[Federal Register Volume 59, Number 205 (Tuesday, October 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26405]


[[Page Unknown]]

[Federal Register: October 25, 1994]


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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9801, et al.]

 

Proposed Exemptions; Alex. Brown & Sons, Inc. (ABS) et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restriction of the Employee 
Retirement income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
request for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing. A request for a hearing must also state the issues to be 
addressed and include a general description of the evidence to be 
presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of 
the Secretary of the Treasury to issue exemptions of the type requested 
to the Secretary of Labor. Therefore, these notices of proposed 
exemption are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Alex. Brown & Sons, Incorporated (ABS)

Located in Baltimore, Maryland

[Application No. D-9801]

Proposed Exemption

I. Transactions

    A. Effective August 12, 1994, 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.\1\
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    \1\Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
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    B. Effective August 12, 1994, 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.\2\ 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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    \2\For purposes of this exemption, each plan participating in a 
commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that 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 August 12, 1994, 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.3
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    \3\In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions.

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 August 12, 1994, the restrictions of sections 406(a) 
and 407(a) of the Act, and the taxes imposed by sections 4975(a) and 
(b) of the Code by reason of sections 4975(c)(1)(A) through (D) of the 
Code, shall not apply to any transactions to which those restrictions 
or taxes would otherwise apply merely because a person is deemed to be 
a party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider described in 
section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2) (F), 
(G), (H) or (I) of the Code), solely because of the plan's ownership of 
certificates.

II. General Conditions

    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is in one of the three highest 
generic rating categories from either Standard & Poor's Corporation 
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc. 
(D & P) or Fitch Investors Service, Inc. (Fitch);
    (4) The trustee is not an affiliate of any member of the Restricted 
Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith; and
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, or 
any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.

III. Definitions

    For purposes of this exemption:
    A. ``Certificate'' means:
    (1) A certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; 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 ABS 
or any of its affiliates is either (i) the sole underwriter or the 
manager or co-manager of the underwriting syndicate, or (ii) a selling 
or placement agent.
    For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1) Either
    (a) secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association);
    (b) secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T);
    (c) obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, multi-family 
residential and commercial real property (including obligations secured 
by leasehold interests on commercial real property);
    (d) obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U);
    (e) ``guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2);
    (f) fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1);
    (2) Property which had secured any of the obligations described in 
subsection B.(1);
    (3) Undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to be 
made to certificateholders; and
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship and other credit support 
arrangements with respect to any obligations described in subsection 
B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) the investment pool consists only of 
assets of the type which have been included in other investment pools, 
(ii) certificates evidencing interests in such other investment pools 
have been rated in one of the three highest generic rating categories 
by S&P's, Moody's, D & P, or Fitch for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. ``Underwriter'' means:
    (1) ABS;
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
ABS; or
    (3) Any member of an underwriting syndicate or selling group of 
which ABS or a person described in (2) is a manager or co-manager with 
respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services loans contained in 
the trust, including the master servicer and any subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;
    (6) Any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) Any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as the 
trust would be have if the equipment note were secured only by the 
equipment and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust holds a security interest in the lease;
    (2) The trust holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as the trust would receive 
under a motor vehicle installment loan contract.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    Effective Date: This exemption, if granted, will be effective for 
transactions occurring on or after August 12, 1994.

Summary of Facts and Representations

    1. ABS, an investment banking firm, provides financial advice to, 
and raises capital for, a broad range of domestic and international 
clients. ABS conducts business from its headquarters in Baltimore and 
in various cities across the United States, as well as London and 
Geneva. ABS is the oldest banking firm in the United States, having 
been in business since 1800. Since its inception, ABS has been very 
active in the government bond, corporate equity and municipal finance 
and housing finance areas. As of December 31, 1993, ABS had total 
assets of over $1.2 billion and total shareholder's equity of over $345 
million. For the year ended December 31, 1993, ABS had gross revenues 
of over $628 million and net earnings, after income taxes, of over $89 
million.

Trust Assets

    2. ABS 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;\4\ (2) motor vehicle receivable 
investment trusts; (3) consumer or commercial receivables investment 
trusts; and (4) guaranteed governmental mortgage pool certificate 
investment trusts.\5\
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    \4\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. ABS requests relief for single-family residential mortgages in 
this exemption because it would prefer one exemption for all trusts 
of similar structure. However, ABS has stated that it may still 
avail itself of the exemptive relief provided by PTE 83-1.
    \5\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.\6\
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    \6\Trust assets may also include obligations that are secured by 
leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
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Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee. The sponsor or 
servicer of a trust selects assets to be included in the trust. These 
assets are receivables which may have been originated by a sponsor or 
servicer of the trust, an affiliate of the sponsor or servicer, or by 
an unrelated lender and subsequently acquired by the trust sponsor or 
servicer.
    On or prior to the closing date, the sponsor acquires legal title 
to all assets selected for the trust, establishes the trust and 
designates an independent entity as trustee. On the closing date, the 
sponsor conveys to the trust legal title to the assets, and the trustee 
issues certificates representing fractional undivided interests in the 
trust assets. ABS, alone or together with other broker-dealers, acts as 
underwriter or placement agent with respect to the sale of the 
certificates. The majority of the public offerings of certificates made 
to date have been underwritten on a firm commitment basis. However, 
some may be undertaken on a best efforts basis. In addition, ABS has 
privately placed certificates on both a firm commitment and an agency 
basis. ABS may also act as the lead underwriter for a syndicate of 
securities underwriters. ABS may also act as the servicer or seller to 
the trust of the receivables or the trust sponsor.
    Certificate holders are entitled to receive monthly, quarterly or 
semi-annually installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificate holders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from obligors by the servicer may be commingled with the 
servicer's assets during the month prior to deposit. Usually, the 
period of time between receipt of funds by the servicer and deposit of 
these funds in a segregated account does not exceed one month. 
Furthermore, in those cases where distributions are made semi-annually, 
the servicer will furnish a report on the operation of the trust to the 
trustee on a monthly basis. At or about the time this report is 
delivered to the trustee, it will be made available to certificate 
holders 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. ABS 
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.7
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    \7\It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(1)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this 
exemption.
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    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. In certain transactions of 
this type, interest and/or principal payments received on the 
underlying receivables are distributed first to the class of 
certificates having the earliest stated maturity of principal, and/or 
earlier payment schedule, and only when that class of certificates have 
been paid in full (or has received a specified amount) will 
distributions be made with respect to the second class of certificates. 
Distributions on certificates having later stated maturities will 
proceed in like manner until all the certificateholders have been paid 
in full. The only difference between this multi-class pass-through 
arrangement and a single-class pass-through arrangement is the order in 
which distributions are made to certificateholders. In each case, 
certificateholders will have a beneficial ownership interest in the 
underlying assets. In neither case will the rights of a plan purchasing 
a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.8
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    \8\If a trust issues subordinated certificates, holders of such 
subordinated certificates may not share in the amount distributed on 
a pro rata basis with the senior certificateholders. The Department 
notes that the exemption does not provide relief for plan investment 
in such subordinated certificates.
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    6. For tax reasons, the trust must be maintained as an essentially 
passive entity. Therefore, both the sponsor's discretion and the 
servicer's discretion with respect to assets included in a trust are 
severely limited. Pooling and servicing agreements provide for the 
substitution of receivables by the sponsor only in the event of defects 
in documentation discovered within a short time after the issuance of 
trust certificates. Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed through to certificateholders.

Parties to Transactions

    7. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a homeowner or automobile 
purchaser, or leases property to the lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their business, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    8. The sponsor will be one of three entities: (i) A special-purpose 
corporation unaffiliated with the servicer, (ii) a special-purpose or 
other corporation affiliated with the servicer, or (iii) the servicer 
itself. Where the sponsor is not also the servicer, the sponsor's role 
will generally be limited to acquiring the receivables to be included 
in the trust, establishing the trust, designating the trustee, and 
assigning the receivables to the trust.
    9. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and as such is 
responsible for enforcing all the rights created thereby in favor of 
certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to ABS, the trust sponsor or the servicer. ABS represents 
that the trustee will be a substantial financial institution or trust 
company experienced in trust activities. The trustee receives a fee for 
its services, which will be paid by the servicer, sponsor or the trust 
as specified in the pooling and servicing agreement. The method of 
compensating the trustee which is specified in the pooling and 
servicing agreement will be disclosed in the prospectus or private 
placement memorandum relating to the offering of the certificates.
    10. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a trust, it is common for the 
receivables to be ``subserviced'' by their respective originators and 
for a single entity to ``master service'' the pool of receivables on 
behalf of the owners of the related series of certificates. Where this 
arrangement is adopted, a receivable continues to be serviced from the 
perspective of the borrower by the local subservicer, while the 
investor's perspective is that the entire pool of receivables is 
serviced by a single, central master servicer who collects payments 
from the local subservicers and passes them through to 
certificateholders.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (though they 
themselves may be related) will be unrelated to ABS. In other cases, 
however, affiliates of ABS may originate or service receivables 
included in a trust, or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    11. Where the sponsor of a trust is not the originator of 
receivables included in a trust, the sponsor generally purchases the 
receivables in the secondary market, either directly from the 
originator or from another secondary market participant. The price the 
sponsor pays for a receivable is determined by competitive market 
forces, taking into account payment terms, interest rate, quality, and 
forecasts as to future interest rates.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters. In some transactions, the sponsor 
or an affiliate may retain a portion of the certificates for its own 
account. In addition, in some transactions the originator may sell 
receivables to a trust for cash. At the time of the sale, the trustee 
would sell certificates to the public or to underwriters and use the 
cash proceeds of the sale to pay the originator for receivables sold to 
the trust. The transfer of the receivables to the trust by the sponsor, 
the sale of certificates to investors, and the receipt of the cash 
proceeds by the sponsor generally take place simultaneously.
    12. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and 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.9 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.
---------------------------------------------------------------------------

    \9\The pass-through rate on certificates representing interests 
in trusts holding leases is determined by breaking down lease 
payments into ``principal'' and ``interest'' components based on an 
implicit interest rate.
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    13. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor, and receive fees for acting in 
that capacity) will retain the difference between payments received on 
the receivables in the trust and payments payable (at the pass-through 
rate) to certificateholders, except that in some cases a portion of the 
payments on receivables may be paid to a third party, such as a fee 
paid to a provider of credit support. The servicer may receive 
additional compensation by having the use of the amounts paid on the 
receivables between the time they are received by the servicer and the 
time they are due to the trust (which time is set forth in the pooling 
and servicing agreement). The servicer 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) Fees and charges associated with 
foreclosure or repossession, or other conversion of a secured position 
into cash proceeds, upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    15. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts in itself or to commingle such payments 
with its own funds prior to the distribution dates. In these cases, the 
servicer would be entitled to the benefit derived from the use of the 
funds between the date of payment on a receivable and the pass-through 
date. Commingled payments may not be protected from the creditors of 
the servicer in the event of the servicer's bankruptcy or receivership. 
In those instances when payments on receivables are held in non-
interest bearing accounts or are commingled with the servicer's own 
funds, the servicer is required to deposit these payments by a date 
specified in the pooling and servicing agreement into an account from 
which the trustee makes payments to certificateholders.
    16. ABS and any other participating underwriter will receive a fee 
in connection with the securities underwriting or private placement of 
certificates. In a firm commitment underwriting, this fee would 
normally consist of the difference between what ABS receives for the 
certificates that it distributes and what it pays the sponsor for those 
certificates. In a private placement, the fee may also take the form of 
an agency commission paid by the sponsor. Such fees are negotiated at 
arm's-length with the sponsor, originator or unrelated lender and are 
affected by fees in comparable offerings.

Purchase of Receivables by the Servicer

    17. The applicant represents that as the principal amount of the 
receivables in a trust is reduced by payments, the cost of 
administering the trust generally increases, making the servicing of 
the trust prohibitively expensive at some point. Consequently, the 
pooling and servicing agreement generally provides that the servicer 
may purchase the receivables remaining in the trust when the aggregate 
unpaid balance payable on the receivables is reduced to a specified 
percentage (usually 5 to 10 percent) of the initial aggregate unpaid 
balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to: (1) The unpaid 
principal balance on the receivable plus accrued interest, less any 
unreimbursed advances of principal made by the servicer; or (2) The 
greater of (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
certificates in the case of a trust that is not a REMIC.

Certificate Ratings

    18. The certificates will have received one of the three highest 
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance 
or other credit support (such as surety bonds, letters of credit, 
guarantees, or the creation of a class of certificates with 
subordinated cash flow) will be obtained by the trust sponsor to the 
extent necessary for the certificates to attain the desired rating. The 
amount of this credit support is set by the rating agencies at a level 
that is a multiple of the worst historical net credit loss experience 
for the type of obligations included in the issuing trust.

Provision of Credit Support

    19. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) out of liquidation proceeds, (c) from the 
credit support provider (which may be itself) or, (d) in the case of a 
trust that issues subordinated certificates, from amounts otherwise 
distributable to holders of subordinated certificates, and the master 
servicer will advance such funds in a timely manner. When the servicer 
is the provider of the credit support and provides its own funds to 
cover defaulted payments, it will do so either on the initiative of the 
trustee, or on its own initiative on behalf of the trustee, but in 
either event it will provide such funds to cover payments to the full 
extent of its obligations under the credit support mechanism. In some 
cases, however, the master servicer may not be obligated to advance 
funds but instead would be called upon to provide funds to cover 
defaulted payments to the full extent of its obligations as insurer. 
However, a master servicer typically can recover advances either from 
the provider of credit support or from future payments on the affected 
assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to enforce the certificateholders' rights, 
as both a party to the pooling and servicing agreement and the owner of 
the trust estate, including rights under the credit support mechanism. 
Therefore, the trustee, who is independent of the servicer, will have 
the ultimate right to enforce the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the servicer out of future payments on receivables held 
by the trust to the extent not covered by credit support. However, 
where the master servicer provides credit support to the trust, there 
are protections in place to guard against a delay in calling upon the 
credit support to take advantage of the fact that the credit support 
declines proportionally with the decrease in the principal amount of 
the obligations in the trust as payments on receivables are passed 
through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;
    (c) As frequently as payments are due on the receivables included 
in the trust (monthly, quarterly or semi-annually, as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all past-due payments 
and the amount of all servicer advances, along with other current 
information as to collections on the receivables and draws upon the 
credit support. Further, the master servicer is required to deliver to 
the trustee annually a certificate of an executive officer of the 
master servicer stating that a review of the servicing activities has 
been made under such officer's supervision, and either stating that the 
master servicer has fulfilled all of its obligations under the pooling 
and servicing agreement or, if the master servicer has defaulted under 
any of its obligations, specifying any such default. The master 
servicer's reports are reviewed at least annually by independent 
accountants to ensure that the master servicer is following its normal 
servicing standards and that the master servicer's reports conform to 
the master servicer's internal accounting records. The results of the 
independent accountants' review are delivered to the trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount becomes a fixed dollar 
amount subject to reduction only for actual draws. From the time that 
the floor amount is effective until the end of the life of the trust, 
there are no proportionate reductions in the credit support amount 
caused by reductions in the pool principal balance. Indeed, since the 
floor is a fixed dollar amount, the amount of credit support ordinarily 
increases as a percentage of the pool principal balance during the 
period that the floor is in effect.

Disclosure

    20. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, and any material risk factors with 
respect to the certificates;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (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.

Secondary Market Transactions

    24. It is ABS's normal policy to attempt to make a market for 
securities for which it is lead or co-managing underwriter, and it is 
ABS's intention to attempt to make a market for any certificates for 
which ABS is lead or co-managing underwriter. In general, it is also 
ABS's policy to facilitate sales by investors who purchase certificates 
if ABS has acted as agent or principal in the original private 
placement of the certificates and if such investors request ABS's 
assistance.

Retroactive Relief

    25. ABS represents that it has engaged in transactions related to 
mortgage-backed and asset-backed securities based on the assumption 
that retroactive relief would not be granted. However, it is possible 
that some transactions may have occurred that would be prohibited. For 
example, because many certificates are held in street or nominee name, 
it is not always possible to identify whether the percentage interest 
of plans in a trust is or is not ``significant'' for purposes of the 
Department's regulation relating to the definition of plan assets (29 
CFR 2510.3-101(f)). These problems are compounded as transactions occur 
in the secondary market. In addition, with respect to the ``publicly-
offered security'' exception contained in that regulation (29 CFR 
2510.3-101(b)), it is difficult to determine whether each purchaser of 
a certificate is independent of all other purchasers.
    Therefore, ABS requests relief retroactive for transactions which 
have occurred on or after August 12, 1994, the date ABS originally 
filed its exemption application with the Department.

Summary

    26. 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 ABS seeks exemptive relief will be 
governed by the pooling and servicing agreement, which is made 
available to plan fiduciaries for their review prior to the plan's 
investment in certificates;
    (d) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (e) ABS has made, and anticipates that it will continue to 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.10
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    \1\0In referring to different ``types'' of asset-backed 
securities, the Department means certificates representing interests 
in trusts containing different ``types'' of receivables, such as 
single family residential mortgages, multi-family residential 
mortgages, commercial mortgages, home equity loans, auto loan 
receivables, installment obligations for consumer durables secured 
by purchase money security interests, etc. The Department intends 
this condition to require that certificates in which a plan invests 
are of the type that have been rated (in one of the three highest 
generic rating categories by S&P's, D&P, Fitch or Moody's) and 
purchased by investors other than plans for at least one year prior 
to the plan's investment pursuant to the proposed exemption. In this 
regard, the Department does not intend to require that the 
particular assets contained in a trust must have been ``seasoned'' 
(e.g., originated at least one year prior to the plan's investment 
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales

    ABS 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.11 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.12 Likewise, issues are raised 
under section 406(a)(1)(D) of the Act where a plan fiduciary causes a 
plan to purchase certificates where trust funds will be used to benefit 
a party in interest.
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    \1\1In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which ABS 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.
    \1\2The applicant represents that where a trust sponsor is an 
affiliate of ABS, 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 ABS is not a fiduciary with 
respect to plan assets to be invested in certificates.
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    Additionally, ABS 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. ABS 
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, ABS represents that to the extent there is a plan asset 
``look through'' to the underlying assets of a trust, the investment in 
certificates by a plan covering employees of an obligor under 
receivables contained in a trust may be prohibited by sections 406(a) 
and 407(a) of the Act.
    After consideration of the issues involved, the Department has 
determined to provide the limited sections 406(b) and 407(a) relief as 
specified in the proposed exemption.

Notice to Interested Persons

    The applicant represents that because those potentially interested 
participants and beneficiaries cannot all be identified, the only 
practical means of notifying such participants and beneficiaries of 
this proposed exemption is by the publication of this notice in the 
Federal Register. Comments and requests for a hearing must be received 
by the Department not later than 30 days from the date of publication 
of this notice of proposed exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

 The Masters, Mates and Pilots Pension Plan (the Pension Plan) and 
Individual Retirement Account Plan (the IRAP; Together, the Plans) 
Located in Linthicum Heights, Maryland

[Application Nos. D-9618 and D-9619]

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) 
and 407(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 
(E) of the Code, shall not apply to the continued holding by the Plans 
of their shares of stock (the Stock) in American Heavy Lift Shipping 
Company (AHL), provided that (a) the Plans' independent fiduciary has 
determined that the Plans' holding of the Stock is appropriate for the 
Plans and in the best interests of the Plans' participants and 
beneficiaries; and (b) the Plans' independent fiduciary continues to 
monitor the Plans' holding of the Stock and determines at all times 
that such transaction remains in the best interests of the Plans.

Temporary Nature of Exemption

    If the proposed exemption is granted, the exemption will be 
effective until the later of: (1) December 31, 1995, or (2) December 
31, 1996 provided another application for exemption is filed with the 
Department prior to December 31, 1995.

Summary of Facts and Representations

    1. The Pension Plan is a defined benefit plan that currently has 
approximately 5,800 participants. As of December 31, 1992, the Pension 
Plan had approximately $673 million in assets. The IRAP is a defined 
contribution plan that currently has approximately 5,200 participants. 
As of December 31, 1992, the IRAP had approximately $87 million in 
assets. The Plans principally cover members of the International 
Organization of Masters, Mates and Pilots.
    2. Bear Stearns Fiduciary Services, Inc. (BSFS) is a registered 
investment advisor which serves as the Named Fiduciary for the Special 
Assets Portfolio of the Plans. The Special Assets Portfolio consists of 
various venture capital and other non-liquid investments which were 
made by a former investment manager of the Plans, Tower Asset 
Management, Inc. (Tower), and which were the subject of protracted 
litigation (the Litigation) between the Department, Tower, the Plans 
and certain of their trustees, and certain plan participants.13 
The Litigation ultimately was settled pursuant to Court Order entered 
by the United States District Court for the Southern District of New 
York (the Court).
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    \1\3In re Masters, Mates and Pilots Pension Plan and IRAP 
Litigation, Lead File No. 85 Civ. 9545 (VLB) (S.D.N.Y.)
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    3. In the course of the Litigation, BSFS was appointed Named 
Fiduciary for the Plans' Special Assets Portfolio by Court Order dated 
September 18, 1990 (the Court Order). BSFS assumed its responsibilities 
on November 8, 1990. The Court Order provided that the Named Fiduciary, 
rather than the Plans' trustees, has the ``sole, exclusive, full and 
complete authority and discretion concerning the control, management 
and disposition of the Special Assets Portfolio''.
    4. Since February, 1987, the Plans have each owned 45 shares of the 
Stock, which Stock represents all of the outstanding shares of AHL. AHL 
is a Delaware corporation, headquartered in Houston, Texas, that is 
engaged in the shipping industry. Its principal assets consist of four 
single-hulled tankers, built in the 1950's, that are used primarily for 
the transportation of petroleum products in the Jones Act trade (i.e., 
American-flagged tankers in the domestic intra-coastal trade). The 
Plans' Stock can be traced back to certain prior investments made by 
Tower and is held in the Plans' Special Assets Portfolio, along with 
the Plans' other remaining Tower-initiated investments.
    5. Since AHL is an employer of employees covered under the Plans, 
the Stock constitutes employer securities under section 407(d)(1) of 
the Act. The applicants represent that the Stock constituted qualifying 
employer securities within the meaning of section 407(d)(5) of the Act 
at the time of its acquisition, but as of January 1, 1993, the Stock 
ceased to be a qualifying employer security because the Stock is 
wholly-owned by the Plans and thus cannot meet the requirements of 
section 407(f) of the Act. However, the Plans' continued holding of the 
Stock is currently exempt from the prohibited transaction restrictions 
of the Act pursuant to Prohibited Transaction Class Exemption No. 79-15 
as a result of a court order, dated November 2, 1992, entered in the 
Litigation (the PTE 79-15 Order). Under the terms of the PTE 79-15 
Order, this exemption is effective until the later of: a) December 31, 
1993; or b) December 31, 1994, provided the Plans make application to 
the Department for an exemption to permit the continued holding of the 
Stock. By filing the request which is the subject of the exemption 
proposed herein, the exemption provided under the PTE 79-15 Order has 
been automatically extended to December 31, 1994.
    6. While BSFS, in its capacity as Named Fiduciary, has ultimate 
investment management responsibility for the Special Assets Portfolio, 
it does not exercise investment management discretion over the 
portfolio's assets on a day-to-day basis. Rather, as contemplated by 
the Court Order, responsibility for the day-to-day management and 
supervision of the portfolio's assets has been delegated at all times 
to independent investment managers selected by BSFS. With respect to 
the Plans' investment in the Stock, such responsibility was first 
delegated to Sunwestern Advisors, L.P. (Sunwestern), which served as 
the investment manager for this investment until July 14, 1992. 
Effective that date, Sunwestern's responsibilities were assumed by a 
new investment manager, Potomac Asset Management, Inc. (Potomac), which 
continues to serve in that capacity.
    7. Potomac, a registered investment adviser founded in 1978, is 
owned by three principals, all of whom are analysts as well as 
portfolio managers. In addition to the principals, Potomac has an 
experienced fixed-income manager, equity manager, and corporate finance 
consultant. In addition to its traditional investment management of 
$165 million in bond and stock portfolios, Potomac maintains a 
corporate finance business consisting of private placement consulting 
and monitoring for pension funds, fair market value analysis for 
various clients, restructuring and financing of private companies and 
related activities. Potomac has had experience in managing investments 
by multi-employer plans in privately-held companies, similar to the 
situation involving the Plans' investment in the Stock.
    8. Potomac represents that aggressive efforts were made by 
Sunwestern to sell the Plans' Stock in 1991 and 1992. These efforts 
were unsuccessful largely due to the age of AHL's ships and market 
uncertainties created by the Oil Pollution Act of 1990 (OPA 1990). By 
the time these sales efforts were discontinued in mid-1992, no bona 
fide offers for any price above essentially scrap value had 
materialized. Under OPA 1990, every single-hull tanker engaged in the 
domestic petroleum trade must be converted to a double-hulled tanker or 
it will be phased out of service beginning in 1995, depending upon its 
year of construction. AHL's four tankers were constructed between 1957 
and 1960. Therefore, AHL must either double-hull two of the tankers 
before the end of 1995 and the other two by the end of 1996, or those 
ships will be prohibited from engaging in the domestic petroleum trade. 
If AHL chooses not to double-hull the ships, it will have to depend on 
the less consistent grain, vegetable oil, etc. trade for business.
    9. Potomac represents that, in its judgment, there has been no 
change in market conditions that would permit a sale of the Plans' 
interest in the near term, and, more importantly by year end when the 
exemption pursuant to the PTE 79-15 Order expires. While AHL has 
returned to profitability (see reps. 10 and 11, below), the twin 
problems that plagued prior sales efforts (see rep. 8, above) still 
remain and make the sale of AHL on a going concern basis, in Potomac's 
opinion, a virtual impossibility. The only expressions of interest that 
Potomac has received since becoming investment manager in 1992 have 
consisted of casual inquiries concerning whether AHL would sell one of 
its vessels at slightly below scrap value. In addition, the scrapping 
of AHL's ships is not feasible at the present time due to existing 
contractual commitments. Currently, several of AHL's ships are on 
extended term charter and thus, with the possible exception of a single 
ship, AHL could not now scrap its fleet without abrogating its 
contractual obligations.
    10. Potomac represents that while no sale of AHL is currently 
feasible on favorable terms, AHL has returned to profitability 
following the difficulties it experienced over the last half of 1991 
and during 1992. Potomac states that these profitable operations will 
result in a very significant return to the Plans on their investment 
over the near term, particularly when compared to the only viable 
alternative, a sale of AHL's ships at a price approximating their scrap 
value. Since a scrap value sale of the ships remains available after 
the relatively short period of profitable operations permitted under 
OPA 1990, Potomac believes that the Plans' retention of their 
investment is the preferable investment course of action over the near 
term, even if OPA 1990's requirements ultimately end the useful life of 
AHL's ships.
    11. Potomac represents that AHL's Board, subject to Potomac's 
review as investment manager, has instituted a number of measures 
designed to return AHL to profitability. These measures included a 
change in AHL's key management, the ability of new management to secure 
term, as opposed to spot charters, and the installation of more refined 
and sophisticated cash management and management information systems. 
In addition, AHL had significant necessary maintenance performed, 
including the successful completion of total drydock on three of AHL's 
four ships. During the first quarter of 1994, AHL earned a net profit 
of $787,284 from operations, and shareholders' equity rose to the 
highest level in AHL's history. Potomac represents that it believes 
that in 1994, AHL will earn between $1.2 million and $1.6 million from 
operations. Potomac further represents that the scrap value of the 
ships will not decline significantly from today's values, if at all, 
over the near term. Thus, even if AHL found that OPA 1990's 
requirements left it with no option other than scrapping its vessels 
after 1996, the continued operation of the company, so long as it is 
profitable, will leave the Plans with the added value generated by such 
profitability, plus roughly the same scrap value that they could now 
realize. In addition, this investment option allows AHL to continue to 
study other options and await market developments that may 
significantly enhance the value of its assets to a potential buyer and 
thus significantly enhance the value of the Plans' investment.
    12. One such potential market development involves the 
reconstruction of existing single-hulled vessels to meet the 
requirements of OPA 1990, which may present a cost-effective 
alternative to the building of new ships. This alternative entails 
attaching new, double-hulled cargo bodies to the engine and crew 
sections of existing ships. Potomac represents that discussions it has 
had with Avondale Industries, Inc. (Avondale), one of the nation's 
leading shipbuilding companies, suggest that the cost of rebuilding an 
existing vessel in this fashion would be approximately 50% of the cost 
of a new vessel. This potential cost savings represents an important 
value potential for AHL's existing ships that Potomac represents would 
exceed the ship's scrap value and may be attractive to a possible buyer 
should a demand for rebuilt ships, in fact, develop. Potomac has been 
exploring this option in discussions with Avondale and representatives 
of the United States Coast Guard. In addition, preliminary discussions 
have been held with the Federal Maritime Administration concerning the 
potential financing of such a project, by whomever is the owner, with 
federal loan guarantees. Potomac emphasizes in exploring this option 
that it does not intend the Plans either to make any additional 
investment in AHL for this purpose, or to guarantee any financing for 
AHL. In fact, BSFS, in its capacity of named fiduciary for the Plans 
with oversight responsibility over Potomac (see rep. 13., below), has 
made it clear to Potomac that any such investment by the Plans, either 
directly or in the form of guarantees, is out of the question. Rather, 
it is Potomac's goal to advance this conversion project so as to make 
AHL and its ships attractive to a potential buyer/investor in the event 
a market for reconfigured vessels develops as a cost-effective 
alternative to new construction.
    13. BSFS represents that its obligations under the Court Order to 
monitor and report on the activities of the investment managers for the 
Special Assets Portfolio sharply restrict Potomac's opportunity to 
perpetuate unduly the Plans' continued ownership of AHL. Pursuant to 
the investment management agreement with Potomac that BSFS negotiated 
on behalf of the Plans, Potomac is obligated to supply detailed 
quarterly reports on each of the Special Assets it manages and to 
comply with written investment guidelines. Those guidelines state that 
Potomac ``shall seek, among other prudent objectives, to: (A) Maximize 
the Plans' net, long-term investment return [and] (B) Liquidate each 
such investment when and insofar as prudent * * *'' Furthermore, the 
guidelines require Potomac to prepare and update on a quarterly basis 
an ``action plan'' for each asset, including AHL. The action plan 
requires the investment manager to state the timetable for achieving a 
sale (if sale is intended) or for achieving any other stated objective. 
In short, BSFS represents that significant mechanisms are in place to 
prevent Potomac from improperly seeking to continue indefinitely to 
manage the Plans' Stock in AHL. BSFS represents that in its capacity as 
Named Fiduciary, it has reviewed in depth Potomac's analysis of the 
various options available and has accepted Potomac's conclusion that 
the continued ownership of the Stock is in the best interests of the 
Plans.
    14. In summary, the applicant represents that the proposed 
transaction satisfies the criteria contained in section 408(a) of the 
Act because: (a) the proposed exemption would continue for a limited 
period of time a transaction permitted by the PTE 79-15 Order; (b) the 
Plans' independent investment manager, Potomac, has reviewed the Plans' 
holding of the Stock and has determined that it is in the best interest 
of both Plans to continue holding the Stock; (c) Potomac will continue 
to monitor the transaction to determine whether it remains in the 
Plans' best interests to retain the Stock; d) BSFS, which has the 
overall responsibility as Named Fiduciary over the Plans' investment in 
the Stock, has reviewed Potomac's findings and agrees with Potomac's 
determination that the Plans' continued holding of the Stock is in the 
best interests of both Plans; and e) the Plans will make no additional 
investment in AHL, nor will they guarantee any financing to AHL, for 
the purpose of double-hulling of the ships.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(b) of the act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 20th day of October, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration.
[FR Doc. 94-26405 Filed 10-24-94; 8:45 am]
BILLING CODE 4510-29-P