[Federal Register Volume 62, Number 74 (Thursday, April 17, 1997)]
[Notices]
[Pages 18803-18817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9974]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. L-10280, et al.]
Proposed Exemptions; Operating Engineers Local 150 Apprenticeship
Fund (the Fund)
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 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.
Operating Engineers Local 150 Apprenticeship Fund (the Fund), Located
in Plainfield, Illinois
[Exemption Application No. L-10280]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32826,
32847, August 10, 1990). If the exemption is granted the restrictions
of section 406(a) and 406(b)(1) and (2) shall not apply to the proposed
sale (the Sale) of a certain parcel of improved real property (the
Property) from the Fund to International Union of Operating Engineers,
Local 150 (Local 150), a party in interest with respect to the Plan
provided that the following conditions are met:
(1) The fair market value of the Property is established by a
qualified and independent real estate appraiser;
(2) Local 150 pays the greater of $180,000 or the current fair
market value of the Property as of the date of the transaction;
(3) The Sale is a one time transaction for cash; and
(4) The Fund pays no fees or commissions related to the Sale.
Summary of Facts and Representations
1. The Fund is a welfare plan which is an apprenticeship and
training plan with approximately 600 apprentices and 5,494 journeymen.
The Fund was established on June 1, 1967. As of December 31, 1995, the
fair market value of the Fund's assets was $6,492,242. The Fund
sponsors include the Local 150 and other employer associations.
2. The Fund acquired the Property as part of a merger with the
Operating Engineers Local 537 Apprenticeship and Re-training Fund on or
about October 28, 1992. During this time, the Operating Engineers Local
537 terminated and transferred all of its assets to the Fund. The
Property is located in Rock Island, Illinois and consists of an office
building on approximately 53 acres of land. The applicant represents
that the Property has been leased by the Fund to Local 150 pursuant to
Prohibited Transaction Class Exemption 76-1 (41 FR 1270, March 26,
1976).1 Since 1992, the Fund has received net income from the
Property in the amount of $33,461.
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\1\ The Department is making no determination with respect to
whether or not the Lease met the conditions of PTE 76-1.
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3. In March 1993, the Property was appraised at a value of $180,000
by Baecke Appraisers, a qualified independent real estate appraisal
firm. The value of the Property was determined by using the market
value approach which is defined in the appraisal as the most probable
price a property should bring on requisite to a fair sale, the buyer
and seller each acting prudently and assuming the price is not affected
by undue stimulus. In April 15, 1996, Mr. Robert Baecke of Baecke
Appraisers, updated the appraisal and recertified the value of the
Property to be $180,000. Mr. Baecke researched sales of comparable
properties in the Property's market area that have occurred since the
time of the original appraisal. His analysis consisted of research of
data from the multiple listing service, county records, exterior
inspections of the properties and conversations with individuals
[[Page 18804]]
involved in the transactions. Additionally, Mr. Baecke analyzed the
valuation approaches used in the original appraisal, taking into
consideration all current data. Mr. Baecke concluded that the
Property's appraised value remains $180,000. In this regard, Mr. Baecke
represented that the value of the Property at time the Fund acquired
the Property was $180,000. The Fund will pay no commissions or fees
associated with the Sale.
4. The Fund proposes to sell the Property to Local 150. The
Trustees of the Fund have determined that the Fund no longer needs the
Property, and wish to sell the Property. Local 150 has offered to
purchase the Property for cash at the appraised value of $180,000.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) The Sale is a one-time transaction for cash, and no
commissions will be paid upon the Sale; (2) the Fund will be receiving
at least fair market value for the Property as determined by an
independent qualified real estate appraiser; and (3) the Fund pays no
commissions or fees associated with the Sale.
For Further Information Contact: Allison Padams of the Department,
telephone (202)219-8971. (This is not a toll-free number.)
Joint Apprenticeship Committee of Plumbers Local No. 27 (the Plan),
Located in Pittsburgh, Pennsylvania
[Application No. L-10366]
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 C.F.R. Part
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the
exemption is granted the restrictions of sections 406(a), 406(b)(1) and
(b)(2) of the Act shall not apply to the proposed sale by the Plan of
certain improved real property located in Allegheny County,
Pennsylvania (the Property) to the Local Union No. 27 (the Plumbers
Local) of the United Association of Journeymen and Apprentices of the
Plumbing and Pipe Fitting Industry of the United States and Canada, a
party in interest with respect to the Plan; provided that the following
conditions are met:
(A) The Plan does not incur any expenses or suffer any loss with
respect to the transaction; and
(B) The Plan receives a cash purchase price for the Property of no
less than the greater of (1) the Plan's cost basis in the Property as
of the date of the sale, or (2) the fair market value of the Property
as of the date of the sale, as determined by an independent, qualified
appraiser, and in no event less than $265,597.
Summary of Facts and Representations
Introduction
The Plan's operations are conducted in the Pipe Trades Training
Center (the Property), which is owned by the Plan. The Trustees of the
Plan have determined that it is no longer economically feasible for the
Plan to maintain and operate its own facility, and that the Plan can be
operated more efficiently as a tenant in the Property. The Trustees
propose to sell the Property to the Union, the members of which are
participants in the Plan, and to arrange for the Plan to lease space in
the Property from the Union. An exemption is requested to allow the
sale transaction under the terms and conditions described herein.
1. The Plan is an apprenticeship training plan providing
educational and occupational training for apprentices and journeymen
plumbers who are members of the Union. The Plan was created and is
maintained pursuant to collective bargaining agreements between the
Union and the Mechanical Contractors Association of Western
Pennsylvania (the Association), which represents employers of plumbers
who are members of the Union. The Plan is administered by a board of
six trustees (the Trustees), three of whom are representatives of the
Union and three of whom are representatives of the Association and
other employers in signed agreements with the Union. As of October 1,
1996, approximately 610 members of the Union were participants in the
Plan, which had total assets of approximately $360,080 as of December
31, 1995.
2. Among the assets of the Plan is the Property, a parcel of
improved real property located at 104 Montour West Industrial Park in
North Fayette Township near Pittsburgh in Allegheny County,
Pennsylvania. The Property consists of 1.29 acres of land improved with
a one-story structure (the Building) occupied by the Plan and operated
by the Trustees as the Pipe Trades Training Center and ancillary office
facility. The Building, which is constructed of cement block on
reinforced concrete slab, has a total interior area of 6,948 square
feet, consisting of 984 square feet of office space (the Office Space)
and the remainder utilized as classrooms, shop, computer, and file room
areas. The Office Space is occupied by the Union, which has leased the
Office Space from the Plan since 1987 (the Union Lease). The Trustees
and the Union represent that the Union Lease satisfies the requirements
of Prohibited Transaction Class Exemption 76-1 (PTE 76-1, 41, FR 12740,
March 26, 1976) and Prohibited Transaction Class Exemption 77-10 (PTE
77-10, 42 FR 33918, July 1, 1977), relating to, among other things, a
lease of office space by a multiemployer plan to a participating
employee organization.2
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\2\ The Department expresses no opinion as to whether the Union
Lease satisfied the conditions of PTE 76-1 or PTE 77-10, or whether
such lease of office space by the Plan to the Union was exempt from
the prohibitions of section 406 of the Act.
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3. The Property is described legally as lot 113R of the Montour
West Industrial Park (the Industrial Park) as recorded with the
Recorder's Office of Allegheny County, and it consists of a parcel
originally described in the county legal records as lot 113 and one
third of an adjacent parcel originally described as lot 112. The
Trustees represent that the Plan purchased the original lot 113 from an
unrelated party on August 22, 1974, and on December 17, 1975 the Plan
sold a one-half interest in original lot 113 to the Joint
Apprenticeship Committee of Steamfitters Local Union No. 449 (the
Steamfitters Plan), an apprenticeship training plan providing benefits
to members of the United Association of Journeymen and Apprentices of
the Plumbing and Pipe Fitting Industry of the United States and Canada,
Local Union No. 449 (the Steamfitters Local). Thereafter, the original
lot 112 was acquired jointly by the Plan and the Steamfitters Plan from
an unrelated party on December 29, 1991. Although the Plumbers Local
and the Steamfitters Local are components of the United Association of
Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of
the United States and Canada, the Trustees represent that the
Steamfitters Local and the Steamfitters Plan are not parties in
interest with respect to the Plan, within the meaning of section 3(14)
of the Act, and that the trustees of each plan are independent of and
unrelated to each other. The Trustees explain that in many
jurisdictions plumbers and steamfitters are members of the same local
union, with referrals for work based on a determination of whether
water or steam pipes are involved. In the Pittsburgh/Western
Pennsylvania area, however, the Trustees maintain that there was
historically substantial employment in the steel mills and factories
for steamfitters, and consequently, two separate local unions
[[Page 18805]]
emerged, one representing steamfitters and one representing plumbers.
Because the training for apprentices in each local union is similar,
and because each local union had similar needs in a training facility,
the trustees of the apprenticeship plans of each local union agreed to
share the same training facility for their apprenticeship programs. In
this context, the two plans jointly owned the original lot 113, on
which the Building is situated, and the adjacent original lot 112, an
unimproved lot utilized for parking space.
In 1987, the trustees of the Steamfitters Plan determined to
commence arrangements for a movement of the operations of that plan to
a separate training facility in Pittsburgh. The trustees of the
Steamfitters Plan then transferred that plan's one-half interest in
lots 113 and 112 to the Plan, by deed dated January 9, 1987. (The
Steamfitters Plan continued to utilize facilities on the Property as a
tenant until that plan acquired its own building in 1993.)
Subsequently, on June 1990, the legal records for the Industrial Park
were revised to provide that two thirds of lot 112 was redesignated as
lot 111R and the remaining one third of lot 112 was combined with lot
113 and redesignated as lot 113R. The Trustees sold lot 111R to an
unrelated party in 1990, and lot 113R remains the legal designation of
the Property. According to Daniel F. Smith, IFA (Smith), a professional
independent real estate appraiser in Pittsburgh, Pennsylvania, the
Property had a fair market value of $246,000 as of June 13, 1996. The
Plan's actual cost basis in the Property is $265,597, as determined as
of May 14, 1996 by the certified public accounting firm of R.S.
Cumberledge & Associates (Cumberledge) in Pittsburgh, Pennsylvania.
4. The Trustees represent that it is not economically feasible for
the Plan to continue maintaining the Property while continuing to
provide a quality training program for the Union's members. The
Trustees state that recent financial statements indicate a declining
balance of reserves in the assets of the Plan, which is operating at a
deficit due to increasing Building maintenance and related expenses.
The Trustees represent that employer contributions to the Plan and
rents paid by the Union to the Plan are not sufficient to cover
escalating costs of maintaining the Property, even though such employer
contributions have increased pursuant to collective bargaining and the
Trustees represent that the rentals paid by the Union are in excess of
the Building's fair market rental value as indicated by Smith's
appraisal. The Trustees are concerned that the Plan's continued
ownership of the Property will threaten the availability of funds for
instructor salaries, equipment, and training program operations. The
Trustees represent that they have determined that the Plan would be
able to operate its training program more economically as a tenant,
rather than an owner, in the Property.
5. Accordingly, the Trustees and representatives of the Union
propose that the Union purchase the Property from the Plan and are
requesting an exemption for such transaction under the terms and
conditions described herein. The Union will pay the Plan a cash
purchase price for the Property in the amount of no less than the
greater of (a) the Plan's cost basis in the Property as of the date of
the sale, or (b) the Property's fair market value as of the sale date
as determined by Smith in an update of his appraisal of June 13, 1996,
and in no event less than $265,597, which was the Plan's cost basis in
the Property as determined by Cumberledge as of May 14, 1996. The Plan
will incur no costs related to the transaction.
6. Commencing with the Union's purchase of the Property, it is
proposed that the Plan will continue to utilize the Property as its
training facility by leasing from the Union the same space in the
Property which the Plan has utilized prior to the purchase transaction.
The Union and the Trustees represent that this lease of space in the
Property from the Union (the Plan Lease) will meet the requirements of
Prohibited Transaction Class Exemption 78-6 (PTE 78-6, 43 FR 23024, May
30, 1978), relating to, among other things, a lease of real property by
an employee organization to a related apprenticeship training
plan.3 In addition to other requirements, the conditions of PTE
78-6 require the Plan Lease to be on terms at least as favorable to the
plan as an arm's-length transaction with an unrelated party would be,
and the Plan Lease must be appropriate and helpful in carrying out the
purposes for which the plan is established or maintained. The Trustees
represent that the Plan Lease will satisfy these and all other
conditions of PTE 78-6 and that the Plan Lease will enable the Plan to
terminate the lease arrangement with sixty days written notice to the
Union. The Trustees represent that if the exemption is granted, the
Plan Lease will be executed between the Plan and the Union immediately
after the sale transaction is consummated and the Plan's use of the
Property will continue uninterrupted.
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\3\ In this proposed exemption the Department expresses no
opinion as to whether the Plan Lease will meet the requirements of
PTE 78-6.
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7. In summary, the applicants represent that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (1) The transaction will be a one-time transaction
for cash; (2) The Plan will receive a purchase price for the Property
which is no less than the greater of the Plan's cost basis in the
Property or the Property's fair market value as of the date of the
transaction; (3) The Plan will incur no expenses with respect to the
transaction; and (4) The transaction will enable the Plan to reduce its
total expenses and to operate more efficiently.
For Further Information Contact: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Howes Leather Company, Inc. Employee Stock Ownership Plan (the Plan),
Located in Curwensville, Pennsylvania
[Application No. D-10385]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the proposed sale by the Plan of an
individual life insurance policy (the Policy) to the Howes Leather
Company, Inc. (the Employer), the sponsor of the Plan; provided that
the following conditions are satisfied:
(A) All terms and conditions of the transaction are at least as
favorable to the Plan as those which the Plan could obtain in arm's-
length transactions with unrelated parties;
(B) The Plan receives a purchase price for the Policy of no less
than the greater of (1) the fair market value of the Policy as of the
sale date, or (2) Policy's cash surrender value (as described below) as
of the sale date;
(C) The Plan does not incur any expenses or suffer any loss with
respect to the transaction; and
(D) In the event the Employer recovers with respect to the Policy a
total amount in excess of the purchase price paid to the Plan for the
Policy, such excess
[[Page 18806]]
amount shall be distributed prorata among the participants of the Plan.
Summary of Facts and Representations
1. The Plan is a defined contribution employee stock ownership plan
with 32 participants and total assets of approximately $465,168 as of
February 16, 1996. The Plan is sponsored by the Employer, Howes Leather
Company, Inc., a Delaware corporation engaged in the business of
leather processing in the city of Curwensville, Pennsylvania. The
trustees of the Plan are James M. Fitzgibbons and Barry I. Getto, each
of whom is an officer, director and shareholder of the Employer. The
Plan invests primarily in common stock of the Employer, which
constituted approximately 92 percent of the Plan's assets as of
February 16, 1996.
2. The Employer represents that the Plan has been terminated and
that distribution of Plan assets was completed in April 1996. Although
the Plan is an individual-account employee stock ownership plan, at the
time of the Plan's termination date there remained in the Plan one
general asset in which all Plan participants held undivided pro-rata
interests: the Policy. The Policy is an individual life insurance
policy issued by the Fidelity Mutual Life Insurance Company (the
Insurer) on the life of Harry J. Widney, a former participant in the
Plan who had terminated participation in the Plan and received full
payment of Plan benefits many years prior to the Plan termination. The
Employer represents that Mr. Widney had been a shareholder of the
Employer and that the Plan had acquired the Policy to provide the Plan
with assets to purchase Employer stock from his estate in the event of
his death. When Mr. Widney left the Employer's business and terminated
his participation in the Plan during the Plan year commencing July 1,
1982, his account balance in the Plan was distributed to him in the
form of Employer stock. The Employer represents that Mr. Widney was
offered the Policy but refused to accept it. As a result, the Policy
was retained as a general asset of the Plan.
With an original face value of $50,000 and paid-up additions
totaling $7,998, the Policy has a total face value of $57,998. The
Employer represents that upon termination of the Plan, the Trustees
were unable to liquidate the Policy, by surrendering it for its cash
surrender value, because the Insurer is in rehabilitation proceedings
(the Rehabilitation) which have rendered the Policy frozen and
inaccessible. The Employer represents that it is uncertain when the
Rehabilitation will be resolved to enable the cash surrender of the
Policy by the Plan and that, due to the current status of the Insurer,
the ability of the Insurer to pay the full value of the Policy is in
question.
3. The Employer represents that upon termination of the Plan, the
Trustees undertook to make prompt distributions to all Plan
participants of their respective benefits from the Plan, and that they
did not wish to delay distribution until resolution of the
Rehabilitation. Accordingly, in order to enable the Plan to proceed
with complete distributions, the Employer represents that it made an
interest-free loan to the Plan (the Loan) in the amount of cash which
the Plan would have realized from a cash surrender of the Policy on the
Termination Date. The Loan proceeds were distributed pro rata among all
participants in the Plan as of the Termination Date. The Loan was in
the amount of $34,044.77, which was the cash surrender value of the
Policy upon the termination of the Plan as determined by the Insurer.
The Employer represents that the Loan satisfied the requirements of
Prohibited Transaction Class Exemption 80-26 (PTE 80-26, 45 FR 35040,
May 23, 1980), relating to interest-free loans to a plan for, among
other things, the payment of benefits.4 The Policy remains an
asset in the Plan's trust even though distribution to Plan participants
has been completed.
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\4\ The Department expresses no opinion as to whether the Loan
satisfied the conditions of class exemption PTE 80-26.
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4. In order to complete the liquidation of the Plan, the Employer
now proposes to purchase the Policy from the Plan so that the last
remaining Plan asset may be liquidated and the Plan's trust may be
dissolved, and the Employer is requesting an exemption for such
transaction under the terms and conditions described herein. The
Employer proposes to purchase the Policy from the Plan for a purchase
price in the amount of the Loan, and to consummate the purchase
transaction by means of canceling the Loan in exchange for the Policy.
Accordingly, the purchase price for the Policy will be $34,044.77, the
Policy's cash surrender value as of the date of Plan termination, which
was the same amount of cash which the Plan would have realized from a
cash surrender of the Policy if the Rehabilitation proceedings had not
prevented the cash surrender of the Policy upon the Plan termination.
The Plan will not incur any expenses with respect to the transaction.
5. Upon cancellation of the Loan, the Policy will be transferred to
the Employer, and thereafter the Employer will be entitled to amounts
due the holder of the Policy under its terms and conditions. The
Employer represents that due to the Rehabilitation and the financial
condition of the Insurer, it is questionable whether the Employer will
ever recover the cash surrender value of the Policy, and it is unlikely
the Employer will ever recover any amounts in excess of the amount the
Employer is paying the Plan for the Policy. Nonetheless, the Employer
has agreed that in the event it receives total proceeds from the Policy
in excess of the amounts paid the Plan as purchase price for the
Policy, such additional amounts will be distributed pro rata among Plan
participants with active accounts in the Plan as of the date of the
Plan termination.
6. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act for the
following reasons: (a) The transaction will enable the completed
termination of the Plan and dissolution of the Plan trust; (b) The Plan
will not incur any expenses with respect to the transaction; (c) The
purchase price of the Policy will be its cash surrender value as of the
date of Plan termination as determined by the Insurer; (d) The
transaction will include the Employer's cancellation of the Plan's
obligations under the Loan; and (e) Any proceeds from the Policy
received by the Employer in excess of the purchase price will be
distributed among the Plan's participants with active accounts as of
the Termination Date.
For Further Information Contact: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
The Roquette America, Inc. Pension Plan for Salaried Employees (the
Plan), Located in Keokuk, Iowa
[Application No. D-10390]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1) (A) through (D) of the Code, shall not
apply to (1) the proposed loan to the Plan by Aon Consulting, Inc. (Aon
Consulting), in connection with certain excess
[[Page 18807]]
distributions (the Overpayments) that Aon Consulting inadvertently
caused to be made under the Plan, and (2) the potential repayment of
the loan by the Plan to Aon Consulting.
This proposed exemption is subject to the following conditions:
(1) The Plan pays no interest nor incurs any other expense relating
to the loan;
(2) The loan amount covers the Overpayments, plus lost opportunity
costs attributable to the Overpayments;
(3) Any repayment of the loan is restricted solely to the amount,
if any, recovered by the Plan with respect to the Overpayments in
litigation or otherwise; and
(4) A qualified, independent fiduciary for the Plan has reviewed
the terms and conditions of the loan on behalf of the Plan and
determined that such terms and conditions are in the best interests of
and appropriate for the Plan.
Summary of Facts and Representations
1. The Plan is a defined benefit pension plan sponsored by Roquette
America, Inc. (the Employer). The Employer, a Delaware corporation, is
engaged in the production of corn sweeteners for use in foods. As of
December 29, 1995, the Plan had total assets of approximately
$14,203,379.29. As of July 18, 1996, the Plan had approximately 334
participants and beneficiaries. The trustee of the Plan is the Northern
Trust Company (Northern Trust).
2. Aon Consulting, a Pennsylvania corporation, performs actuarial
and recordkeeping services for the Plan and other services for the
Employer. In 1994, Aon Consulting actuaries miscalculated the value of
the accrued benefits of two Plan participants (the Participants), both
former officers of the Employer, and, as a consequence, caused the Plan
to overpay the Participants upon the termination of their employment.
One Participant's lump sum payment was calculated at $412,719.32
instead of $238,843.17 (overstated by $173,876.15). The other
Participant's lump sum payment was calculated at $222,722.31 instead of
$127,419.26 (overstated by $95,303.05). The applicant represents that
the Plan's benefit formula was one of extraordinary complexity and that
the errors were not noticed before the inflated benefit payments were
made to the Participants on March 18, 1994.
Aon Consulting discovered the errors in May, 1994, and reported
them to Northern Trust in June, 1994. In August, 1994, the Employer
informed each of the Participants of the errors by registered mail and
requested immediate return of the Overpayments. Separately, each
Participant has refused.
Repeated subsequent requests, both in writing and by telephone, for
return of the Overpayments have yielded no result.
3. Aon Consulting proposes to make the Plan whole by making an
interest-free loan to the Plan for $269,179, the amount of the
Overpayments, plus lost opportunity costs attributable to the
Overpayments. Among other reasons, because the loan is to be secured by
the possible recovery of the Overpayments by the Plan, the loan is
outside the scope of relief provided by Prohibited Transaction Class
Exemption 80-26 (PTCE 80-26, 45 FR 28545, April 29, 1980).5
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5 PTCE 80-26 provides an exemption, under certain conditions,
from section 406(a)(1) (B) and (D) and section 406(b)(2) of the Act
and the taxes imposed by section 4975 of the Code, by reason of
section 4975(c)(1) (B) and (D) of the Code, for interest-free loans
by a party in interest or disqualified person to an employee benefit
plan.
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The loan amount will include an additional $50,640 to make up for
the Plan's lost opportunity costs for the period from March 18, 1994,
the date of occurrence of the Overpayments, to December 31, 1995, for a
subtotal of $319,819.6 The loan amount will also include an amount
yet to be determined to provide the Plan with a rate of investment
return on the $319,819, for the period from January 1, 1996 to the
effective date of this exemption.7 The loan will be evidenced by a
promissory note and the loan proceeds paid to the Plan within 30 days
of publication in the Federal Register of the notice of the grant of
this exemption.
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6 The Department notes the applicant's representation that
the figure of $50,640 is based upon an assumed 18.8% return, which
was the Plan's actual investment experience for the period from
March 18, 1994 to December 31, 1995.
7 The Department notes the applicant's representation that
the Plan's lost opportunity costs for the period from January 1,
1996 to the effective date of this exemption will be calculated
based upon an assumed rate of return which is equal to the Plan's
actual investment experience for that period.
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The loan will be repaid only to the extent of any amount recovered
by the Plan with respect to the Overpayments. Northern Trust will
continue to cooperate with Aon Consulting in pursuing recovery of the
Overpayments, including, if necessary, the commencement of litigation
against the Participants and their respective heirs, estates,
executors, administrators, or other personal representatives, in the
name of the Plan. Aon Consulting will fund all activities relating to
recovery of the Overpayments. In consideration for the loan, the
Employer, Northern Trust, and the Plan will release Aon Consulting from
any further claims that they may have arising from the Overpayments.
The costs of this exemption application will be borne by Aon
Consulting.
5. The interests of the Plan with respect to the loan are
represented by Northern Trust, acting as an independent fiduciary for
the Plan. In a letter from Richard W. Long, Trust Officer, dated March
17, 1997, Northern Trust represents that it is unrelated to and
independent of both Aon Consulting and the Employer. Northern Trust
further represents that it has extensive experience as a fiduciary
under the Act, that it is knowledgeable as to the subject transactions,
and that it has reviewed the terms and conditions of the loan on behalf
of the Plan and determined that such terms and conditions are in the
best interests of and appropriate for the Plan. Specifically, Northern
Trust notes that the Plan is guaranteed to be made whole by Aon
Consulting by virtue of the interest-free loan (which covers the full
amount of the Overpayments, plus interest), and is thus able to avoid
the legal costs and uncertainties associated with recouping the
Overpayments through alternate means. The potential repayment
obligation on the part of the Plan serves the legitimate purpose of
preventing a ``double recovery'' by the Plan.
6. In summary, the applicant represents that the proposed
transactions satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) The Plan will
pay no interest nor incur any other expense relating to the loan; (2)
the loan will enable the Plan to immediately recover the amount of the
Overpayments, including appropriate interest; (3) any repayment of the
loan will be restricted solely to the amount, if any, recovered by the
Plan with respect to the Overpayments in litigation or otherwise; and
(4) Northern Trust, acting as an independent fiduciary for the Plan,
has reviewed the terms and conditions of the loan on behalf of the Plan
and determined that such terms and conditions are in the best interests
of and appropriate for the Plan.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons, and all employee organizations in which any Plan participant
is a member, by mail or by posting in the Employer's offices within 30
days of the date of publication of this notice of pendency in the
Federal Register. Such notice shall include a copy of this notice of
[[Page 18808]]
pendency as published in the Federal Register and shall inform
interested persons of their right to comment and/or request a hearing
with respect to the proposed exemption. Comments and requests for a
hearing are due within 60 days of the date of publication of this
notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Norwest Investment Services, Inc. (NISI), Located in Minneapolis,
Minnesota
[Application No. D-10430]
Proposed Exemption
I. Transactions
A. Effective February 12, 1997, 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.8
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\8\ 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 February 12, 1997, 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.9 For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
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\9\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1) (i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. Effective February 12, 1997, 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.10
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\10\ 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 February 12, 1997, the restrictions of sections 406(a)
and 407(a) of the Act, and the taxes imposed by sections 4975(a) and
(b) of the Code by reason of sections 4975(c)(1)(A) through (D) of the
Code, shall not apply to any transactions to which those restrictions
or taxes would otherwise apply merely because a person is deemed to be
a party in interest or disqualified person (including a fiduciary) with
respect to a plan by virtue of providing services to the plan (or by
virtue of having a relationship to such service provider described in
section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F),
(G), (H) or (I) of the Code), solely because of the plan's ownership of
certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's
[[Page 18809]]
Structured Rating Group (S&P's), Moody's Investors Service, Inc.
(Moody's), Duff & Phelps Credit Rating Co. (D & P) or Fitch Investors
Service, L.P. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. Certificate means:
(1) a certificate--
(a) that represents a beneficial ownership interest in the assets
of a trust; and
(b) that entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) a certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) that is issued by and is an obligation of a trust; with respect
to certificates defined in (1) and (2) above for which NISI or any of
its affiliates is either (i) the sole underwriter or the manager or co-
manager of the underwriting syndicate, or (ii) a selling or placement
agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. Trust means an investment pool, the corpus of which is held in
trust and consists solely of:
(1) either
(a) secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property);
(d) obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) guaranteed governmental mortgage pool certificates, as defined
in 29 CFR 2510.3-101(i)(2);
(f) fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);11
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\11\ It is the Department's view that the definition of
``trust'' contained in III.B. includes a two-tier structure under
which certificates issued by the first trust, which contains a pool
of receivables described above, are transferred to a second trust
which issues securities that are sold to plans. However, the
Department is of the further view that, since the exemption provides
relief for the direct or indirect acquisition or disposition of
certificates that are not subordinated, no relief would be available
if the certificates held by the second trust were subordinated to
the rights and interests evidenced by other certificates issued by
the first trust.
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(2) property which had secured any of the obligations described in
subsection B.(1);
(3) undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and
(4) rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the investment pool consists only of
assets of the type which have been included in other investment pools,
(ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories
by S&P's, Moody's, D & P, or Fitch for at least one year prior to the
plan's acquisition of certificates pursuant to this exemption, and
(iii) certificates evidencing interests in such other investment pools
have been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption.
C. Underwriter means:
(1) NISI;
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
NISI; or
(3) any member of an underwriting syndicate or selling group of
which NISI 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
[[Page 18810]]
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.
T. Qualified Equipment Note Secured By A Lease means an equipment
note:
(1) which is secured by equipment which is leased;
(2) which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) with respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. Qualified Motor Vehicle Lease means a lease of a motor vehicle
where:
(1) The trust holds a security interest in the lease;
(2) The trust holds a security interest in the leased motor
vehicle; and
(3) The trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
W. NISI means Norwest Investment Services, Inc. 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 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts at 35932.
Summary of Facts and Representations
1. NISI is the wholly-owned, separately capitalized investment
banking subsidiary of Norwest Corporation (Norwest), a diversified
financial services company which was incorporated in Delaware and
registered under the Bank Holding Company Act of 1956, as amended. On
September 30, 1996 Norwest's consolidated assets were approximately $78
billion. The principal executive offices of Norwest are located in
Minneapolis, Minnesota. As of September 30, 1996, Norwest had
subsidiary banks located in 16 states. In addition, non-bank
subsidiaries of Norwest offer insurance, securities brokerage services,
investment banking and venture capital investment, and mortgage banking
and consumer finance.
[[Page 18811]]
Norwest Mortgage, Inc., an indirect wholly-owned subsidiary of
Norwest headquartered in Des Moines, Iowa, is one of the largest
mortgage banking originators in the United States, with offices in all
50 states. Norwest Financial Services, Inc. (NFI) and its subsidiaries
engage in consumer finance activities in each of the 50 states, the
Caribbean and Central America and Canada. NFI is also an indirect
wholly-owned subsidiary of Norwest. Subsidiaries of NFI also engage in
data processing activities for other consumer finance companies.
Norwest Bank Minnesota, N.A. (the Bank), a separate wholly-owned
subsidiary of Norwest, is engaged in banking and related activities and
is the largest bank in the banking group. At September 30, 1996, the
Bank had total assets of $17.1 billion. The principal executive offices
of the Bank are located in Minneapolis, Minnesota. The banking group
also includes ten other commercial banks and one federal savings bank,
located in 10 states, exceeded $2 billion dollars in total assets as of
September 30, 1996.
NISI was incorporated in 1984. It maintains its principal place of
business in Minneapolis, Minnesota, and has branches in Arizona,
Colorado, Iowa, Illinois, Indiana, Montana, North Dakota, Nebraska, New
Mexico, South Dakota, Texas, Washington, Wisconsin and Wyoming, as well
as the Twin Cities Metropolitan Area.
NISI is a member of the National Association of Securities Dealers
and a primary dealer in U.S. Treasury securities. NISI underwrites and
deals in corporate debt securities, municipal securities, high-yield
securities and asset-backed securities, provides private placement and
corporate finance advisory services, including merger and acquisition
advisory services, publishes research on a wide range of securities and
issuers, and engages in syndication, arranging and trading of bank
loans.
NISI has experience in asset securitizations. NISI's participation
in securitization transactions includes the underwriting of public
offerings and serving as private placement agent or commercial paper
conduit agent/dealer for transactions backed by retail auto receivables
and bank and retail credit cards receivables.
NISI represents that in 1989 it received Federal Reserve Board
authorization to underwrite and deal in commercial paper, municipal
revenue bonds, residential mortgage-related securities and consumer
receivable-related securities. This order is currently subject to the
condition that NISI does not derive more than 10% of its total gross
revenues from such activities. In addition, NISI's affiliates have the
power to sell interests in their own assets in the form of asset-backed
securities.
Trust Assets
2. NISI 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; 12 (2) motor vehicle
receivable investment trusts; (3) consumer or commercial receivables
investment trusts; and (4) guaranteed governmental mortgage pool
certificate investment trusts. 13
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\12\ 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. NISI requests relief for single-family residential mortgages in
this exemption because it would prefer one exemption for all trusts
of similar structure. However, NISI has stated that it may still
avail itself of the exemptive relief provided by PTE 83-1.
\13\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
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3. Commercial mortgage investment trusts may include mortgages on
ground leases of real property. Commercial 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.14
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\14\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990 at 23150).
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. The sponsor or
servicer of a trust selects assets to be included in the trust. These
assets are receivables which may have been originated by a sponsor or
servicer of the trust, an affiliate of the sponsor or servicer, or by
an unrelated lender and subsequently acquired by the trust sponsor or
servicer.15
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\15\ It is the view of the Department that section III.B.(4)
includes within the definition of the term ``trust'' rights under
any yield supplement or similar arrangement which obligates the
sponsor or master servicer, or another party specified in the
relevant pooling and servicing agreement, to supplement the interest
rates otherwise payable on the obligations described in section
III.B.(1), in accordance with the terms of a yield supplement
arrangement described in the pooling and servicing agreement,
provided that such arrangements do not involve swap agreement or
other notional principal contracts.
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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. NISI, alone or together with other broker-dealers, acts
as underwriter or placement agent with respect to the sale of the
certificates. All of the public offerings of certificates presently
contemplated are to be underwritten by NISI on a firm commitment basis.
In addition, NISI anticipates that it may privately place certificates
on both a firm commitment and an agency basis. NISI may also act as the
lead underwriter for a syndicate of securities underwriters.
Certificateholders will be entitled to receive monthly, quarterly
or semi-annual installments of principal and/or interest, or lease
payments due on the receivables, adjusted, in the case of payments of
interest, to a specified rate--the pass-through rate--which may be
fixed or variable.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
certificateholders) to hold funds received between distribution dates.
The account is under the sole control of the trustee, who invests the
account's assets in short-term securities which have received a rating
comparable to the rating assigned to the certificates. In some cases,
the servicer
[[Page 18812]]
may be permitted to make a single deposit into the account once a
month. When the servicer makes such monthly deposits, payments received
from obligors by the servicer may be commingled with the servicer's
assets during the month prior to deposit. Usually, the period of time
between receipt of funds by the servicer and deposit of these funds in
a segregated account does not exceed one month. Furthermore, in those
cases where distributions are made semi-annually, the servicer will
furnish a report on the operation of the trust to the trustee on a
monthly basis. At or about the time this report is delivered to the
trustee, it will be made available to certificateholders and delivered
to or made available to each rating agency that has rated the
certificates.
5. Some of the certificates will be multi-class certificates. NISI
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.16
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\16\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this
exemption.
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``Fast-pay/slow-pay'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying receivables are distributed first
to the class of certificates having the earliest stated maturity of
principal, and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class pass-through arrangement is
the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying assets. In neither case will the rights of a plan
purchasing a certificate be subordinated to the rights of another
certificateholder in the event of default on any of the underlying
obligations. In particular, if the amount available for distribution to
certificateholders is less than the amount required to be so
distributed, all senior certificateholders then entitled to receive
distributions will share in the amount distributed on a pro rata
basis.17
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\17\ 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. The trust will 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 a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their business,
including finance companies for whom such origination constitutes the
bulk of their operations, financial institutions for whom such
origination constitutes a substantial part of their operations, and any
kind of manufacturer, merchant, or service enterprise for whom such
origination is an incidental part of its operations. Each trust may
contain assets of one or more originators. The originator of the
receivables may also function as the trust sponsor or servicer.
8. The sponsor will be one of three entities: (i) A special-purpose
or other 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 NISI, the trust sponsor or the servicer. NISI represents
that the trustee will be a substantial financial institution or trust
company experienced in trust activities. The trustee receives a fee for
its services, which will be paid by the servicer or sponsor. The method
of compensating the trustee which is specified in the pooling and
servicing agreement will be disclosed in the prospectus or private
placement memorandum relating to the offering of the certificates.
10. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, the receivables may be
``subserviced'' by their respective originators and a single entity may
``master service'' the pool of receivables on behalf of the owners of
the related series of certificates. Where this arrangement is adopted,
a receivable continues to be serviced from the perspective of the
borrower by the local subservicer, while the investor's perspective is
that the entire pool of receivables is serviced by a single, central
master servicer who collects payments from the local subservicers and
passes them through to certificateholders.
Receivables of the type suitable for inclusion in a trust
invariably are serviced with the assistance of a computer. After the
sale, the servicer
[[Page 18813]]
keeps the sold receivables on the computer system in order to continue
monitoring the accounts. Although the records relating to sold
receivables are kept in the same master file as receivables retained by
the originator, the sold receivables are flagged as having been sold.
To protect the investor's interest, the servicer ordinarily covenants
that this ``sold flag'' will be included in all records relating to the
sold receivables, including the master file, archives, tape extracts
and printouts.
The sold flags are invisible to the obligor and do not affect the
manner in which the servicer performs the billing, posting and
collection procedures related to the sold receivables. However, the
servicer uses the sold flag to identify the receivables for the purpose
of reporting all activity on those receivables after their sale to
investors.
Depending on the type of receivable and the details of the
servicer's computer system, in some cases the servicer's internal
reports can be adapted for investor reporting with little or no
modification. In other cases, the servicer may have to perform special
calculations to fulfill the investor reporting responsibilities. These
calculations can be performed on the servicer's main computer, or on a
small computer with data supplied by the main system. In all cases, the
numbers produced for the investors are reconciled to the servicer's
books and reviewed by public accountants.
The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates are generally made on a
firm commitment basis. Private placement of certificates may be made on
a firm commitment or agency basis. It is anticipated that the lead and
co-managing underwriters will make a market in certificates offered to
the public.
In some cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (although they may
themselves be related) will be unrelated to NISI. In other cases,
however, affiliates of NISI may originate or service receivables
included in a trust or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. In some cases, the sponsor will obtain the receivables from
various originators pursuant to existing contracts with such
originators under which the sponsor continually buys receivables. In
other cases, the sponsor will purchase the receivables at fair market
value from the originator or a third party pursuant to a purchase and
sale agreement related to the specific offering of certificates. In
other cases, the sponsor will originate the receivables itself.
As compensation for the receivables transferred to the trust, the
sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates. If the sponsor receives certificates from the trust, the
sponsor sells all or a portion of these certificates for cash to
investors or securities underwriters.
12. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on receivables included in the trust minus a specified servicing
fee.18 This rate is generally determined by the same market forces
that determine the price of a certificate. The price of a certificate
and its pass-through, or coupon, rate together determine the yield to
investors. If an investor purchases a certificate at less than par,
that discount augments the stated pass-through rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
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18 The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting in that capacity) will retain the difference
between payments received on the receivables in the trust and payments
payable (at the pass-through rate) to certificateholders, except that
in some cases a portion of the payments on receivables may be paid to a
third party, such as a fee paid to a provider of credit support. The
servicer may receive additional compensation by having the use of the
amounts paid on the receivables between the time they are received by
the servicer and the time they are due to the trust (which time is set
forth in the pooling and servicing agreement). The servicer typically
will be required to pay the administrative expenses of servicing the
trust, including in some cases the trustee's fee, out of its servicing
compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is
established.
14. The servicer may be entitled to retain certain administrative
fees paid by a third party, usually the obligor. These administrative
fees fall into three categories: (a) prepayment fees; (b) late payment
and payment extension fees; and (c) expenses, fees and charges
associated with foreclosure or repossession, or other conversion of a
secured position into cash proceeds, upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
15. Payments on receivables may be made by obligors to the servicer
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and
servicing agreement may permit the servicer to place these payments in
non-interest bearing accounts maintained with itself or to commingle
such payments with its own funds prior to the distribution dates. In
these cases, the servicer would be entitled to the benefit derived from
the use of the funds between the date of payment on a receivable and
the pass-through date. Commingled payments may not be protected from
the creditors of the servicer in the event of the servicer's bankruptcy
or receivership. In those instances when payments on receivables are
held in non-interest bearing accounts or are commingled with the
servicer's own funds, the servicer is required to deposit these
payments by a date specified in the pooling and servicing agreement
into an account from which the trustee makes payments to
certificateholders.
16. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would consist of the difference
between what the underwriter receives for the certificates that it
distributes and what it pays the sponsor for those certificates. In a
[[Page 18814]]
private placement, the fee normally takes the form of an agency
commission paid by the sponsor. In a best efforts underwriting in which
the underwriter would sell certificates in a public offering on an
agency basis, the underwriter would receive an agency commission rather
than a fee based on the difference between the price at which the
certificates are sold to the public and what it pays the sponsor. In
some private placements, the underwriter may buy certificates as
principal, in which case its compensation would be the difference
between what it receives for the certificates that it sells and what it
pays the sponsor for these certificates.
Purchase of Receivables by the Servicer
17. The applicant represents that as the principal amount of the
receivables in a trust is reduced by payments, the cost of
administering the trust generally increases, making the servicing of
the trust prohibitively expensive at some point.
Consequently, the pooling and servicing agreement generally
provides that the servicer may purchase the receivables remaining in
the trust when the aggregate unpaid balance payable on the receivables
is reduced to a specified percentage (usually 5 to 10 percent) of the
initial aggregate unpaid balance.
The purchase price of a receivable is specified in the pooling and
servicing agreement and will be at least equal to: (1) the unpaid
principal balance on the receivable plus accrued interest, less any
unreimbursed advances of principal made by the servicer; or (2) the
greater of (a) the amount in (1) or (b) the fair market value of such
obligations in the case of a REMIC, or the fair market value of the
receivables in the case of a trust that is not a REMIC.
Certificate Ratings
18. The certificates will have received one of the three highest
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance
or other credit support (such as surety bonds, letters of credit,
guarantees, or overcollateralization) will be obtained by the trust
sponsor to the extent necessary for the certificates to attain the
desired rating. The amount of this credit support is set by the rating
agencies at a level that is a multiple of the worst historical net
credit loss experience for the type of obligations included in the
issuing trust.
Provision of Credit Support
19. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust (i.e. act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) Out of late
payments by the obligors, (b) from the credit support provider (which
may be the master servicer or an affiliate thereof) or, (c) in the case
of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates, and
the master servicer will advance such funds in a timely manner. When
the servicer is the provider of the credit support and provides its own
funds to cover defaulted payments, it will do so either on the
initiative of the trustee, or on its own initiative on behalf of the
trustee, but in either event it will provide such funds to cover
payments to the full extent of its obligations under the credit support
mechanism. In some cases, however, the master servicer may not be
obligated to advance funds but instead would be called upon to provide
funds to cover defaulted payments to the full extent of its obligations
as insurer. Moreover, a master servicer typically can recover advances
either from the provider of credit support or from future payments on
the affected assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the trust as payments on
receivables are passed through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount thereafter is subject
to reduction only for actual draws. From the time that the floor amount
is effective until the end of the life of the trust, there are no
proportionate reductions in the credit support amount caused by
reductions in the pool principal balance. Indeed, since the floor is a
fixed dollar amount, the amount of credit support ordinarily increases
as a percentage of the pool principal balance during the period that
the floor is in effect.
[[Page 18815]]
Disclosure
20. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
(c) Identification of the independent trustee for the trust;
(d) A description of the receivables contained in the trust,
including the types of receivables, the diversification of the
receivables, their principal terms, and their material legal aspects;
(e) A description of the sponsor and servicer;
(f) A description of the pooling and servicing agreement, including
a description of the seller's principal representations and warranties
as to the trust assets and the trustee's remedy for any breach thereof;
a description of the procedures for collection of payments on
receivables and for making distributions to investors, and a
description of the accounts into which such payments are deposited and
from which such distributions are made; identification of the servicing
compensation and any fees for credit enhancement that are deducted from
payments on receivables before distributions are made to investors; a
description of periodic statements provided to the trustee, and
provided to or made available to investors by the trustee; and a
description of the events that constitute events of default under the
pooling and servicing contract and a description of the trustee's and
the investors' remedies incident thereto;
(g) A description of the credit support;
(h) A general discussion of the principal federal income tax
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
(i) A description of the underwriters' plan for distributing the
pass-through securities to investors; and
(j) Information about the scope and nature of the secondary market,
if any, for the certificates.
21. Reports indicating the amount of payments of principal and
interest are provided to certificateholders at least as frequently as
distributions are made to certificateholders. Certificateholders will
also be provided with periodic information statements setting forth
material information concerning the underlying assets, including, where
applicable, information as to the amount and number of delinquent and
defaulted loans or receivables.
22. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission, a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates. While the Securities and Exchange Commission's
interpretation of the periodic reporting requirements is subject to
change, periodic reports concerning a trust will be filed to the extent
required under the Securities Exchange Act of 1934.
23. At or about the time distributions are made to
certificateholders, a report will be delivered to the trustee as to the
status of the trust and its assets, including underlying obligations.
Such report will typically contain information regarding the trust's
assets, payments received or collected by the servicer, the amount of
prepayments, delinquencies, servicer advances, defaults and
foreclosures, the amount of any payments made pursuant to any credit
support, and the amount of compensation payable to the servicer. Such
report also will be delivered to or made available to the rating agency
or agencies that have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the servicer,
paying agent or trustee summarizing information regarding the trust and
its assets. Such statement will include information regarding the trust
and its assets, including underlying receivables. Such statement will
typically contain information regarding payments and prepayments,
delinquencies, the remaining amount of the guaranty or other credit
support and a breakdown of payments between principal and interest.
Forward Delivery Commitments
24. To date, no forward delivery commitments have been entered into
by NISI in connection with the offering of any certificates, but NISI
may contemplate entering into such commitments. The utility of forward
delivery commitments has been recognized with respect to offering
similar certificates backed by pools of residential mortgages, and NISI
may find it desirable in the future to enter into such commitments for
the purchase of certificates.
Secondary Market Transactions
25. It is NISI's normal policy to attempt to make a market for
securities for which it is lead or co-managing underwriter. NISI
anticipates that it will make a market in certificates, although it
will have no obligation to do so.
Retroactive Relief
26. NISI represents that it has not assumed that retroactive relief
would be granted prior to the date of its application, and therefore
has not engaged in transactions related to mortgage-backed and asset-
backed securities based on such an assumption. However, NISI requests
the exemptive relief granted to be retroactive to February 12, 1997,
the date of its 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, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute receivables
contained in the trust once the trust has been formed;
(b) Certificates in which plans invest will have been rated in one
of the three highest rating categories by S&P's, Moody's, D&P or Fitch.
Credit support will be obtained to the extent necessary to attain the
desired rating;
(c) All transactions for which NISI 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
[[Page 18816]]
(e) NISI anticipates that it will make a secondary market in
certificates.
Discussion of Proposed Exemption
I. Differences Between Proposed Exemption and Class Exemption PTE 83-1
The exemptive relief proposed herein is similar to that provided in
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts, amended and
restated as PTE 83-1 [48 FR 895, January 7, 1983].
PTE 83-1 applies to mortgage pool investment trusts consisting of
interest-bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property. The exemption
provides relief from sections 406(a) and 407 for the sale, exchange or
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406(a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (1) The proposed exemption
provides individual exemptive relief rather than class relief; (2) The
proposed exemption covers transactions involving trusts containing a
broader range of assets than single-family residential mortgages; (3)
Instead of requiring a system for insuring the pooled receivables, the
proposed exemption conditions relief upon the certificates having
received one of the three highest ratings available from S&P's,
Moody's, D&P or Fitch (insurance or other credit support would be
obtained only to the extent necessary for the certificates to attain
the desired rating); and (4) The proposed exemption provides more
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
After consideration of the representations of the applicant and
information provided by S&P's, Moody's, D&P and Fitch, the Department
has decided to condition exemptive relief upon the certificates having
attained a rating in one of the three highest generic rating categories
from S&P's, Moody's, D&P or Fitch. The Department believes that the
rating condition will permit the applicant flexibility in structuring
trusts containing a variety of mortgages and other receivables while
ensuring that the interests of plans investing in certificates are
protected. The Department also believes that the ratings are indicative
of the relative safety of investments in trusts containing secured
receivables. The Department is conditioning the proposed exemptive
relief upon each particular type of asset-backed security having been
rated in one of the three highest rating categories for at least one
year and having been sold to investors other than plans for at least
one year.19
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19 In referring to different ``types'' of asset-NISIcked
securities, the Department means certificates representing interests
in trusts containing different ``types'' of receivables, such as
single family residential mortgages, multi-family residential
mortgages, commercial mortgages, home equity loans, auto loan
receivables, installment obligations for consumer durables secured
by purchase money security interests, etc. The Department intends
this condition to require that certificates in which a plan invests
are of the type that have been rated (in one of the three highest
generic rating categories by S&P's, D&P, Fitch or Moody's) and
purchased by investors other than plans for at least one year prior
to the plan's investment pursuant to the proposed exemption. In this
regard, the Department does not intend to require that the
particular assets contained in a trust must have been ``seasoned''
(e.g., originated at least one year prior to the plan's investment
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
NISI 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.20 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. 21 Likewise, issues are raised
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a
plan to purchase certificates where trust funds will be used to benefit
a party in interest.
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20 In this regard, we note that the exemptive relief
proposed herein is limited to certificates with respect to which
NISI 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.
21 The applicant represents that where a trust sponsor is
an affiliate of NISI, 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 NISI is not a
fiduciary with respect to plan assets to be invested in
certificates.
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Additionally, NISI 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. NISI
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, NISI 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
[[Page 18817]]
must be received by the Department not later than 30 days from the date
of publication of this notice of proposed exemption in the Federal
Register.
For Further Information Contact: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 14th day of April, 1997.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 97-9974 Filed 4-16-97; 8:45 am]
BILLING CODE 4510-29-P