rate will always be lower than the rate of
return to the client-plans from authorized investments for cash
collateral by such stated percentage as shall be pre-approved by the
independent fiduciary. MSTC will submit the formula for determining the
maximum daily rebate rates to an independent fiduciary of the client-
plan for approval before lending any securities to the MS Group on
behalf of the plan.
16. MSTC will also adopt minimum daily lending fees for non-cash
collateral payable by the MS Group to MSTC on behalf of a plan.
Separate minimum daily lending fees will be established with respect to
loans of designated classes of securities, such as U.S. government
securities, U.S. equities and corporate bonds, international fixed
income securities and international equities. With respect to each
designated class of securities, the minimum lending fee will be stated
as a percentage of the principal value of the loaned securities. MSTC
will submit such minimum daily lending fees to an independent fiduciary
to the client-plan for approval before initially lending any securities
to the MS Group on behalf of the plan.
17. For collateral other than cash, the lending fees charged the
previous day are reviewed by MSTC for competitiveness. Based on the
demand of the marketplace, this daily fee tends to remain constant and,
with respect to domestic securities and international debt securities,
is currently at least one tenth of one percent of the principal value
of the loaned securities. With respect to international equity
securities, the daily fee is currently one fifth of one percent of the
principal value of the loaned securities. Because 50 percent or more of
securities loans by client-plans will be to unrelated brokers or
dealers,4 the competitiveness of MSTC's fee schedule will be
continuously tested in the marketplace. Accordingly, loans to the MS
Group should result in a competitive rate of income to the lending
client-plan.
\4\ This 50 percent requirement applies regardless of the type
of collateral used to secure the loan.
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18. Should MSTC recognize prior to the end of a business day that,
with respect to new and/or existing loans, it must change the rebate
rate or lending fee formula in the best interest of client-plans, it
may do so (i) with respect to borrowers other than the MS Group, at the
end of such business day, and (ii) with respect to the MS Group, upon
MSTC's receipt of a written approval of the client-plan's independent
fiduciary.5
\5\ MSTC represents that it will not initiate any modification
in such rates or fees which would be detrimental to the client-
plans.
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MSTC may propose a change in the lending fee or rebate rate
determination, as applicable, with respect to an outstanding loan by
delivering written notice of the effective date and the new
determination pursuant to which a lending fee or rebate rate, as the
case may be, may be determined at least five business days before the
date of the proposed change. In the event that the client-plan does not
consent to such change by not providing MSTC acknowledgement of its
consent in writing by such means that will ensure receipt by MSTC prior
to 10:00 a.m. New York time, on the effective date of the change, then
MSTC will not make such change. The applicants represent that allowing
MSTC to request a modification to the lending fee or the rebate rate
formula with respect to an existing loan to the MS Group when market
conditions change will be beneficial to the client-plans. According to
the applicants, in the absence of the ability to make such
modification, the MS Group may be forced by market conditions to
terminate the loan and seek better terms elsewhere. Such termination
may then force the client-
[[Page 41122]]
plan to seek new borrowers for its securities who, in light of the
changed market conditions, are likely to negotiate for the lending fee
or rebate rate which the MS Group would have received or paid had MSTC
had the written authority from the independent fiduciary to decrease
the lending fee or increase the rebate rate.
19. While MSTC will normally loan securities to requesting
borrowers on a first come, first served basis, as a means of assuring
uniformity of treatment among borrowing brokers, it should be
recognized that in some cases it may not be possible to adhere to a
first come, first served allocation. This can occur, for example, in
instances where (a) the credit limit established for a ``first in
line'' borrower by the client-plan has already been satisfied; (b) the
``first in line'' borrower is not approved as a borrower by the
particular client-plan whose securities are sought to be borrowed; or
(c) the ``first in line'' borrower cannot be ascertained, as an
operational matter, because several borrowers spoke to differed MSTC
representatives at or about the same time with respect to the same
security. In situation (a) and (b), loans would normally be effected
with the ``second in line'' borrower. In situation (c), securities
would be allocated equitably among all eligible borrowers.
20. MS&Co will indemnify each lending client-plan against any
losses due directly to the lending of such plan's securities to the MS
Group. Accordingly, MS&Co will assure the client-plan that the rate of
return on each loan will at a minimum equal the transactional cost to
the plan of lending securities to The MS Group. The applicants contend
that, as a result of this indemnity, the rate of return earned by
client-plans from lending to the MS Group will, in total, exceed the
return from lending securities to other brokers.
21. By the close of business on the day the loaned securities are
delivered to the MS Group, MSTC will receive from the MS Group non-cash
collateral by physical delivery or book entry in a securities
depository, or, cash collateral by wire transfer or book entry. At the
discretion of the client-plan, cash collateral may be managed either by
the plan, by its designated agent or by MSTC. If a client-plan chooses
to manage its cash collateral, MSTC will promptly forward the cash
collateral to the client-plan. The non-cash collateral will consist of
securities issued or guaranteed by the U.S. Government or its agencies
or irrevocable bank letters of credit (issued by a person other than
MS&Co or its affiliates) or other collateral permitted under PTE 81-6
or any successor. The market value of the collateral on the day the
loan settles will be at least 102 percent of the market value of the
loaned securities. The Basic Loan Agreement will give the client-plan a
continuing security interest in and a lien on the collateral. MSTC will
monitor the level of the collateral daily. If the market value of the
collateral falls below 100 percent of that of the loaned securities,
MSTC will require the MS Group to deliver by the close of business the
next day sufficient additional collateral to bring the level back to at
least 102 percent.
22. A client-plan that loans securities to the MS Group will
receive a weekly report with which to monitor lending activity, rates
on loans to the MS Group compared with loans to other brokers, and the
level of collateral on the loans. The weekly report will show, on a
daily basis, the market value of all outstanding security loans to the
MS Group and to other borrowers as compared to the total collateral
held for both categories of loans.
23. The weekly report will state the daily fees where collateral
other than cash is utilized and will specify the details used to
establish the daily rebate payable to all brokers where cash is used as
collateral. The weekly report also will state, on a daily basis, the
rates at which securities are loaned to the MS Group compared with
those at which securities are loaned to other brokers. This statement
will give an independent fiduciary information which can be compared to
that contained in the daily rate schedule.
24. MSTC will send a monthly transaction report to each client-plan
participating in the lending program. The monthly report will provide a
list of all security loans outstanding and closed for a specified
period. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rate at which the
security is loaned, and the number of days the security has been on
loan.
25. Only client-plans with assets having an aggregate market value
of at least $50 million will be permitted to lend securities to the MS
Group. The applicants maintain that this restriction is intended to
assure that any lending to the MS Group will be monitored by an
independent fiduciary of above average experience and sophistication in
matters of this kind.
26. MSTC will record on audio tape all telephone traffic between
its securities lending department and all borrowers, including the MS
Group. The telephone tapes will be retained for a period of at least
six months. This recording procedure will enable client-plans and the
Department to review MSTC's adherence to its policy of lending
securities to the first interested borrower at rates or lending fees on
the daily schedule, or at rates or lending fees which are more
advantageous to the client-plans.
27. Plan B. MS&Co will directly negotiate ``exclusive borrowing''
agreements with fiduciaries of plans, including plans for which MSTC
serves as custodian or in the future may serve as directed trustee,
where such fiduciary is independent of the MS Group and MSTC. Under
such an agreement, the MS Group will have exclusive access for a
specified period of time to borrow certain securities of the plan
pursuant to certain conditions. MSTC will not participate in the
negotiation of the agreement. The involvement of MSTC, if any, will be
limited to such activities as holding securities available for lending,
handling the movement of borrowed securities and collateral and
investing or depositing any cash collateral and supplying the plans
with certain reports. The applicants represent that, under the
exclusive borrowing agreement, neither the MS Group nor MSTC will
perform for client-plans the functions which constitute the essential
functions of a securities lending agent.
28. Upon delivery of loaned securities to the MS Group, MSTC, or
another custodian, on behalf of a client-plan, will receive from the MS
Group, the same day by wire transfer or book entry cash collateral or,
by physical delivery or book entry in a securities depository,
collateral consisting of securities issued or guaranteed by the U.S.
Government or its agencies, irrevocable bank letters of credit, or
other non-cash collateral permitted under PTE 81-6. The market value of
the collateral on the day the loan settles will be at least 102 percent
of the market value of the loaned securities. MSTC or such other
custodian will monitor the level of the collateral daily and, if its
market value falls below 100 percent, the MS Group will deliver
sufficient additional collateral on the following day such that the
market value of all collateral will equal at least 102 percent of the
market value of the loaned securities. The MS Group or, in the case of
some client plans, MSTC, will provide a weekly report to the plan
showing, on a daily basis, the aggregate market value of all
outstanding security loans to the MS Group and the aggregate market
value of the collateral.
29. Before entering into an exclusive borrowing agreement, the MS
Group will furnish to the plan the most recent
[[Page 41123]]
publicly available audited and unaudited statements of its financial
condition. Further, the agreement will contain a representation by the
MS Group, as provided in section 18(c)(ii) of the Securities Lending
Agreement, that as of each time it borrows securities, there have been
no material adverse changes in its financial condition. All the
procedures under the agreement will, at a minimum, conform to the
applicable provisions of PTE 81-6 and PTE 82-63.
30. In exchange for the exclusive right to borrow certain
securities from a client-plan, the MS Group will pay the plan either a
flat fee, or a minimum flat fee plus a percentage (negotiated at the
time the exclusive borrowing agreement is entered into) of the total
balance outstanding of borrowed securities, or a percentage of the
total balance outstanding without any flat fee. In light of this fee
arrangement, all earnings generated by cash collateral will be returned
to the MS Group. The client-plan will receive credit for all interest
dividends or other distributions on any borrowed securities.
31. The exclusive borrowing agreement may be terminated by either
party to the agreement at any time. MS&Co will agree that upon
termination it will deliver any borrowed securities back to the client-
plan within five business days of written notice of termination. If the
MS Group fails to return the securities or the equivalent thereof, the
client-plan will have certain rights under the agreement to realize
upon the collateral. Pursuant to the terms of the agreement, the MS
Group will indemnify the plan against any losses due to its use of the
borrowed securities equal to the difference between the replacement
cost of the securities and the market value of the collateral on the
date a loan is declared to be in default.
32. With regard to those plans for which MSTC provides custodial,
clearing and/or reporting functions relative to securities loans, MSTC
and a plan fiduciary independent of MSTC and the MS Group will agree in
advance and in writing to any fee that MSTC is to receive for such
services. Such fees, if any, would be fixed fees (e.g., MSTC might
negotiate to receive a fixed percentage of the value of the assets with
respect to which it performs these services or to receive a stated
dollar amount) and any such fee would be in addition to any fee MSTC
has negotiated to receive from any such client-plan for standard
custodial or other services unrelated to the securities lending
activity. The arrangement to have MSTC provide such functions relative
to securities loans to the MS Group will be terminable by the client-
plan within five business days of receipt of written notice without
penalty to the plan except for the return to the MS Group of part of
any flat fee paid by the MS Group to the plan, if the client-plan has
also terminated its exclusive borrowing agreement with the MS Group.
Before entering into an agreement with a plan to provide such functions
relative to securities loans to the MS Group, MSTC will furnish to the
plan any publicly available information which it believes is necessary
for the plan to determine whether to enter into or renew the agreement.
33. In summary, the applicants represent that the described
transactions satisfy the statutory criteria of section 408(a) of the
Act because: (a) Plan A requires approval of the form of a basic loan
agreement and the execution of the Affiliated Broker-Dealer Lending
Authorization by a plan fiduciary independent of the MS Group and MSTC
before a client-plan lends any securities to the MS Group, while under
Plan B, The MS&Co will directly negotiate exclusive borrowing
agreements with a client-plan; (b) the lending arrangements will permit
the client-plans to benefit from the MS Group's substantial market
position as securities lenders and will enable the plans to earn
additional income from the loaned securities while still receiving
dividends, interest and other distributions on those securities; (c)
the client-plan will receive sufficient information concerning the MS
Group's financial condition before the plan lends any securities to the
MS Group; (d) the collateral on each loan to the MS Group initially
will be at least 102 percent of the market value of the loaned
securities, which is in excess of the 100 percent collateral required
under PTE 81-6, and will be monitored daily by MSTC; (e) the client-
plans will receive a weekly report and monthly report, so that an
independent fiduciary of the client-plans also may monitor loan
activity, fees, the level of the collateral and loan return/yield; (f)
MSTC will have no discretionary authority or control over the plan's
acquisition or disposition of securities available for loan; (g) the
terms of each loan will be at least as favorable to the plans as those
of a comparable arm's-length transaction between unrelated parties; and
(h) all the procedures under the proposed transactions will, at a
minimum, conform to the applicable provisions of PTE 81-6 and PTE 82-
63.
FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Central Freight Lines Employees Profit Sharing and Retirement Plan (the
Plan) Located in Waco, TX
[Application No. D-09994]
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 2570,
Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is
granted, the restrictions of section 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) shall
not apply to the proposed cash sale by the Plan of certain unimproved
real property (the Property) to Central Freight Lines, Inc. (the
Employer), a party in interest with respect to the Plan.
This proposed exemption is conditioned upon the following
requirements: (1) All terms and conditions of the sale are at least as
favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party; (2) the sale is a one-time
transaction for cash; (3) the Plan is not required to pay any real
estate commissions or fees in connection with the proposed transaction;
and (4) the Plan receives a sales price for the Property which is not
less than the greater of (a) the fair market value of the Property as
determined by a qualified, independent appraiser, or (b) the net
acquisition cost of the Property.
Summary of Facts and Representations
1. The Plan is a defined contribution plan with 3,149 participants
and net assets available for benefits of approximately $103,639,097 as
of December 31, 1994. The trustee of the Plan and decisionmaker with
respect to Plan investments is A.G. Edwards Trust Company of St. Louis,
Missouri.
2. The Employer, which maintains its general offices in Waco,
Texas, is a trucking company that is involved in the transportation and
delivery of freight throughout the midwestern and southwestern United
States. The Employer is a wholly-owned subsidiary of Roadway Services,
Inc. (Roadway), a publicly-owned trucking company which maintains its
corporate offices in Akron, Ohio.
3. Prior to 1989, the Plan, through two separate purchases,
acquired a 38.810 acre tract of undeveloped land for a total purchase
price of $1,495,352. The
[[Page 41124]]
Property is located on the northwest side of Spur 482 (Storey Lane) and
approximately 1,500 feet northeast of State Highway 114 in the City of
Irving, Dallas County, Texas. The Property adjoins the Employer's
Dallas freight terminal.
The Plan acquired the Property for investment purposes from
unrelated parties. On July 12, 1976, the Plan purchased 36.464 acres of
land (Tract A) from the University of Dallas. The Plan paid a purchase
price of $1,284,009 for Tract A and closing costs of $697. Thus, the
total acquisition price paid by the Plan for Tract A was $1,284,706.
On August 1, 1980, the Plan purchased 1.928 acres of adjoining land
(Tract B) from Jack H. Beachum. The Plan paid a purchase price for
Tract B of $210,624 plus closing costs of $22. Thus, the total
acquisition price paid by the Plan for Tract B was $210,646.6
6 The Department notes, that the dimensions of Tract A and
Tract B, if aggregated, equal 38.392 acres instead of 38.810 acres.
In attempting to explain this discrepancy, the applicant has advised
that the subject Property does consist of 38.810 acres of land based
on a survey of the Tracts. The applicant attributes the size
references and legal descriptions of Tract A and Tract B to ``old
field notes.'' When the Property was subsequently surveyed, the
applicant states that either the dimensions of the Tracts,
individually, or when taken together, were larger than originally
thought.
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4. On December 30, 1983, the Plan sold the Property to FrittsSesler
Investments, Inc. (FrittsSesler), a real estate investment company and
an unrelated party, for $4,226,418. The terms of the sale provided for
a cash downpayment of $845,284 with the balance to be paid over 10
years. The unpaid portion of the purchase price was evidenced by a
promissory note in the amount of $3,381,134. The note carried interest
at 11 percent interest per annum and provided for interest only
payments for the first 5 years and payments of principal and interest
for the last 5 years of the loan. The note was secured by a deed of
trust on the Property.
From the date of closing until January 1987, the Plan received
$845,284 in principal and $1,115,774 in interest on the note. In 1987,
FrittsSesler defaulted on the note. The note was then accelerated and
the Property was posted for foreclosure. In January 1988, the Property
was deeded back to the Plan by a Deed in Lieu of Foreclosure. At the
time of the foreclosure, an appraisal completed of the Property on
January 13, 1988 by Messrs. Scott D. Evans, Associate Appraiser, and
Mr. Ronald W. Potts, MAI, SRPA, independent appraisers affiliated with
Cushman & Wakefield of Texas, Inc., located in Dallas, Texas, placed
the fair market value of the Property at $4,280,000.
5. It is represented that the Property has never been used by or
leased to parties in interest since its initial acquisition and
reacquisition by the Plan. It is also represented that the Plan has
incurred certain costs totaling $512,598 in connection with its
reacquisition of the Property. These costs represent expenses of
$58,942 that are associated with the Plan's acceptance of the Deed in
Lieu of Foreclosure; $90 for closing costs; and $453,566 for real
estate taxes.
6. Since repossessing the Property, the Plan has continually
advertised it for sale. However, due to the depressed real estate
market in the State of Texas and because of changes in growth patterns
of the Dallas-Fort Worth area, no interest has been expressed in
purchasing the Property. In addition, the Property has generated no
income to the Plan and has declined in value. Therefore, the Employer
requests an administrative exemption from the Department in order that
it may purchase the Property from Plan. The proposed sales price for
the Property will represent not less than the greater of the (a) fair
market value of the Property as determined by a qualified, independent
appraiser or (b) $46,892 representing the net acquisition cost of the
Property.7
7 The $46,892 net acquisition cost of the Property is
determined as follows: $2,007,950 [representing the total
acquisition price plus certain costs incurred by the Plan since its
reacquisition of the Property (i.e., $1,495,352+$512,598)] minus
$1,961,058 [representing the total revenues received by the Plan for
the Property (i.e., $845,284+$1,115,774)].
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7. The Employer has obtained an independent appraisal of the
Property from Bill C. Dotson, MAI and Richard S. Neely, Associate
Appraiser, independent appraisers affiliated with the Alliance
Appraisal Group, Inc. of Dallas, Texas. In an appraisal report dated
January 16, 1995, Messrs. Dotson and Neely have placed the fair market
value of the Property at $1,270,000 as of January 3, 1995.
In an addendum to the appraisal report dated July 13, 1995, Mr.
Dotson states that he has re-analyzed the initial valuation of the
Property to determine whether there is any assemblage value due to the
proximity of the Property to other real property owned by the Employer.
In making this determination, Mr. Dotson represents that he has
considered (a) the Employer's existing facility which he believes is in
no need for further expansion, (b) larger tracts of commercial land in
the vicinity of the Property for which he can ascertain no significant
assemblage value and (c) the valuation adage that ``Property is worth
more to the adjacent owner than to a third party.'' He notes that for
the adage to be true, there has to be a proven demand for the property
for there to be assemblage value. In his opinion, the Employer has not
shown a demand factor over and above common market forces.
Mr. Dotson asserts that the subject Property is a stand alone tract
which can be utilized for a number of purposes. In his view, the
Property is not co-dependent on any other tracts of land for frontage,
access or visibility. Thus, Mr. Dotson concludes that the Property has
no assemblage or premium value by reason of its proximity to other
existing real property that is owned by the Employer.
8. Because the fair market value of the Property is greater than
its net acquisition cost, the Plan will sell the Property to the
Employer for $1,270,000. The Employer will pay the consideration to the
Plan in cash. In addition, the Plan will not be required to pay any
real estate fees or commissions in connection with the proposed sale.
9. In summary, it is represented that the proposed transaction will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because: (a) All terms and conditions of the sale will be at
least as favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party; (b) the sale will be a one-time
transaction for cash; (c) the Plan will not be required to pay any real
estate commissions or fees in connection with the proposed sale; and
(d) the Plan will receive a sales price for the Property which is not
less than the greater of (i) the fair market value of the Property as
determined by a qualified, independent appraiser, or (ii) the net
acquisition cost of the Property.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
persons within 5 days of the date of publication of the notice of
pendency in the Federal Register. Notice will be posted at the
Employer's work sites. Such notice will 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. Comments with
respect to the notice of proposed exemption are due within 35 days
after the date of publication of this proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
[[Page 41125]]
telephone (202) 219-8881. (This is not a toll-free number.)
Donald D. Busker Individual Retirement Account (the IRA) Located in
Detroit Lakes, Minnesota
[Application No. D-10005]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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 sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to
the proposed cash sale of two parcels of unimproved real property (the
Properties) by the IRA to Donald D. Busker, a disqualified person with
respect to the IRA 8 provided the following conditions are met:
\8\ Pursuant to 29 CFR 2510.3-2(d), there is no jurisdiction
with respect to the IRA under Title I of the Act. However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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(a) The sale is a one-time transaction for cash;
(b) The terms and conditions of the sale are at least as favorable
to the IRA as those obtainable in an arm's-length transaction with an
unrelated party;
(c) The IRA receives the fair market value of the Properties as
established at the time of the sale by an independent qualified
appraiser; and
(d) The IRA is not required to pay any commissions, costs or other
expenses in connection with the sale.
Summary of Facts and Representations
1. The IRA is an individual retirement account, as described under
section 408(a) of the Code, which was established by Donald D. Busker
(Mr. Busker). As of June 14, 1995, the IRA had assets valued at
$362,470. The trustee of the IRA is the First Trust Company of North
Dakota, N.A.
2. The applicants states that a portion of the IRA's existing
assets, including the Properties, were obtained from a rollover of
assets received by Mr. Busker in 1990 from distributions to which he
was entitled as a participant in the Country Equities Inc. Retirement
Plan (the CER Plan). The applicant states further that the CER Plan had
received such assets from prior rollovers made to Mr. Busker from the
Donald D. Busker and Associates Pension Trust (the Busker Pension
Plan), which had been terminated in January 1982.
The Properties consist of two parcels of unimproved real property.
The first parcel (Property I) is located in Shell Lake Township in
Becker County, east of Detroit Lakes, Minnesota. Property I consists of
approximately eighty acres of unimproved wooded lowland in a fairly
remote part of Becker County. The applicant states that access to
Property I is available by easement over county land to the south.
The second parcel (Property II) is located near Frazee, Minnesota,
on Murphy and Silver Lakes in Gorman Township, Otter Tail County.
Property II currently consists of approximately 144 acres of unimproved
land, part of which is zoned for agricultural conservation and part of
which is zoned for potential development as a recreational area. In
this regard, the applicant states that approximately 53 acres on
Property II are part of the Conservation Reserve Program (CRP), a U.S.
Government subsidy program for farmland that is not being used for
agricultural purposes. In addition, part of the remaining acres which
comprise Property II are located adjacent to Murphy Lake and are
available for recreational uses. However, the applicant states that
only about 3000 feet of this part of Property II is useable and that
the remaining parts of Property II adjacent to the lakes are not
currently capable of development because the land is excessively low
and wet.
Mr. Busker represents that he does not own any land which is
adjacent to either of the Properties and that the Properties have not
been leased to or used by any disqualified person.
3. The Properties were originally acquired as a real estate
investment by the Busker Pension Plan. The applicant states that the
Properties were acquired from unrelated parties in two separate cash
transactions. Specifically, Property I was acquired by the Busker
Pension Plan in 1978 for $4,250. Property II was acquired in 1978 as
part of a larger parcel of real estate, which included a residential
house and other improvements, for a total of $98,500 (the Original
Property II). Portions of the Original Property II were subsequently
platted for development and, along with the house, sold by the Busker
Pension Plan to unrelated parties. However, Mr. Busker has not been
able to sell the remaining portions of the Original Property II,
currently owned by the IRA (i.e. Property II as described above). The
applicant states that parts of Property II have also been platted for
possible sale as separate parcels. The applicant states further that
the IRA has received approximately $2992 in CRP subsidy payments as a
result of its ownership of the acres on Property II which are subject
to the CRP subsidy program.
4. Roger K. Tinjum, an accredited rural appraiser associated with
Tinjum Appraisal Company, located in Detroit Lakes, Minnesota,
appraised the Properties in December 1993 and updated his appraisal in
June 1995. Mr. Tinjum states that he is a qualified real estate
appraiser with over thirty years of experience and is familiar with the
Properties and other similar properties located in the area. In
addition, Mr. Tinjum represents that both he and his firm are
independent of, and unrelated to, Mr. Busker.
Mr. Tinjum's appraisal of the Properties relied primarily on the
market approach, with an analysis of recent sales of similar properties
in the area, to establish the fair market value of the Properties. Mr.
Tinjum states that his analysis took into consideration the potential
of the Properties for further development. In this regard, Mr. Tinjum
represents that the highest and best use for the Properties would be
recreational use. Based on this analysis, Mr. Tinjum concluded that the
fair market values of Property I and Property II were $20,000 and
$72,000, respectively, as of December 10, 1993.
By letter dated June 15, 1995, Mr. Tinjum states that the present
fair market value of the Properties has not changed since December 10,
1993.
The applicant states that Mr. Tinjum will update his appraisal of
the Properties at the time of the proposed transaction to establish
their fair market value. Such appraisal will take into consideration
any recent sales of comparable properties in the area since the date of
Mr. Tinjum's last appraisal.
5. The applicant requests an exemption for the proposed sale of the
Properties by the IRA to Mr. Busker. As noted above, the IRA would
receive cash in exchange for the Properties in an amount equal to the
fair market value of the Properties, as determined by an independent,
qualified appraiser at the time of the transaction.
The applicant represents that the proposed transaction would be in
the best interests of the IRA because it would allow the IRA to dispose
of the Properties, which at the present time are illiquid investments
which have not been appreciating in value, and reinvest the sale
proceeds in more liquid investments which would offer greater returns.
The applicant states that the terms and conditions of the sale would be
at least as favorable to the IRA as the terms and condition which the
IRA could obtain in an arm's-length transaction with an unrelated
party. The applicant states further that the IRA
[[Page 41126]]
would not pay any commissions or other expenses in connection with the
transaction.
6. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria of section 4975(c)(2) of
the Code because: (a) The terms and conditions of the sale would be at
least as favorable to the IRA as those obtainable in an arm's-length
transaction with an unrelated party; (b) the sale would be a one-time
cash transaction which would allow the IRA to dispose of illiquid
assets which have not been appreciating in value; (c) the IRA would
receive the fair market value of the Property, as established at the
time of the sale by an independent, qualified appraiser; (d) the IRA
would not be required to pay any commissions, costs or other expenses
in connection with the sale; and (e) Mr. Busker has determined that the
proposed sale of the Properties would be in the best interests of the
IRA.
NOTICE TO INTERESTED PERSONS: Because Mr. Busker is the only
participant in the IRA, it has been determined that there is no need to
distribute the notice of proposed exemption to interested persons.
Comments and requests for a hearing are due thirty (30) days after
publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Profit Sharing Plan for Employees of Athens Disposal Co., Ranco
Leasing, Covina Disposal Co., and South Pasadena Disposal Co. (the
Plan), Located in City of Industry, California
[Application No. D-10029]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a) and 406 (b)(1) and
(b)(2) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1) (A) through
(E) of the Code shall not apply to the cash sale on March 24, 1994, for
$300,000 (the Sale) of 7,500 shares (the Shares) of common stock issued
by Garfield Bank (the Bank), chartered in California and located in
Montebello, California, by the Plan to Athens Disposal Co., Inc., a
party in interest with respect to the Plan; provided that (1) the Plan
experienced no loss nor incurred any expense from the Sale; and (2) the
Plan received as consideration from the Sale an amount that was no less
than the fair market value of the Shares on the date of the Sale.
EFFECTIVE DATE: If this proposed exemption is granted, the effective
date of the exemption will be March 24, 1994.
Summary of Facts and Representations
1. There are three closely-held corporations that currently sponsor
the Plan (the Employers) that are all incorporated in California and
are wholly owned by various members of the Arakelian family. One of the
three corporations that make up the Employers is the Athens Disposal
Co., Inc. (the Applicant), incorporated on July 1, 1958, which is
headquartered in City of Industry, California and is engaged in the
business of municipal solid waste collection and disposal. The second
of the Employers is the South Pasadena Disposal Co., Inc. (South
Pasadena), incorporated September 5, 1992, which provides the same
services as the Applicant for the City of Pasadena, California. The
third member of the Employers is the Ranco Leasing Co., Inc. (Ranco),
incorporated November 21, 1981, which owns rubbish collection vehicles
that it leases to the Applicant and to South Pasadena and provides
fleet maintenance services for the leased vehicles.9
9 Covina Disposal Co., Inc., incorporated in California on
October 3, 1985, a wholly-owned subsidiary of the Applicant, had
been another sponsor of the Plan, but was liquidated on June 30,
1990, and had its assets and liabilities distributed to the
Applicant with its participants in the Plan absorbed by the
Applicant.
---------------------------------------------------------------------------
2. The Plan is a profit sharing plan that maintains individual
accounts for its 254 participants and beneficiaries with net assets of
$4,975,373, as of June 30, 1994. The Plan is intended to satisfy the
qualification requirements of section 401(a) of the Code. The named
fiduciary of the Plan is a committee (the Committee) currently
consisting of two individuals, Messrs. Ron Arakelian and Ron Arakelian,
Jr., who are controlling shareholders as well as officers and directors
of the Applicant. The Committee is appointed by the Board of Directors
of the Applicant and charged with the responsibility to administer the
Plan, which includes among other things directing investments of Plan
assets and appointing legal counsel, accountants, plan administrator,
and trustees.
The Committee has employed and delegated responsibility for
administering the accounting and recordkeeping services for the Plan to
Page Services Corporation, a California corporation, located in Los
Angeles, California. Messrs. Ron Arakelian and Ron Arakelian, Jr. also
serve the Plan as the trustees (the Trustees) of its assets.
3. During the Plan's fiscal year ended June 30, 1985, the Applicant
conveyed the 7,500 Shares to the Plan as its $300,000 funding
contribution for the fiscal year.10 The Shares, originally
purchased by the applicant over a 10 year period at a price of $40 per
share, were determined to have a fair market value of $40 per share on
the date that they were contributed to the Plan.
\10\ The Applicant represents that the contribution of the
Shares was not a prohibited transaction under the Act. The
Department expresses no opinion as to whether the contribution was a
prohibited transaction.
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While the Plan continued to hold the Shares the Bank began
experiencing a poor financial performance resulting in net losses from
operations for the years ended December 31, 1993 and 1994. The poor
financial performance of the Bank was also manifested by limited
dividend payments of the Bank to the holders of the Shares. The only
dividend payments made to the Plan totalled $1,875 for each of the
years 1992 and 1993.
The Applicant represents that the Bank became the subject of
examinations during 1993 by both the Federal Reserve Bank (the FRB) and
the Superintendent of Banks for the State of California (the State).
The State completed its examination by September 24, 1993, whereas, the
FRB took an additional year to complete its examination on September
24, 1994. In preliminary letters in 1993 from both the FRB and the
State, the Bank was notified, among other things, that it was in an
unsafe and unsound condition with a continuing deterioration in asset
quality, an inadequate loan loss reserve, and a decline in capital and
liquidity. The FRB concluded that the continued deterioration in asset
quality threatened the already marginal capital position of the Bank
and negatively impacted on its future earnings prospects. The Applicant
further represents that the FRB reclassified the Bank as significantly
undercapitalized for purposes of federal regulations which resulted in
restrictions (a) on the ability of the Bank to pay dividends and
management fees; (b) on the growth of its total assets; and (c) on its
ability to expand through acquisitions, branching, or new lines of
business. According to the Applicant the State also issued an order to
the Bank that its capital is considered to be impaired as of September
30, 1994, which subjects the
[[Page 41127]]
Shares to assessment under certain circumstances and potential
forfeiture.
The common stock of the Bank was appraised on January 21, 1994, and
February 11, 1994, by an independent appraiser, Mr. Glenn Garlick,
Principal of Houlihan Valuation Appraisers located in Costa Mesa,
California. When making the appraisals Mr. Garlick understood that the
Applicant intended to purchase the Shares from the Plan at the greater
of either $40 per share or the fair market value based upon an
independent appraisal. In the February 11, 1994, appraisal, Mr. Garlick
concluded that without consideration of the intent of the applicant to
purchase the Shares, the fair market value of the Shares is not greater
than $27 per share.
The Applicant further represents that another indication of the
continued decline in the fair market value of the Shares was manifested
in the private placement offering of Units in March 1995 by the Bank to
individual subscribers for $10 per Unit. Each Unit consists of one
share of common stock of the Bank plus one five-year warrant
convertible into one share common stock for the additional
consideration of $10.
4. In order to eliminate the ever increasing risk associated with
the continued investment in the Shares by the Plan and to permit the
Plan to distribute or otherwise invest the original value of the assets
in the Plan, the Applicant on March 24, 1994, made a $300,000 cash
purchase of the Shares from the Plan. The Plan incurred no expenses or
commissions from the Sale. Furthermore, the Applicant represents that
the Plan was able to invest the proceeds from the Sale into more liquid
and income producing investments; such as, U.S. Treasury Bills, money
market accounts, and publicly traded common stock.
The Applicant represents that the Plan's elimination of the risks
inherent in the continued investment in the Shares by the Sale to the
Applicant was in the best interests of the Plan and its participants
and beneficiaries, and also served to protect the rights of the
participants and beneficiaries. The Trustees of the Plan made these
determinations based on their knowledge that the Bank was subject to
the FRB and State examinations and resulting enforcement actions
described above that presented significant risks to the Plan if it
continued to hold the Shares. In addition, the Trustees were motivated
to act because the Shares were providing little or no income for the
Plan, plus there was little or no likelihood that there would be income
received in the foreseen future by the Plan.
5. In summary, the applicant represents that the transaction
satisfies the criteria for an exemption under section 408(a) of the Act
because (a) the Plan received from the Applicant in a one-time
transaction cash in an amount that was no less than the fair market
value of the Shares on the date of the Sale; (b) the transaction
enabled the Plan and its participants and beneficiaries to avoid the
continuing risks associated with holding the Shares; (c) the Plan
incurred no loss or expense from the Sale; (d) the Trustees have
determined that the transaction was in the best interests of the Plan
and its participants and beneficiaries and was protective of their
rights under the Plan.
FOR FURTHER INFORMATION CONTACT: Mr. C. E. Beaver of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Banc One Capital Corporation (Banc One) Located in Columbus, OH
[Application No. D-10046]
Proposed Exemption
Section I. Transactions
A. Effective June 2, 1995, the restrictions of sections 406(a) and
407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of
the Code by reason of section 4975(c)(1) (A) through (D) of the Code
shall not apply to the following transactions involving trusts and
certificates evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to Subsection I.A. (1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded
Plan.11
11 Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(a)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective June 2, 1995, the restrictions of sections 406(b)(1)
and 406(b)(2) of the Act and the taxes imposed by section 4975 (a) and
(b) of the Code by reason of section 4975(c)(1)(E) of the Code shall
not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.12 For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
\12\ For purposes of this exemption, each plan participating in
a commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions
[[Page 41128]]
set forth in paragraphs B.(1) (i), (iii) and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Subsection I.B. (1) or (2).
C. Effective June 2, 1995, the restrictions of sections 406(a),
406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a)
and (b) of the Code by reason of section 4975(c) of the Code, shall not
apply to transactions in connection with the servicing, management and
operation of a trust, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to or described
in all material respects in the prospectus or private placement
memorandum provided to investing plans before they purchase
certificates issued by the trust.13
\13\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, Section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in Section III.S.
D. Effective June 2, 1995, the restrictions of sections 406(a) and
407(a) of the Act, and the taxes imposed by sections 4975 (a) and (b)
of the Code by reason of sections 4975(c)(1) (A) through (D) of the
Code, shall not apply to any transactions to which those restrictions
or taxes would otherwise apply merely because a person is deemed to be
a party in interest or disqualified person (including a fiduciary) with
respect to a plan by virtue of providing services to the plan (or by
virtue of having a relationship to such service provider described in
section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2)
(F), (G), (H) or (I) of the Code), solely because of the plan's
ownership of certificates.
Section II. General Conditions
A. The relief provided under Section I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D&P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Section I, if the provision of Subsection II.A.(6) above
is not satisfied with respect to acquisition or holding by a plan of
such certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in Subsection II.A.(6) above.
Section III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) A certificate--
(a) that represents a beneficial ownership interest in the assets
of a trust; and
(b) that entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) A certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) that is issued by and is an obligation of a trust; with respect
to certificates defined in (1) and (2) above for which Banc One or any
of its affiliates is either (i) the sole underwriter or the manager or
co-manager of the underwriting syndicate, or (ii) a selling or
placement agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either--
(a) secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in Section III.T);
(c) obligations that bear interest or are purchased at a discount
and which are secured by single-family residential,
[[Page 41129]]
multi-family residential and commercial real property (including
obligations secured by leasehold interests on commercial real
property);
(d) obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in Section III.U);
(e) ``guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this Section B.(1);
(2) Property which had secured any of the obligations described in
Subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in Subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) The investment pool consists only of
assets of the type which have been included in other investment pools,
(ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories
by S&P's, Moody's, D&P, or Fitch for at least one year prior to the
plan's acquisition of certificates pursuant to this exemption, and
(iii) certificates evidencing interests in such other investment pools
have been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption.
C. ``Underwriter'' means:
(1) Banc One;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
Banc One; or
(3) Any member of an underwriting syndicate or selling group of
which Banc One or a person described in (2) is a manager or co-manager
with respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services loans contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
[[Page 41130]]
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(1) Which is secured by equipment which is leased;
(2) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) With respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as the
trust would have if the equipment note were secured only by the
equipment and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust holds a security interest in the lease;
(2) The trust holds a security interest in the leased motor
vehicle; and
(3) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as the trust would receive
under a motor vehicle installment loan contract.
V. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. ``Banc One'' means Banc One Capital Corporation, an Ohio
corporation, and its affiliates.
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in Section V(h) of Prohibited Transaction Exemption (PTE) 95-60
(60 FR 35925, July 12, 1995), the Class Exemption for Certain
Transactions Involving Insurance Company General Accounts, at 35932.
Effective Date: If granted, this proposed exemption will be effective
for transactions occurring on or after June 2, 1995.
Summary of Facts and Representations
1. Banc One, formerly Meuse, Rinker, Chapman, Endres and Brooks, is
the wholly owned, separately capitalized investment banking subsidiary
of Banc One Corporation, a Columbus, Ohio-based holding company which
had assets of $88.9 billion as of December 31, 1994 and operates 69
affiliate banks with 1,418 offices in 12 states. Banc One Corporation
also owns and operates subsidiaries that engage in data processing,
trust, brokerage, investment management, equipment leasing, mortgage
banking, consumer finance and insurance.
Banc One was established in 1981 and it maintains its principal
place of business in Columbus, Ohio. Banc One has branch operations
located in Dallas, Milwaukee, Chicago, Indianapolis, Los Angeles,
Phoenix, Louisville and Washington, D.C. As a member of the National
Association of Securities Dealers, Banc One maintains a fixed income
securities brokerage for the initial placement and remarketing of
offerings originated by the firm as well as other issues traded in the
secondary market. As of December 31, 1994, Banc One had total assets of
$437,336,000.
Since 1988, Banc One has been securitizing assets ranging from
mobile home loans to development lots. Its professional staff has a
combined experience of working as an underwriter and financial advisor.
Banc One's investment bankers have extensive experience in creating
taxable and tax-exempt obligations having a wide range of structural
characteristics as well as security arrangements.
Banc One represents that it has the legal authority to underwrite
asset-backed securities. In an order dated July 16, 1990, the Federal
Reserve Board granted Banc One the power to underwrite and deal in
mortgage-backed securities and other asset-backed securities. This
order is subject to the condition that Banc One does not derive more
than 10 percent of its total gross revenues from such activities. In
addition, Banc One's affiliates have the power to sell interests in
their own assets in the form of asset-backed securities.
Trust Assets
2. Banc One seeks exemptive relief to permit plans to invest in
pass-through certificates representing undivided interests in the
following categories of trusts: (1) Single and multi-family residential
or commercial mortgage investment trusts; 14 (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts.15
\14\ The Department notes that PTE 83-1 (48 FR 895, January 7,
1983), a class exemption for mortgage pool investment trusts, would
generally apply to trusts containing single-family residential
mortgages, provided that the applicable conditions of PTE 83-1 are
met. Banc One and its affiliates request relief for single-family
residential mortgages in this exemption because it would prefer one
exemption for all trusts of similar structure. However, Banc One has
stated that it may still avail itself of the exemptive relief
provided by PTE 83-1.
\15\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation, or the
Federal National Mortgage Association. The Department's regulation
relating to the definition of plan assets (29 CFR 2510.3-101(i))
provides that where a plan acquires a guaranteed governmental
mortgage pool certificate, the plan's assets include the certificate
and all of its rights with respect to such certificate under
applicable law, but do not, solely by reason of the plan's holding
of such certificate, include any of the mortgages underlying such
certificate. The applicant is requesting exemptive relief for trusts
containing guaranteed governmental mortgage pool certificates
because the certificates in the trusts may be plan assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial mortgages are frequently
secured by ground leases on the underlying property, rather than by fee
simple interests. The separation of the fee simple interest and the
ground lease interest is generally done for tax reasons. Properly
structured, the pledge of the ground lease to secure a mortgage
provides a lender with the same level of security as would be provided
by a pledge of the related fee simple interest. The terms of the ground
leases pledged to secure leasehold mortgages will in all cases be at
least ten years longer than the term of such mortgages.16
\16\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. The sponsor or
servicer of a trust selects assets to be included in the trust. These
assets are receivables which may have been originated, in the ordinary
course of business, by a sponsor or servicer of the trust, an affiliate
of the sponsor or servicer, or by an unrelated lender and subsequently
acquired by the trust sponsor or servicer.
On or prior to the closing date, the sponsor acquires legal title
to all assets selected for the trust, establishes the trust and
designates an independent entity as trustee. On the closing date, the
sponsor conveys to the trust legal title to the assets and the trustee
issues certificates representing fractional undivided interests in the
trust assets. Banc One, or one or more broker-dealers (which may
include Banc One), acts as underwriter or placement agent with respect
to the sale of the certificates. All of the public offerings of
certificates presently contemplated have been or are to be underwritten
by Banc One on a firm commitment basis. In addition, Banc One
anticipates privately placing certificates on both a firm commitment
[[Page 41131]]
and an agency basis. Banc One may also act as the lead underwriter for
a syndicate of securities underwriters.
Certificateholders are entitled to receive monthly, quarterly or
semi-annual installments of principal and/or interest or lease payments
due on the receivables, adjusted, in the case of payments of interest,
to a specified rate--the pass-through rate--which may be fixed or
variable.
5. Some of the certificates will be multi-class certificates. Banc
One requests exemptive relief for two types of multi-class
certificates: ``strip'' certificates and ``fast-pay/ slow-pay''
certificates. Strip certificates are a type of security in which the
stream of interest payments on receivables is split from the flow of
principal payments and separate classes of certificates are
established, each representing rights to disproportionate payments of
principal and interest.17
\17\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying receivables are distributed first
to the class of certificates having the earliest stated maturity of
principal, and/or earlier payment schedule, and only when that class of
certificates have been paid in full (or has received a specified
amount) will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass- through arrangement and a single-class pass-through arrangement
is the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying assets. In neither case will the rights of a plan
purchasing a certificate be subordinated to the rights of another
certificateholder in the event of default on any of the underlying
obligations. In particular, if the amount available for distribution to
certificateholders is less than the amount required to be so
distributed, all senior certificateholders then entitled to receive
distributions will share in the amount distributed on a pro rata
basis.18
18 If a trust issues subordinated certificates, holders of such
subordinated certificates may not share in the amount distributed on
a pro rata basis with the senior certificateholders. The Department
notes that the exemption does not provide relief for plan investment
in such subordinated certificates.
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6. For tax reasons, the trust must be maintained as an essentially
passive entity. Therefore, both the sponsor's discretion and the
servicer's discretion with respect to assets included in a trust are
severely limited. Pooling and servicing agreements provide for the
substitution of receivables by the sponsor only in the event of defects
in documentation discovered within a short time after the issuance of
trust certificates (within 120 days, except in the case of obligations
having an original term of 30 years, in which case the period will not
exceed two years). Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
Parties to Transactions
7. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a home owner or automobile
purchaser, or leases property to the lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
8. The sponsor of a trust will be one of three entities: (i) a
special-purpose corporation unaffiliated with the servicer, (ii) a
special-purpose or other corporation affiliated with the servicer, or
(iii) the servicer itself. Where the sponsor is not also the servicer,
the sponsor's role will generally be limited to acquiring the
receivables to be included in the trust, establishing the trust,
designating the trustee and assigning the receivables to the trust.
9. The trustee of a trust is the legal owner of the obligations in
the trust. The trustee is also a party to or beneficiary of all the
documents and instruments deposited in the trust, and as such, is
responsible for enforcing all the rights created thereby in favor of
certificateholders.
The trustee will be an independent entity, and therefore, will be
unrelated to Banc One, the trust sponsor or the servicer. Banc One
represents that the trustee will be a substantial financial institution
or trust company experienced in trust activities. The trustee receives
a fee for its services which will be paid by the servicer, sponsor or
the trust as specified in the pooling and servicing agreement. The
method of compensating the trustee will be specified in the pooling and
servicing agreement and disclosed in the prospectus or private
placement memorandum relating to the offering of the certificates.
10. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, it is common for the
receivables to be ``subserviced'' by their respective originators and
for a single entity to ``master service'' the pool of receivables on
behalf of the owners of the related series of certificates. Where this
arrangement is adopted, a receivable continues to be serviced from the
perspective of the borrower by the local subservicer, while the
investor's perspective is that the entire pool of receivables is
serviced by a single, central master servicer who collects payments
from the local subservicers and passes them through to
certificateholders.
Receivables of the type suitable for inclusion in a trust
invariably are serviced with the assistance of a computer. After the
sale, the servicer keeps the sold receivables on the computer system in
order to continue monitoring the accounts. Although the records
relating to sold receivables are kept in the same master file as
receivables retained by the originator, the sold receivables are
flagged as
[[Page 41132]]
having been sold. To protect the investor's interest, the servicer
ordinarily covenants that this ``sold flag'' will be included in all
records relating to the sold receivables, including the master file,
archives, tape extracts and printouts.
The sold flags are invisible to the obligor and do not affect the
manner in which the servicer performs the billing, posting and
collection procedures relating to the sold receivables. However, the
servicer uses the sold flag to identify the receivables for the
purposes of reporting all activity on those receivables after their
sale to the investors.
Depending on the type of receivable and the details of the
servicer's computer system, in some cases, the servicer's internal
reports can be adapted for investor reporting with little or no
modification. In other cases, the servicer may have to perform special
calculations to fulfill the investor reporting responsibilities. These
calculations can be performed on the servicer's main computer or on a
small computer with data supplied by the main system. In all cases, the
numbers produced for the investor are reconciled to the servicer's
books and reviewed by public accountants.
The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates are generally made on a
firm commitment basis. Private placements of certificates may be made
on a firm commitment or agency basis. It is anticipated that the lead
or co-managing underwriter will make a market in certificates offered
to the public.
In some cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (though they
themselves may be related) will be unrelated to Banc One. However,
affiliates of Banc One may originate or service receivables included in
a trust or they may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. In some cases, the sponsor will obtain the receivables from
various originators pursuant to existing contracts with such
originators under which the sponsor continually buys receivables. In
other cases, the sponsor will purchase the receivables at fair market
value from the originator or the finance company pursuant to a purchase
and sale agreement related to the specific offering of certificates. In
other cases, the sponsor will originate the receivables, itself.
As compensation for the receivables transferred to the trust, the
sponsor receives cash or certificates representing the entire
beneficial interest in the trust. The sponsor sells some or all of
these certificates for cash to investors or securities underwriters.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on receivables included in the trust minus a specified servicing
fee.19 This rate is generally determined by the same market forces
that determine the price of a certificate. The price of a certificate
and its pass-through, or coupon rate, together determine the yield to
investors. If an investor purchases a certificate at less than par,
that discount augments the stated pass-through rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
19 The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting as sponsor) will retain the difference between
payments received on the receivables in the trust and payments payable
(at the pass-through rate) to certificateholders, except that in some
cases, a portion of the payments on receivables may be paid to a third
party, such as a fee paid to a provider of credit support. The servicer
may receive additional compensation by having the use of the amounts
paid on the receivables between the time they are received by the
servicer and the time they are due to the trust (which time is set
forth in the pooling and servicing agreement). Typically, the servicer
will be required to pay the administrative expenses of servicing the
trust, including, in some cases, the trustee's fee, out of its
servicing compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid in a lump sum
at the time the trust is established, or on the receivables in excess
of the pass-through rate.
14. The servicer may be entitled to retain certain administrative
fees paid by a third party, usually the obligor. These administrative
fees fall into three categories: (a) Prepayment fees; (b) late payment
and payment extension fees; and (c) expenses, fees and charges
associated with foreclosure or repossession or other conversion of a
secured position into cash proceeds upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
15. Payments on receivables may be made by obligors to the servicer
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and
servicing agreement may permit the servicer to place these payments in
non-interest bearing accounts in itself or to commingle such payments
with its own funds prior to the distribution dates. In these cases, the
servicer would be entitled to the benefit derived from the use of the
funds between the date of payment on a receivable and the pass-through
date. Commingled payments may not be protected from the creditors of
the servicer in the event of the servicer's bankruptcy or receivership.
In those instances when payments on receivables are held in non-
interest bearing accounts or are commingled with the servicer's own
funds, the servicer is required to deposit these payments by a date
specified in the pooling and servicing agreement into an account from
which the trustee makes payments to certificateholders.
16. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would normally consist of the
difference between what the underwriter receives for the certificates
that it distributes and what it pays the sponsor for those
certificates. In a private placement, the fee normally takes the form
of an agency commission paid by the sponsor. In a best efforts
underwriting in which the underwriter would sell certificates in a
public offering on an agency basis, the underwriter would receive an
agency commission rather than a fee based on the difference between the
price at which the certificates are sold to the public and what it pays
the sponsor. In some private placements, the
[[Page 41133]]
underwriter may buy certificates as principal, in which case, its
compensation would be the difference between what it receives for the
certificates that it sells and what it pays the sponsor for these
certificates.
Purchase of Receivables by the Servicer
17. As the principal amount of the receivables in a trust is
reduced by payments, the cost of administering the trust generally
increases, making the servicing of the trust prohibitively expensive at
some point. Consequently, the pooling and servicing agreement generally
provides that the servicer may purchase the receivables remaining in
the trust when the aggregate unpaid balance payable on the receivables
is reduced to a specified percentage (usually 5 to 10 percent) of the
initial aggregate unpaid balance.
The repurchase price for such an option is set at a level such that
the certificateholders will receive the full amount on all of the
receivables held by the trust plus the full amount of property, if any,
that has been acquired by the trust through collections on or
liquidations of the receivables.
Certificate Ratings
18. The certificates will have received one of the three highest
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance
or other credit support (such as overcollateralization, surety bonds,
letters of credit or guarantees) will be obtained by the trust sponsor
to the extent necessary for the certificates to attain the desired
rating. The amount of this credit support is set by the rating agencies
at a level that is a multiple of the worst historical net credit loss
experience for the type of obligations included in the issuing trust.
Provision of Credit Support
19. In some cases, the master servicer or an affiliate of the
master servicer may provide credit support to the trust (i.e., act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) from the credit support provider (which
may be itself), or, (c) in the case of a trust that issues subordinated
certificates, from amounts otherwise distributable to holders of
subordinated certificates, and the master servicer will advance such
funds in a timely manner. In some transactions, the master servicer may
not be obligated to advance funds, but instead, would be called upon to
provide funds to cover defaulted payments to the full extent of its
obligations as insurer. Moreover, a master servicer typically can
recover advances either from the provider of credit support from the
future payment stream. When the servicer is the provider of the credit
support and provides its own funds to cover defaulted payments, it will
do so either on the initiative of the trustee, or on its own initiative
on behalf of the trustee, but in either event it will provide such
funds to cover payments to the full extent of its obligations under the
credit support mechanism.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover defaulted
payments or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the servicer out of future payments on receivables held
by the trust to the extent not covered by credit support. However,
where the master servicer provides credit support to the trust, there
are protections in place to guard against a delay in calling upon the
credit support to take advantage of the fact that the credit support
declines proportionally with the decrease in the principal amount of
the obligations in the trust as payments on receivables are passed
through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the master servicer lacks an incentive to postpone the
recognition of credit losses because the credit support amount becomes
a fixed dollar amount, subject to reduction only for actual draws. From
the time that the floor amount is effective until the end of the life
of the trust, there are no proportionate reductions in the credit
support amount caused by reductions in the pool principal balance.
Indeed, since the floor is a fixed dollar amount, the amount of credit
support ordinarily increases as a percentage of the pool principal
balance during the period that the floor is in effect.
Disclosure
20. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
[[Page 41134]]
(c) Identification of the independent trustee for the trust;
(d) A description of the receivables contained in the trust,
including the types of receivables, the diversification of the
receivables, their principal terms and their material legal aspects;
(e) A description of the sponsor and servicer;
(f) A description of the pooling and servicing agreement, including
a description of the seller's principal representations and warranties
as to the trust assets and the trustee's remedy for any breach thereof;
a description of the procedures for collection of payments on
receivables and for making distributions to investors, and a
description of the accounts into which such payments are deposited and
from which such distributions are made; identification of the servicing
compensation and any fees for credit enhancement that are deducted from
payments on receivables before distributions are made to investors; a
description of periodic statements provided to the trustee, and
provided to or made available to investors by the trustee; and a
description of the events that constitute events of default under the
pooling and servicing contract and a description of the trustee's and
the investors' remedies incident thereto;
(g) A description of the credit support;
(h) A general discussion of the principal federal income tax
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
(i) A description of the underwriters' plan for distributing the
pass-through securities to investors; and
(j) Information about the scope and nature of the secondary market,
if any, for the certificates.
21. Reports indicating the amount of payments of principal and
interest are provided to certificateholders at least as frequently as
distributions are made to certificateholders. Certificateholders will
also be provided with periodic information statements setting forth
material information concerning the underlying assets, including, where
applicable, information as to the amount and number of delinquent and
defaulted loans or receivables.
22. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates. While the Securities and Exchange Commission's
interpretation of the periodic reporting requirements is subject to
change, periodic reports concerning a trust will be filed to the extent
required under the Securities Exchange Act of 1934.
23. At or about the time distributions are made to
certificateholders, a report will be delivered to the trustee as to the
status of the trust and its assets, including underlying obligations.
Such report will typically contain information regarding the trust's
assets, payments received or collected by the servicer, the amount of
prepayments, delinquencies, servicer advances, defaults and
foreclosures, the amount of any payments made pursuant to any credit
support, and the amount of compensation payable to the servicer. Such
report also will be delivered to or made available to the rating agency
or agencies that have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the trustee
summarizing information regarding the trust and its assets. Such
statement will include information regarding the trust and its assets,
including underlying receivables. Such statement will typically contain
information regarding payments and prepayments, delinquencies, the
remaining amount of the guaranty or other credit support and a
breakdown of payments between principal and interest.
Forward Delivery Commitments
24. To date, Banc One has not entered into any forward delivery
commitments in connection with the offering of pass-through
certificates. However, Banc One may contemplate entering into such
commitments. The utility of forward delivery commitments has been
recognized with respect to the offering of similar certificates backed
by pools of residential mortgages. As such, Banc One may find it
desirable in the future to enter into such commitments for the purchase
of certificates.
Secondary Market Transactions
25. It is Banc One's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter. Banc One
anticipates that it will make a market in certificates.
Retroactive Relief
26. Banc One represents that it has not engaged in transactions
related to mortgage-backed and asset-backed securities based on the
assumption that retroactive relief would be granted prior to the date
of this application. However, Banc One requests the exemptive relief
granted to be retroactive to June 2, 1995, the date of this
application, and would like to rely on such retroactive relief for
transactions entered into prior to the date exemptive relief may be
granted.
Summary
27. In summary, Banc One represents that the transactions for which
exemptive relief is requested satisfy the statutory criteria of section
408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute receivables
contained in the trust once the trust has been formed;
(b) Certificates in which plans invest will have been rated in one
of the three highest rating categories by S&P's, Moody's, D&P or Fitch.
Credit support will be obtained to the extent necessary to attain the
desired rating;
(c) All transactions for which Banc One seeks exemptive relief will
be governed by the pooling and servicing agreement, which is made
available to plan fiduciaries for their review prior to the plan's
investment in certificates;
(d) Exemptive relief from sections 406(b) and 407 for sales to
plans is substantially limited; and
(e) Banc One anticipates that it will make a secondary market in
certificates.
Discussion of Proposed Exemption
I. Differences Between Proposed Exemption and Class Exemption PTE 83-1
The exemptive relief proposed herein is similar to that provided in
PTE 81-7 (46 FR 7520, January 23, 1981), Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts, amended and
restated as PTE 83-1 (48 FR 895, January 7, 1983).
PTE 83-1 applies to mortgage pool investment trusts consisting of
interest-bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property. The exemption
provides relief from sections 406(a) and 407 for the sale, exchange or
[[Page 41135]]
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406 (b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406(a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (a) The proposed exemption
provides individual exemptive relief rather than class relief; (b) the
proposed exemption covers transactions involving trusts containing a
broader range of assets than single-family residential mortgages; (c)
instead of requiring a system for insuring the pooled receivables, the
proposed exemption conditions relief upon the certificates having
received one of the three highest ratings available from S&P's,
Moody's, D&P or Fitch (insurance or other credit support would be
obtained only to the extent necessary for the certificates to attain
the desired rating); and (d) the proposed exemption provides more
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
After consideration of the representations of the applicant and
information provided by S&P's, Moody's, D&P and Fitch, the Department
has decided to condition exemptive relief upon the certificates having
attained a rating in one of the three highest generic rating categories
from S&P's, Moody's, D&P or Fitch. The Department believes that the
rating condition will permit the applicant flexibility in structuring
trusts containing a variety of mortgages and other receivables while
ensuring that the interests of plans investing in certificates are
protected. The Department also believes that the ratings are indicative
of the relative safety of investments in trusts containing secured
receivables. The Department is conditioning the proposed exemptive
relief upon each particular type of asset-backed security having been
rated in one of the three highest rating categories for at least one
year and having been sold to investors other than plans for at least
one year.\20\
\20\ In referring to different ``types'' of asset-backed
securities, the Department means certificates representing interests
in trusts containing different ``types'' of receivables, such as
single family residential mortgages, multi-family residential
mortgages, commercial mortgages, home equity loans, auto loan
receivables, installment obligations for consumer durables secured
by purchase money security interests, etc. The Department intends
this condition to require that certificates in which a plan invests
are of the type that have been rated (in one of the three highest
generic rating categories by S&P's, D&P, Fitch or Moody's) and
purchased by investors other than plans for at least one year prior
to the plan's investment pursuant to the proposed exemption. In this
regard, the Department does not intend to require that the
particular assets contained in a trust must have been ``seasoned''
(e.g., originated at least one year prior to the plan's investment
in the trust).
III. Limited Section 406(b) and Section 407(a) Relief for Sales
Banc One represents that in some cases a trust sponsor, trustee,
servicer, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates may be a pre-existing party
in interest with respect to an investing plan.\21\ In these cases, a
direct or indirect sale of certificates by that party in interest to
the plan would be a prohibited sale or exchange of property under
section 406(a)(1)(A) of the Act.\22\ Likewise, issues are raised under
section 406(a)(1)(D) of the Act where a plan fiduciary causes a plan to
purchase certificates where trust funds will be used to benefit a party
in interest.
\21\ In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which Banc One or
any of its affiliates is either (a) the sole underwriter or manager
or co-manager of the underwriting syndicate, or (b) a selling or
placement agent.
\22\ The applicant represents that where a trust sponsor is an
affiliate of Banc One, sales to plans by the sponsor may be exempt
under PTE 75-1, Part II (relating to purchases and sales of
securities by broker-dealers and their affiliates), if Banc One is
not a fiduciary with respect to plan assets to be invested in
certificates.
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Additionally, Banc One represents that a trust sponsor, servicer,
trustee, insurer, and obligor with respect to receivables contained in
a trust, or an underwriter of certificates representing an interest in
a trust may be a fiduciary with respect to an investing plan. Banc One
represents that the exercise of fiduciary authority by any of these
parties to cause the plan to invest in certificates representing an
interest in the trust would violate section 406(b)(1), and in some
cases section 406(b)(2), of the Act.
Moreover, Banc One represents that to the extent there is a plan
asset ``look through'' to the underlying assets of a trust, the
investment in certificates by a plan covering employees of an obligor
under receivables contained in a trust may be prohibited by sections
406(a) and 407(a) of the Act.
After consideration of the issues involved, the Department has
determined to provide the limited sections 406(b) and 407(a) relief as
specified in the proposed exemption.
Notice to Interested Persons
The applicant represents that because those potentially interested
participants and beneficiaries cannot all be identified, the only
practical means of notifying such participants and beneficiaries of
this proposed exemption is by the publication of this notice in the
Federal Register. Comments and requests for a hearing must be received
by the Department not later than 30 days from the date of publication
of this notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other
[[Page 41136]]
provisions of the Act and/or the Code, including any prohibited
transaction provisions to which the exemption does not apply and the
general fiduciary responsibility provisions of section 404 of the Act,
which among other things require a fiduciary to discharge his duties
respecting the plan solely in the interest of the participants and
beneficiaries of the plan and in a prudent fashion in accordance with
section 404(a)(1)(b) of the act; nor does it affect the requirement of
section 401(a) of the Code that the plan must operate for the exclusive
benefit of the employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 7th day of August, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-19871 Filed 8-10-95; 8:45 am]
BILLING CODE 4510-29-P