[Federal Register Volume 60, Number 155 (Friday, August 11, 1995)]
[Notices]
[Pages 41118-41136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19871]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09940, et al.]


Proposed Exemptions; Morgan Stanley & Co. Incorporated (MS&Co) 
and Morgan Stanley Trust Company (MSTC)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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

Written Comments and Hearing Requests

    Unless otherwise stated in the Notice of Proposed Exemption, all 
interested persons are invited to submit written comments, and with 
respect to exemptions involving the fiduciary prohibitions of section 
406(b) of the Act, requests for hearing within 45 days from the date of 
publication of this Federal Register Notice. Comments and request 

[[Page 41119]]
for a hearing should state: (1) The name, address, and telephone number 
of the person making the comment or request, and (2) the nature of the 
person's interest in the exemption and the manner in which the person 
would be adversely affected by the exemption. A request for a hearing 
must also state the issues to be addressed and include a general 
description of the evidence to be presented at the hearing. A request 
for a hearing must also state the issues to be addressed and include a 
general description of the evidence to be presented at the hearing.

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

Notice to Interested Persons

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

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

[Application No. D-09940]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a)(1)(A) through (D) and 
406(b)(1) and (2) of the Act and the sanctions resulting from the 
application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code, shall not apply to the lending 
of securities to Morgan Stanley & Co., Incorporated (MS&Co) and to any 
other U.S. registered broker-dealers affiliated with Morgan Stanley 
Trust Company (the Affiliated Broker-Dealer, collectively, the MS 
Group) by employee benefit plans for which Morgan Stanley Trust Company 
(MSTC) acts as directed trustee or custodian and securities lending 
agent and to the receipt of compensation by MSTC in connection with 
these transactions, provided that the following conditions are met:
    1. Neither MS&Co nor MSTC has discretionary authority or control 
over a client-plan's assets involved in the transaction or renders 
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with 
respect to those assets;
    2. Any arrangement for MSTC to lend plan securities to the MS Group 
will be approved in advance by a plan fiduciary who is independent of 
MSTC and the MS Group;
    3. A client-plan may terminate the arrangement at any time without 
penalty on five business days notice;
    4. The client-plans will receive collateral consisting of cash, 
securities issued or guaranteed by the U.S. government or its agencies 
or instrumentalities, bank letters of credit or other collateral 
permitted under PTE 81-6, from the MS Group by physical delivery, book 
entry in a securities depository, wire transfer or similar means by the 
close of business on or before the day the loaned securities are 
delivered to the MS Group;
    5. The market value of the collateral will initially equal at least 
102 percent of the market value of the loaned securities and, if the 
market value of the collateral falls below 100 percent, the MS Group 
will deliver additional collateral on the following day such that the 
market value of the collateral will again equal 102 percent;
    6. All procedures regarding the securities lending activities will 
at a minimum conform to the applicable provisions of Prohibited 
Transaction Exemptions (PTEs) 81-6 and 82-63;
    7. MS&Co will indemnify each lending client-plan against any losses 
incurred by such plan in connection with the lending of securities to 
the MS Group;
    8. The client-plan will receive the equivalent of all distributions 
made to holders of the borrowed securities during the term of the loan, 
including, but not limited to, cash dividends, interest payments, 
shares of stock as a result of stock splits and rights to purchase 
additional securities, or other distributions;
    9. Only plans with total assets having an aggregate market value of 
at least $50 million will be permitted to lend securities to the MS 
Group;
    10. With regard to the ``exclusive borrowing'' agreement (as 
described below), MS&Co will directly negotiate the agreement with a 
plan fiduciary who is independent of the MS Group and MSTC, and such 
agreement may be terminated by either party to the agreement at any 
time; and
    11. Prior to any plan's approval of the lending of its securities 
to the MS Group, a copy of this exemption, if granted, (and the notice 
of pendency) will be provided to the plan.

Summary of Facts and Representations

    1. MS&Co, a wholly owned subsidiary of Morgan Stanley Group Inc., 
is an investment services firm which is a member of the New York Stock 
Exchange and other principal securities exchanges in the United States 
and a member of the National Association of Securities Dealers. MS&Co 
is one of the largest investment firms in the United States. As of 
January 31, 1994, MS&Co's parent, Morgan Stanley Group Inc., had 
consolidated capital of over $9.8 billion.
    2. MS&Co and its Affiliated Broker-Dealers (collectively, the MS 
Group), acting as principal, borrows securities from institutions and 
either utilizes such securities to satisfy its own needs or re-lends 
these securities to brokerage firms and other entities which need a 
particular security for a certain period of time. Borrowers often need 
securities to satisfy deliveries in cases of short sales or where a 
broker fails to receive securities it is required to deliver. The MS 
Group, which borrows and lends 

[[Page 41120]]
securities equal in value to approximately $37 billion on an average 
daily basis, is among the largest institutional securities borrowers 
and lenders in the United States. In making such loans, the MS Group 
carefully reviews the credit worthiness of its counterparties.
    3. MSTC is a wholly owned subsidiary of Morgan Stanley Group Inc. 
and an affiliate of MS&Co. MSTC is organized as a trust company in New 
York and provides a variety of services to its clients, including 
services as custodian and clearing agent and in the future may provide 
services as trustee.
    4. An institutional investor, such as a pension fund, lends 
securities in its portfolio to a broker-dealer or bank in order to earn 
a fee in addition to any interest, dividends or other distributions 
paid on those securities. The lender generally requires that the 
security loans be fully collateralized, and the collateral usually is 
in the form of cash or high quality liquid securities such as U.S. 
Government or Federal Agency obligations or certain bank letters of 
credit. When cash is the collateral, the lender generally invests the 
cash and rebates a portion of the earnings on the collateral to the 
borrower. The ``fee'' received by the lender would then be the 
difference between the earnings on the collateral and the amount of 
rebate paid to the borrower. When a loan of securities is 
collateralized with Government or Federal Agency securities or bank 
letters of credit, a fee is paid directly by the borrower to the 
lender. Institutional investors often utilize the services of an agent 
in the performance of their securities lending transactions. The 
lending agent is paid a fee for its services which may be calculated as 
a percentage of the income earned by the investor from its securities 
lending activity. The applicants believe that the essential functions 
which define a securities lending agent are the identification of 
appropriate borrowers of securities and the negotiation of the terms of 
a loan to the borrowers. There are services ancillary to securities 
lending which include monitoring the level of collateral and the value 
of the loaned securities and investing the collateral in some 
instances.
    5. MSTC and MS&Co request an exemption for the lending of 
securities owned by certain pension plans (client-plans) for which MSTC 
will serve as directed trustee or custodian to the MS Group, following 
disclosure of MSTC's affiliation with the MS Group, under either of the 
two arrangements described as Plan A and Plan B and for the receipt of 
compensation in connection with such transactions. However, because 
MSTC under the proposed arrangements will have discretion with respect 
to whether there is a loan of plan securities to the MS Group, the 
lending of securities to the MS Group by plans may be outside the scope 
of relief provided by PTE 81-6 1 and PTE 82-63.2

    \1\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 
18754, May 19, 1987) provides an exemption under certain conditions 
from section 406(a)(1) (A) through (D) of ERISA and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
certain broker dealers or banks which are parties in interest.
    \2\ PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption 
under specified conditions from section 406(b)(1) of ERISA and 
section 4975(c)(1)(E) of the Code for the payment of compensation to 
a plan fiduciary for services rendered in connection with loans of 
plan assets that are securities. PTE 82-63 permits the payment of 
compensation to a plan fiduciary for the provision of securities 
lending services only if the loan of securities itself is not 
prohibited under section 406(a) of ERISA.
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    6. When a loan is collateralized with cash, MSTC, at the plan's 
direction, will either transfer such cash collateral to the client-plan 
or its designated agent for investment or shall invest the cash in 
short-term securities or interest-bearing accounts and, in either case, 
will rebate a portion of the earnings on such collateral to the MS 
Group on behalf of the client-plan. The MS Group will pay a fee to the 
client-plan based on the value of the loaned securities where the 
collateral consists of obligations other than cash. Under Plan A and, 
in some instances, under Plan B (see paragraph 27 regarding the types 
of lending services which may be provided to plans by MSTC under Plan 
B), the client-plan will pay a fee to MSTC for providing lending 
services to the plan which will reduce the income earned by the client-
plan from the lending of securities to the MS Group. The client-plan 
and MSTC will agree in advance to this fee which will represent a 
percentage of the income the client-plan earns from its lending 
activities. Several safeguards, described more fully below, are 
incorporated in the application in order to ensure the protection of 
the client-plan assets involved in the transactions. In addition, the 
applicants represent that each of the two arrangements incorporates the 
relevant conditions contained in PTE 81-6 and PTE 82-63.
    7. Plan A. A fiduciary of a client-plan who is independent of MSTC 
and The MS Group will sign a securities lending authorization (the 
Authorization) before the client-plan may participate in MSTC's 
securities lending program. This Authorization describes the operation 
of the lending program and allows MSTC to lend securities held by the 
client-plan to securities brokers, including the MS Group, as selected 
by MSTC. The Authorization also sets forth, in an attachment, the basis 
and rate for MSTC's compensation from the client-plan for the 
performance of securities lending services.
    8. The independent fiduciary also must sign an Affiliated Broker-
Dealer Lending Authorization before MSTC may include security loans to 
the MS Group in the lending activities of the client-plan. The 
Affiliated Broker-Dealer Lending Authorization will specify, in an 
attached exhibit, the method of determining the daily securities 
lending rates (fees and rebates), the minimum lending fees payable by 
the MS Group and the maximum rebate rate payable to the MS Group. A 
client-plan may terminate both the Authorization and the Affiliated 
Broker-Dealer Lending Authorization at any time.
    9. MSTC, as securities lending agent, will negotiate a Customer 
Securities Loan Agreement (Basic Loan Agreement) with the MS Group on 
behalf of its client-plans. An independent fiduciary of the client-plan 
will approve the form of the agreement before that fiduciary executes 
the Affiliated Broker-Dealer Lending Authorization. The Basic Loan 
Agreement will specify, among other things, the right of the client-
plan to terminate a loan at any time (subject to the customary 
notification period) and the client-plan's rights in the event of any 
default by the MS Group. The agreement will explain the basis for 
compensation to the client-plan for lending securities to the MS Group 
under each category of collateral. The agreement will also contain a 
requirement that the MS Group must pay all transfer fees and transfer 
taxes related to the security loans.
    10. Before entering into the Basic Loan Agreement, the MS Group 
will furnish its most recent publicly available audited and unaudited 
financial statements to MSTC, who, in turn, will provide such 
statements to a client-plan before the plan is asked to approve the 
terms of the Basic Loan Agreement. The Basic Loan Agreement will 
contain a requirement that the MS Group must give prompt notice at the 
time of a loan of any material adverse changes in its financial 
condition since the date of the most recently furnished financial 
statements. If any such changes have taken place, MSTC will request 
that an independent fiduciary of the client-plan approve the loan in 
view of the changed financial condition.

[[Page 41121]]

    11. The client-plan and MSTC will agree to the fee MSTC will 
receive for its services as lending agent prior to the commencement of 
any lending activity. The agreement by MSTC to provide securities 
lending services to a client-plan will be in writing and subject to the 
prior written approval of a fiduciary of the client-plan who is 
independent of the MS Group and MSTC.3 The Basic Loan Agreement 
will allow termination by the client-plan without penalty to the plan 
within five business days of written notice. Before entering into an 
agreement, MSTC will provide the client-plan with any reasonably 
available information which it believes is necessary for the plan to 
make a determination whether to enter into or renew the agreement and 
such other information as the plan may request.

    \3\ This closely parallels conditions c and d of PTE 82-63 which 
require that the payment of compensation to a ``lending fiduciary'' 
is made under a written instrument and is subject to prior written 
authorization of an independent ``authorizing fiduciary''.
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    12. Each time a client-plan loans securities to the MS Group 
pursuant to the Basic Loan Agreement, the MS Group will execute a 
designation letter specifying the material terms of the loan, including 
the securities to be loaned, the required level of collateral, the fee 
or rebate payable, and any special delivery instructions. The terms of 
each loan will be at least as favorable to the client-plan as those of 
a comparable arm's-length transaction between unrelated parties.
    13. MSTC will credit to the account of the client-plan all 
interest, dividends and the like received on the loaned securities 
during the loan period, including distributions and rights of any kind. 
The Basic Loan Agreement will provide that the client-plan may 
terminate any loan at any time. Upon a termination, the MS Group will 
return the loaned securities to the client-plan within five business 
days of written notification. If the MS Group fails to return the 
securities within the designated time, the client-plan has certain 
rights that it may exercise under the Basic Loan Agreement.
    14. MSTC will establish each day separate written schedules of 
lending fees and rebate rates to assure uniformity of treatment among 
borrowing brokers and to limit the discretion MSTC would have in 
negotiating securities loans to the MS Group. Loans to all borrowers of 
a given security on that day will be made at rates or lending fees on 
the relevant daily schedules or at rates or lending fees which may be 
more advantageous to the client-plans. In no case will loans be made to 
the MS Group at rates or lending fees less advantageous to the client-
plan than those on the schedule. The daily schedule of rebate rates 
will be based on the current value of the clients' reinvestment 
vehicles and on market conditions, as reflected by demand for 
securities by borrowers other than the MS Group. As with rebate rates, 
the daily schedule of lending fees will also be based on market 
conditions, as reflected by demand for securities by borrowers other 
than the MS Group, and will generally track the rebate rates with 
respect to the same security or class of securities.
    15. MSTC will adopt maximum daily rebate rates for cash collateral 
payable to the MS Group on behalf of a lending plan. Separate maximum 
daily rebate rates will be established with respect to loans of 
designated classes of securities such as U.S. government securities, 
U.S. equities and corporate bonds, international fixed income 
securities and international equities. With respect to each designated 
class of securities, the maximum rebate rate will be the lower of (i) 
the 7 day LIBOR rate, minus a stated percentage of such LIBOR rate and 
(ii) the client's actual reinvestment rate for the relevant cash 
collateral, minus a stated percentage of such reinvestment rate, as 
pre-approved by the independent fiduciary. Thus, when cash is used as 
collateral, the daily rebate rate will always be lower than the rate of 
return to the client-plans from authorized investments for cash 
collateral by such stated percentage as shall be pre-approved by the 
independent fiduciary. MSTC will submit the formula for determining the 
maximum daily rebate rates to an independent fiduciary of the client-
plan for approval before lending any securities to the MS Group on 
behalf of the plan.
    16. MSTC will also adopt minimum daily lending fees for non-cash 
collateral payable by the MS Group to MSTC on behalf of a plan. 
Separate minimum daily lending fees will be established with respect to 
loans of designated classes of securities, such as U.S. government 
securities, U.S. equities and corporate bonds, international fixed 
income securities and international equities. With respect to each 
designated class of securities, the minimum lending fee will be stated 
as a percentage of the principal value of the loaned securities. MSTC 
will submit such minimum daily lending fees to an independent fiduciary 
to the client-plan for approval before initially lending any securities 
to the MS Group on behalf of the plan.
    17. For collateral other than cash, the lending fees charged the 
previous day are reviewed by MSTC for competitiveness. Based on the 
demand of the marketplace, this daily fee tends to remain constant and, 
with respect to domestic securities and international debt securities, 
is currently at least one tenth of one percent of the principal value 
of the loaned securities. With respect to international equity 
securities, the daily fee is currently one fifth of one percent of the 
principal value of the loaned securities. Because 50 percent or more of 
securities loans by client-plans will be to unrelated brokers or 
dealers,4 the competitiveness of MSTC's fee schedule will be 
continuously tested in the marketplace. Accordingly, loans to the MS 
Group should result in a competitive rate of income to the lending 
client-plan.

    \4\ This 50 percent requirement applies regardless of the type 
of collateral used to secure the loan.
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    18. Should MSTC recognize prior to the end of a business day that, 
with respect to new and/or existing loans, it must change the rebate 
rate or lending fee formula in the best interest of client-plans, it 
may do so (i) with respect to borrowers other than the MS Group, at the 
end of such business day, and (ii) with respect to the MS Group, upon 
MSTC's receipt of a written approval of the client-plan's independent 
fiduciary.5

    \5\ MSTC represents that it will not initiate any modification 
in such rates or fees which would be detrimental to the client-
plans.
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    MSTC may propose a change in the lending fee or rebate rate 
determination, as applicable, with respect to an outstanding loan by 
delivering written notice of the effective date and the new 
determination pursuant to which a lending fee or rebate rate, as the 
case may be, may be determined at least five business days before the 
date of the proposed change. In the event that the client-plan does not 
consent to such change by not providing MSTC acknowledgement of its 
consent in writing by such means that will ensure receipt by MSTC prior 
to 10:00 a.m. New York time, on the effective date of the change, then 
MSTC will not make such change. The applicants represent that allowing 
MSTC to request a modification to the lending fee or the rebate rate 
formula with respect to an existing loan to the MS Group when market 
conditions change will be beneficial to the client-plans. According to 
the applicants, in the absence of the ability to make such 
modification, the MS Group may be forced by market conditions to 
terminate the loan and seek better terms elsewhere. Such termination 
may then force the client-

[[Page 41122]]
plan to seek new borrowers for its securities who, in light of the 
changed market conditions, are likely to negotiate for the lending fee 
or rebate rate which the MS Group would have received or paid had MSTC 
had the written authority from the independent fiduciary to decrease 
the lending fee or increase the rebate rate.
    19. While MSTC will normally loan securities to requesting 
borrowers on a first come, first served basis, as a means of assuring 
uniformity of treatment among borrowing brokers, it should be 
recognized that in some cases it may not be possible to adhere to a 
first come, first served allocation. This can occur, for example, in 
instances where (a) the credit limit established for a ``first in 
line'' borrower by the client-plan has already been satisfied; (b) the 
``first in line'' borrower is not approved as a borrower by the 
particular client-plan whose securities are sought to be borrowed; or 
(c) the ``first in line'' borrower cannot be ascertained, as an 
operational matter, because several borrowers spoke to differed MSTC 
representatives at or about the same time with respect to the same 
security. In situation (a) and (b), loans would normally be effected 
with the ``second in line'' borrower. In situation (c), securities 
would be allocated equitably among all eligible borrowers.
    20. MS&Co will indemnify each lending client-plan against any 
losses due directly to the lending of such plan's securities to the MS 
Group. Accordingly, MS&Co will assure the client-plan that the rate of 
return on each loan will at a minimum equal the transactional cost to 
the plan of lending securities to The MS Group. The applicants contend 
that, as a result of this indemnity, the rate of return earned by 
client-plans from lending to the MS Group will, in total, exceed the 
return from lending securities to other brokers.
    21. By the close of business on the day the loaned securities are 
delivered to the MS Group, MSTC will receive from the MS Group non-cash 
collateral by physical delivery or book entry in a securities 
depository, or, cash collateral by wire transfer or book entry. At the 
discretion of the client-plan, cash collateral may be managed either by 
the plan, by its designated agent or by MSTC. If a client-plan chooses 
to manage its cash collateral, MSTC will promptly forward the cash 
collateral to the client-plan. The non-cash collateral will consist of 
securities issued or guaranteed by the U.S. Government or its agencies 
or irrevocable bank letters of credit (issued by a person other than 
MS&Co or its affiliates) or other collateral permitted under PTE 81-6 
or any successor. The market value of the collateral on the day the 
loan settles will be at least 102 percent of the market value of the 
loaned securities. The Basic Loan Agreement will give the client-plan a 
continuing security interest in and a lien on the collateral. MSTC will 
monitor the level of the collateral daily. If the market value of the 
collateral falls below 100 percent of that of the loaned securities, 
MSTC will require the MS Group to deliver by the close of business the 
next day sufficient additional collateral to bring the level back to at 
least 102 percent.
    22. A client-plan that loans securities to the MS Group will 
receive a weekly report with which to monitor lending activity, rates 
on loans to the MS Group compared with loans to other brokers, and the 
level of collateral on the loans. The weekly report will show, on a 
daily basis, the market value of all outstanding security loans to the 
MS Group and to other borrowers as compared to the total collateral 
held for both categories of loans.
    23. The weekly report will state the daily fees where collateral 
other than cash is utilized and will specify the details used to 
establish the daily rebate payable to all brokers where cash is used as 
collateral. The weekly report also will state, on a daily basis, the 
rates at which securities are loaned to the MS Group compared with 
those at which securities are loaned to other brokers. This statement 
will give an independent fiduciary information which can be compared to 
that contained in the daily rate schedule.
    24. MSTC will send a monthly transaction report to each client-plan 
participating in the lending program. The monthly report will provide a 
list of all security loans outstanding and closed for a specified 
period. The report will identify for each open loan position, the 
securities involved, the value of the security for collateralization 
purposes, the current value of the collateral, the rate at which the 
security is loaned, and the number of days the security has been on 
loan.
    25. Only client-plans with assets having an aggregate market value 
of at least $50 million will be permitted to lend securities to the MS 
Group. The applicants maintain that this restriction is intended to 
assure that any lending to the MS Group will be monitored by an 
independent fiduciary of above average experience and sophistication in 
matters of this kind.
    26. MSTC will record on audio tape all telephone traffic between 
its securities lending department and all borrowers, including the MS 
Group. The telephone tapes will be retained for a period of at least 
six months. This recording procedure will enable client-plans and the 
Department to review MSTC's adherence to its policy of lending 
securities to the first interested borrower at rates or lending fees on 
the daily schedule, or at rates or lending fees which are more 
advantageous to the client-plans.
    27. Plan B. MS&Co will directly negotiate ``exclusive borrowing'' 
agreements with fiduciaries of plans, including plans for which MSTC 
serves as custodian or in the future may serve as directed trustee, 
where such fiduciary is independent of the MS Group and MSTC. Under 
such an agreement, the MS Group will have exclusive access for a 
specified period of time to borrow certain securities of the plan 
pursuant to certain conditions. MSTC will not participate in the 
negotiation of the agreement. The involvement of MSTC, if any, will be 
limited to such activities as holding securities available for lending, 
handling the movement of borrowed securities and collateral and 
investing or depositing any cash collateral and supplying the plans 
with certain reports. The applicants represent that, under the 
exclusive borrowing agreement, neither the MS Group nor MSTC will 
perform for client-plans the functions which constitute the essential 
functions of a securities lending agent.
    28. Upon delivery of loaned securities to the MS Group, MSTC, or 
another custodian, on behalf of a client-plan, will receive from the MS 
Group, the same day by wire transfer or book entry cash collateral or, 
by physical delivery or book entry in a securities depository, 
collateral consisting of securities issued or guaranteed by the U.S. 
Government or its agencies, irrevocable bank letters of credit, or 
other non-cash collateral permitted under PTE 81-6. The market value of 
the collateral on the day the loan settles will be at least 102 percent 
of the market value of the loaned securities. MSTC or such other 
custodian will monitor the level of the collateral daily and, if its 
market value falls below 100 percent, the MS Group will deliver 
sufficient additional collateral on the following day such that the 
market value of all collateral will equal at least 102 percent of the 
market value of the loaned securities. The MS Group or, in the case of 
some client plans, MSTC, will provide a weekly report to the plan 
showing, on a daily basis, the aggregate market value of all 
outstanding security loans to the MS Group and the aggregate market 
value of the collateral.
    29. Before entering into an exclusive borrowing agreement, the MS 
Group will furnish to the plan the most recent 

[[Page 41123]]
publicly available audited and unaudited statements of its financial 
condition. Further, the agreement will contain a representation by the 
MS Group, as provided in section 18(c)(ii) of the Securities Lending 
Agreement, that as of each time it borrows securities, there have been 
no material adverse changes in its financial condition. All the 
procedures under the agreement will, at a minimum, conform to the 
applicable provisions of PTE 81-6 and PTE 82-63.
    30. In exchange for the exclusive right to borrow certain 
securities from a client-plan, the MS Group will pay the plan either a 
flat fee, or a minimum flat fee plus a percentage (negotiated at the 
time the exclusive borrowing agreement is entered into) of the total 
balance outstanding of borrowed securities, or a percentage of the 
total balance outstanding without any flat fee. In light of this fee 
arrangement, all earnings generated by cash collateral will be returned 
to the MS Group. The client-plan will receive credit for all interest 
dividends or other distributions on any borrowed securities.
    31. The exclusive borrowing agreement may be terminated by either 
party to the agreement at any time. MS&Co will agree that upon 
termination it will deliver any borrowed securities back to the client-
plan within five business days of written notice of termination. If the 
MS Group fails to return the securities or the equivalent thereof, the 
client-plan will have certain rights under the agreement to realize 
upon the collateral. Pursuant to the terms of the agreement, the MS 
Group will indemnify the plan against any losses due to its use of the 
borrowed securities equal to the difference between the replacement 
cost of the securities and the market value of the collateral on the 
date a loan is declared to be in default.
    32. With regard to those plans for which MSTC provides custodial, 
clearing and/or reporting functions relative to securities loans, MSTC 
and a plan fiduciary independent of MSTC and the MS Group will agree in 
advance and in writing to any fee that MSTC is to receive for such 
services. Such fees, if any, would be fixed fees (e.g., MSTC might 
negotiate to receive a fixed percentage of the value of the assets with 
respect to which it performs these services or to receive a stated 
dollar amount) and any such fee would be in addition to any fee MSTC 
has negotiated to receive from any such client-plan for standard 
custodial or other services unrelated to the securities lending 
activity. The arrangement to have MSTC provide such functions relative 
to securities loans to the MS Group will be terminable by the client-
plan within five business days of receipt of written notice without 
penalty to the plan except for the return to the MS Group of part of 
any flat fee paid by the MS Group to the plan, if the client-plan has 
also terminated its exclusive borrowing agreement with the MS Group. 
Before entering into an agreement with a plan to provide such functions 
relative to securities loans to the MS Group, MSTC will furnish to the 
plan any publicly available information which it believes is necessary 
for the plan to determine whether to enter into or renew the agreement.
    33. In summary, the applicants represent that the described 
transactions satisfy the statutory criteria of section 408(a) of the 
Act because: (a) Plan A requires approval of the form of a basic loan 
agreement and the execution of the Affiliated Broker-Dealer Lending 
Authorization by a plan fiduciary independent of the MS Group and MSTC 
before a client-plan lends any securities to the MS Group, while under 
Plan B, The MS&Co will directly negotiate exclusive borrowing 
agreements with a client-plan; (b) the lending arrangements will permit 
the client-plans to benefit from the MS Group's substantial market 
position as securities lenders and will enable the plans to earn 
additional income from the loaned securities while still receiving 
dividends, interest and other distributions on those securities; (c) 
the client-plan will receive sufficient information concerning the MS 
Group's financial condition before the plan lends any securities to the 
MS Group; (d) the collateral on each loan to the MS Group initially 
will be at least 102 percent of the market value of the loaned 
securities, which is in excess of the 100 percent collateral required 
under PTE 81-6, and will be monitored daily by MSTC; (e) the client-
plans will receive a weekly report and monthly report, so that an 
independent fiduciary of the client-plans also may monitor loan 
activity, fees, the level of the collateral and loan return/yield; (f) 
MSTC will have no discretionary authority or control over the plan's 
acquisition or disposition of securities available for loan; (g) the 
terms of each loan will be at least as favorable to the plans as those 
of a comparable arm's-length transaction between unrelated parties; and 
(h) all the procedures under the proposed transactions will, at a 
minimum, conform to the applicable provisions of PTE 81-6 and PTE 82-
63.

FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)
Central Freight Lines Employees Profit Sharing and Retirement Plan (the 
Plan) Located in Waco, TX

[Application No. D-09994]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR 2570, 
Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is 
granted, the restrictions of section 406(a), 406(b)(1) and (b)(2) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) shall 
not apply to the proposed cash sale by the Plan of certain unimproved 
real property (the Property) to Central Freight Lines, Inc. (the 
Employer), a party in interest with respect to the Plan.
    This proposed exemption is conditioned upon the following 
requirements: (1) All terms and conditions of the sale are at least as 
favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party; (2) the sale is a one-time 
transaction for cash; (3) the Plan is not required to pay any real 
estate commissions or fees in connection with the proposed transaction; 
and (4) the Plan receives a sales price for the Property which is not 
less than the greater of (a) the fair market value of the Property as 
determined by a qualified, independent appraiser, or (b) the net 
acquisition cost of the Property.

Summary of Facts and Representations

    1. The Plan is a defined contribution plan with 3,149 participants 
and net assets available for benefits of approximately $103,639,097 as 
of December 31, 1994. The trustee of the Plan and decisionmaker with 
respect to Plan investments is A.G. Edwards Trust Company of St. Louis, 
Missouri.
    2. The Employer, which maintains its general offices in Waco, 
Texas, is a trucking company that is involved in the transportation and 
delivery of freight throughout the midwestern and southwestern United 
States. The Employer is a wholly-owned subsidiary of Roadway Services, 
Inc. (Roadway), a publicly-owned trucking company which maintains its 
corporate offices in Akron, Ohio.
    3. Prior to 1989, the Plan, through two separate purchases, 
acquired a 38.810 acre tract of undeveloped land for a total purchase 
price of $1,495,352. The 

[[Page 41124]]
Property is located on the northwest side of Spur 482 (Storey Lane) and 
approximately 1,500 feet northeast of State Highway 114 in the City of 
Irving, Dallas County, Texas. The Property adjoins the Employer's 
Dallas freight terminal.
    The Plan acquired the Property for investment purposes from 
unrelated parties. On July 12, 1976, the Plan purchased 36.464 acres of 
land (Tract A) from the University of Dallas. The Plan paid a purchase 
price of $1,284,009 for Tract A and closing costs of $697. Thus, the 
total acquisition price paid by the Plan for Tract A was $1,284,706.
    On August 1, 1980, the Plan purchased 1.928 acres of adjoining land 
(Tract B) from Jack H. Beachum. The Plan paid a purchase price for 
Tract B of $210,624 plus closing costs of $22. Thus, the total 
acquisition price paid by the Plan for Tract B was $210,646.6

     6 The Department notes, that the dimensions of Tract A and 
Tract B, if aggregated, equal 38.392 acres instead of 38.810 acres. 
In attempting to explain this discrepancy, the applicant has advised 
that the subject Property does consist of 38.810 acres of land based 
on a survey of the Tracts. The applicant attributes the size 
references and legal descriptions of Tract A and Tract B to ``old 
field notes.'' When the Property was subsequently surveyed, the 
applicant states that either the dimensions of the Tracts, 
individually, or when taken together, were larger than originally 
thought.
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    4. On December 30, 1983, the Plan sold the Property to FrittsSesler 
Investments, Inc. (FrittsSesler), a real estate investment company and 
an unrelated party, for $4,226,418. The terms of the sale provided for 
a cash downpayment of $845,284 with the balance to be paid over 10 
years. The unpaid portion of the purchase price was evidenced by a 
promissory note in the amount of $3,381,134. The note carried interest 
at 11 percent interest per annum and provided for interest only 
payments for the first 5 years and payments of principal and interest 
for the last 5 years of the loan. The note was secured by a deed of 
trust on the Property.
    From the date of closing until January 1987, the Plan received 
$845,284 in principal and $1,115,774 in interest on the note. In 1987, 
FrittsSesler defaulted on the note. The note was then accelerated and 
the Property was posted for foreclosure. In January 1988, the Property 
was deeded back to the Plan by a Deed in Lieu of Foreclosure. At the 
time of the foreclosure, an appraisal completed of the Property on 
January 13, 1988 by Messrs. Scott D. Evans, Associate Appraiser, and 
Mr. Ronald W. Potts, MAI, SRPA, independent appraisers affiliated with 
Cushman & Wakefield of Texas, Inc., located in Dallas, Texas, placed 
the fair market value of the Property at $4,280,000.
    5. It is represented that the Property has never been used by or 
leased to parties in interest since its initial acquisition and 
reacquisition by the Plan. It is also represented that the Plan has 
incurred certain costs totaling $512,598 in connection with its 
reacquisition of the Property. These costs represent expenses of 
$58,942 that are associated with the Plan's acceptance of the Deed in 
Lieu of Foreclosure; $90 for closing costs; and $453,566 for real 
estate taxes.
    6. Since repossessing the Property, the Plan has continually 
advertised it for sale. However, due to the depressed real estate 
market in the State of Texas and because of changes in growth patterns 
of the Dallas-Fort Worth area, no interest has been expressed in 
purchasing the Property. In addition, the Property has generated no 
income to the Plan and has declined in value. Therefore, the Employer 
requests an administrative exemption from the Department in order that 
it may purchase the Property from Plan. The proposed sales price for 
the Property will represent not less than the greater of the (a) fair 
market value of the Property as determined by a qualified, independent 
appraiser or (b) $46,892 representing the net acquisition cost of the 
Property.7

     7 The $46,892 net acquisition cost of the Property is 
determined as follows: $2,007,950 [representing the total 
acquisition price plus certain costs incurred by the Plan since its 
reacquisition of the Property (i.e., $1,495,352+$512,598)] minus 
$1,961,058 [representing the total revenues received by the Plan for 
the Property (i.e., $845,284+$1,115,774)].
---------------------------------------------------------------------------

    7. The Employer has obtained an independent appraisal of the 
Property from Bill C. Dotson, MAI and Richard S. Neely, Associate 
Appraiser, independent appraisers affiliated with the Alliance 
Appraisal Group, Inc. of Dallas, Texas. In an appraisal report dated 
January 16, 1995, Messrs. Dotson and Neely have placed the fair market 
value of the Property at $1,270,000 as of January 3, 1995.
    In an addendum to the appraisal report dated July 13, 1995, Mr. 
Dotson states that he has re-analyzed the initial valuation of the 
Property to determine whether there is any assemblage value due to the 
proximity of the Property to other real property owned by the Employer. 
In making this determination, Mr. Dotson represents that he has 
considered (a) the Employer's existing facility which he believes is in 
no need for further expansion, (b) larger tracts of commercial land in 
the vicinity of the Property for which he can ascertain no significant 
assemblage value and (c) the valuation adage that ``Property is worth 
more to the adjacent owner than to a third party.'' He notes that for 
the adage to be true, there has to be a proven demand for the property 
for there to be assemblage value. In his opinion, the Employer has not 
shown a demand factor over and above common market forces.
    Mr. Dotson asserts that the subject Property is a stand alone tract 
which can be utilized for a number of purposes. In his view, the 
Property is not co-dependent on any other tracts of land for frontage, 
access or visibility. Thus, Mr. Dotson concludes that the Property has 
no assemblage or premium value by reason of its proximity to other 
existing real property that is owned by the Employer.
    8. Because the fair market value of the Property is greater than 
its net acquisition cost, the Plan will sell the Property to the 
Employer for $1,270,000. The Employer will pay the consideration to the 
Plan in cash. In addition, the Plan will not be required to pay any 
real estate fees or commissions in connection with the proposed sale.
    9. In summary, it is represented that the proposed transaction will 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act because: (a) All terms and conditions of the sale will be at 
least as favorable to the Plan as those obtainable in an arm's length 
transaction with an unrelated party; (b) the sale will be a one-time 
transaction for cash; (c) the Plan will not be required to pay any real 
estate commissions or fees in connection with the proposed sale; and 
(d) the Plan will receive a sales price for the Property which is not 
less than the greater of (i) the fair market value of the Property as 
determined by a qualified, independent appraiser, or (ii) the net 
acquisition cost of the Property.

Notice to Interested Persons

    Notice of the proposed exemption will be given to all interested 
persons within 5 days of the date of publication of the notice of 
pendency in the Federal Register. Notice will be posted at the 
Employer's work sites. Such notice will include a copy of the notice of 
proposed exemption as published in the Federal Register and shall 
inform interested persons of their right to comment. Comments with 
respect to the notice of proposed exemption are due within 35 days 
after the date of publication of this proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 

[[Page 41125]]
telephone (202) 219-8881. (This is not a toll-free number.)

Donald D. Busker Individual Retirement Account (the IRA) Located in 
Detroit Lakes, Minnesota

[Application No. D-10005]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 4975(c)(2) of the Code and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to 
the proposed cash sale of two parcels of unimproved real property (the 
Properties) by the IRA to Donald D. Busker, a disqualified person with 
respect to the IRA 8 provided the following conditions are met:

    \8\ Pursuant to 29 CFR 2510.3-2(d), there is no jurisdiction 
with respect to the IRA under Title I of the Act. However, there is 
jurisdiction under Title II of the Act pursuant to section 4975 of 
the Code.
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    (a) The sale is a one-time transaction for cash;
    (b) The terms and conditions of the sale are at least as favorable 
to the IRA as those obtainable in an arm's-length transaction with an 
unrelated party;
    (c) The IRA receives the fair market value of the Properties as 
established at the time of the sale by an independent qualified 
appraiser; and
    (d) The IRA is not required to pay any commissions, costs or other 
expenses in connection with the sale.

Summary of Facts and Representations

    1. The IRA is an individual retirement account, as described under 
section 408(a) of the Code, which was established by Donald D. Busker 
(Mr. Busker). As of June 14, 1995, the IRA had assets valued at 
$362,470. The trustee of the IRA is the First Trust Company of North 
Dakota, N.A.
    2. The applicants states that a portion of the IRA's existing 
assets, including the Properties, were obtained from a rollover of 
assets received by Mr. Busker in 1990 from distributions to which he 
was entitled as a participant in the Country Equities Inc. Retirement 
Plan (the CER Plan). The applicant states further that the CER Plan had 
received such assets from prior rollovers made to Mr. Busker from the 
Donald D. Busker and Associates Pension Trust (the Busker Pension 
Plan), which had been terminated in January 1982.
    The Properties consist of two parcels of unimproved real property.
    The first parcel (Property I) is located in Shell Lake Township in 
Becker County, east of Detroit Lakes, Minnesota. Property I consists of 
approximately eighty acres of unimproved wooded lowland in a fairly 
remote part of Becker County. The applicant states that access to 
Property I is available by easement over county land to the south.
    The second parcel (Property II) is located near Frazee, Minnesota, 
on Murphy and Silver Lakes in Gorman Township, Otter Tail County. 
Property II currently consists of approximately 144 acres of unimproved 
land, part of which is zoned for agricultural conservation and part of 
which is zoned for potential development as a recreational area. In 
this regard, the applicant states that approximately 53 acres on 
Property II are part of the Conservation Reserve Program (CRP), a U.S. 
Government subsidy program for farmland that is not being used for 
agricultural purposes. In addition, part of the remaining acres which 
comprise Property II are located adjacent to Murphy Lake and are 
available for recreational uses. However, the applicant states that 
only about 3000 feet of this part of Property II is useable and that 
the remaining parts of Property II adjacent to the lakes are not 
currently capable of development because the land is excessively low 
and wet.
    Mr. Busker represents that he does not own any land which is 
adjacent to either of the Properties and that the Properties have not 
been leased to or used by any disqualified person.
    3. The Properties were originally acquired as a real estate 
investment by the Busker Pension Plan. The applicant states that the 
Properties were acquired from unrelated parties in two separate cash 
transactions. Specifically, Property I was acquired by the Busker 
Pension Plan in 1978 for $4,250. Property II was acquired in 1978 as 
part of a larger parcel of real estate, which included a residential 
house and other improvements, for a total of $98,500 (the Original 
Property II). Portions of the Original Property II were subsequently 
platted for development and, along with the house, sold by the Busker 
Pension Plan to unrelated parties. However, Mr. Busker has not been 
able to sell the remaining portions of the Original Property II, 
currently owned by the IRA (i.e. Property II as described above). The 
applicant states that parts of Property II have also been platted for 
possible sale as separate parcels. The applicant states further that 
the IRA has received approximately $2992 in CRP subsidy payments as a 
result of its ownership of the acres on Property II which are subject 
to the CRP subsidy program.
    4. Roger K. Tinjum, an accredited rural appraiser associated with 
Tinjum Appraisal Company, located in Detroit Lakes, Minnesota, 
appraised the Properties in December 1993 and updated his appraisal in 
June 1995. Mr. Tinjum states that he is a qualified real estate 
appraiser with over thirty years of experience and is familiar with the 
Properties and other similar properties located in the area. In 
addition, Mr. Tinjum represents that both he and his firm are 
independent of, and unrelated to, Mr. Busker.
    Mr. Tinjum's appraisal of the Properties relied primarily on the 
market approach, with an analysis of recent sales of similar properties 
in the area, to establish the fair market value of the Properties. Mr. 
Tinjum states that his analysis took into consideration the potential 
of the Properties for further development. In this regard, Mr. Tinjum 
represents that the highest and best use for the Properties would be 
recreational use. Based on this analysis, Mr. Tinjum concluded that the 
fair market values of Property I and Property II were $20,000 and 
$72,000, respectively, as of December 10, 1993.
    By letter dated June 15, 1995, Mr. Tinjum states that the present 
fair market value of the Properties has not changed since December 10, 
1993.
    The applicant states that Mr. Tinjum will update his appraisal of 
the Properties at the time of the proposed transaction to establish 
their fair market value. Such appraisal will take into consideration 
any recent sales of comparable properties in the area since the date of 
Mr. Tinjum's last appraisal.
    5. The applicant requests an exemption for the proposed sale of the 
Properties by the IRA to Mr. Busker. As noted above, the IRA would 
receive cash in exchange for the Properties in an amount equal to the 
fair market value of the Properties, as determined by an independent, 
qualified appraiser at the time of the transaction.
    The applicant represents that the proposed transaction would be in 
the best interests of the IRA because it would allow the IRA to dispose 
of the Properties, which at the present time are illiquid investments 
which have not been appreciating in value, and reinvest the sale 
proceeds in more liquid investments which would offer greater returns. 
The applicant states that the terms and conditions of the sale would be 
at least as favorable to the IRA as the terms and condition which the 
IRA could obtain in an arm's-length transaction with an unrelated 
party. The applicant states further that the IRA 

[[Page 41126]]
would not pay any commissions or other expenses in connection with the 
transaction.
    6. In summary, the applicant represents that the proposed 
transaction satisfies the statutory criteria of section 4975(c)(2) of 
the Code because: (a) The terms and conditions of the sale would be at 
least as favorable to the IRA as those obtainable in an arm's-length 
transaction with an unrelated party; (b) the sale would be a one-time 
cash transaction which would allow the IRA to dispose of illiquid 
assets which have not been appreciating in value; (c) the IRA would 
receive the fair market value of the Property, as established at the 
time of the sale by an independent, qualified appraiser; (d) the IRA 
would not be required to pay any commissions, costs or other expenses 
in connection with the sale; and (e) Mr. Busker has determined that the 
proposed sale of the Properties would be in the best interests of the 
IRA.

NOTICE TO INTERESTED PERSONS: Because Mr. Busker is the only 
participant in the IRA, it has been determined that there is no need to 
distribute the notice of proposed exemption to interested persons. 
Comments and requests for a hearing are due thirty (30) days after 
publication of this notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

Profit Sharing Plan for Employees of Athens Disposal Co., Ranco 
Leasing, Covina Disposal Co., and South Pasadena Disposal Co. (the 
Plan), Located in City of Industry, California

[Application No. D-10029]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted the restrictions of sections 406(a) and 406 (b)(1) and 
(b)(2) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1) (A) through 
(E) of the Code shall not apply to the cash sale on March 24, 1994, for 
$300,000 (the Sale) of 7,500 shares (the Shares) of common stock issued 
by Garfield Bank (the Bank), chartered in California and located in 
Montebello, California, by the Plan to Athens Disposal Co., Inc., a 
party in interest with respect to the Plan; provided that (1) the Plan 
experienced no loss nor incurred any expense from the Sale; and (2) the 
Plan received as consideration from the Sale an amount that was no less 
than the fair market value of the Shares on the date of the Sale.

EFFECTIVE DATE: If this proposed exemption is granted, the effective 
date of the exemption will be March 24, 1994.

Summary of Facts and Representations

    1. There are three closely-held corporations that currently sponsor 
the Plan (the Employers) that are all incorporated in California and 
are wholly owned by various members of the Arakelian family. One of the 
three corporations that make up the Employers is the Athens Disposal 
Co., Inc. (the Applicant), incorporated on July 1, 1958, which is 
headquartered in City of Industry, California and is engaged in the 
business of municipal solid waste collection and disposal. The second 
of the Employers is the South Pasadena Disposal Co., Inc. (South 
Pasadena), incorporated September 5, 1992, which provides the same 
services as the Applicant for the City of Pasadena, California. The 
third member of the Employers is the Ranco Leasing Co., Inc. (Ranco), 
incorporated November 21, 1981, which owns rubbish collection vehicles 
that it leases to the Applicant and to South Pasadena and provides 
fleet maintenance services for the leased vehicles.9

     9 Covina Disposal Co., Inc., incorporated in California on 
October 3, 1985, a wholly-owned subsidiary of the Applicant, had 
been another sponsor of the Plan, but was liquidated on June 30, 
1990, and had its assets and liabilities distributed to the 
Applicant with its participants in the Plan absorbed by the 
Applicant.
---------------------------------------------------------------------------

    2. The Plan is a profit sharing plan that maintains individual 
accounts for its 254 participants and beneficiaries with net assets of 
$4,975,373, as of June 30, 1994. The Plan is intended to satisfy the 
qualification requirements of section 401(a) of the Code. The named 
fiduciary of the Plan is a committee (the Committee) currently 
consisting of two individuals, Messrs. Ron Arakelian and Ron Arakelian, 
Jr., who are controlling shareholders as well as officers and directors 
of the Applicant. The Committee is appointed by the Board of Directors 
of the Applicant and charged with the responsibility to administer the 
Plan, which includes among other things directing investments of Plan 
assets and appointing legal counsel, accountants, plan administrator, 
and trustees.
    The Committee has employed and delegated responsibility for 
administering the accounting and recordkeeping services for the Plan to 
Page Services Corporation, a California corporation, located in Los 
Angeles, California. Messrs. Ron Arakelian and Ron Arakelian, Jr. also 
serve the Plan as the trustees (the Trustees) of its assets.
    3. During the Plan's fiscal year ended June 30, 1985, the Applicant 
conveyed the 7,500 Shares to the Plan as its $300,000 funding 
contribution for the fiscal year.10 The Shares, originally 
purchased by the applicant over a 10 year period at a price of $40 per 
share, were determined to have a fair market value of $40 per share on 
the date that they were contributed to the Plan.

    \10\ The Applicant represents that the contribution of the 
Shares was not a prohibited transaction under the Act. The 
Department expresses no opinion as to whether the contribution was a 
prohibited transaction.
---------------------------------------------------------------------------

    While the Plan continued to hold the Shares the Bank began 
experiencing a poor financial performance resulting in net losses from 
operations for the years ended December 31, 1993 and 1994. The poor 
financial performance of the Bank was also manifested by limited 
dividend payments of the Bank to the holders of the Shares. The only 
dividend payments made to the Plan totalled $1,875 for each of the 
years 1992 and 1993.
    The Applicant represents that the Bank became the subject of 
examinations during 1993 by both the Federal Reserve Bank (the FRB) and 
the Superintendent of Banks for the State of California (the State). 
The State completed its examination by September 24, 1993, whereas, the 
FRB took an additional year to complete its examination on September 
24, 1994. In preliminary letters in 1993 from both the FRB and the 
State, the Bank was notified, among other things, that it was in an 
unsafe and unsound condition with a continuing deterioration in asset 
quality, an inadequate loan loss reserve, and a decline in capital and 
liquidity. The FRB concluded that the continued deterioration in asset 
quality threatened the already marginal capital position of the Bank 
and negatively impacted on its future earnings prospects. The Applicant 
further represents that the FRB reclassified the Bank as significantly 
undercapitalized for purposes of federal regulations which resulted in 
restrictions (a) on the ability of the Bank to pay dividends and 
management fees; (b) on the growth of its total assets; and (c) on its 
ability to expand through acquisitions, branching, or new lines of 
business. According to the Applicant the State also issued an order to 
the Bank that its capital is considered to be impaired as of September 
30, 1994, which subjects the 

[[Page 41127]]
Shares to assessment under certain circumstances and potential 
forfeiture.
    The common stock of the Bank was appraised on January 21, 1994, and 
February 11, 1994, by an independent appraiser, Mr. Glenn Garlick, 
Principal of Houlihan Valuation Appraisers located in Costa Mesa, 
California. When making the appraisals Mr. Garlick understood that the 
Applicant intended to purchase the Shares from the Plan at the greater 
of either $40 per share or the fair market value based upon an 
independent appraisal. In the February 11, 1994, appraisal, Mr. Garlick 
concluded that without consideration of the intent of the applicant to 
purchase the Shares, the fair market value of the Shares is not greater 
than $27 per share.
    The Applicant further represents that another indication of the 
continued decline in the fair market value of the Shares was manifested 
in the private placement offering of Units in March 1995 by the Bank to 
individual subscribers for $10 per Unit. Each Unit consists of one 
share of common stock of the Bank plus one five-year warrant 
convertible into one share common stock for the additional 
consideration of $10.
    4. In order to eliminate the ever increasing risk associated with 
the continued investment in the Shares by the Plan and to permit the 
Plan to distribute or otherwise invest the original value of the assets 
in the Plan, the Applicant on March 24, 1994, made a $300,000 cash 
purchase of the Shares from the Plan. The Plan incurred no expenses or 
commissions from the Sale. Furthermore, the Applicant represents that 
the Plan was able to invest the proceeds from the Sale into more liquid 
and income producing investments; such as, U.S. Treasury Bills, money 
market accounts, and publicly traded common stock.
    The Applicant represents that the Plan's elimination of the risks 
inherent in the continued investment in the Shares by the Sale to the 
Applicant was in the best interests of the Plan and its participants 
and beneficiaries, and also served to protect the rights of the 
participants and beneficiaries. The Trustees of the Plan made these 
determinations based on their knowledge that the Bank was subject to 
the FRB and State examinations and resulting enforcement actions 
described above that presented significant risks to the Plan if it 
continued to hold the Shares. In addition, the Trustees were motivated 
to act because the Shares were providing little or no income for the 
Plan, plus there was little or no likelihood that there would be income 
received in the foreseen future by the Plan.
    5. In summary, the applicant represents that the transaction 
satisfies the criteria for an exemption under section 408(a) of the Act 
because (a) the Plan received from the Applicant in a one-time 
transaction cash in an amount that was no less than the fair market 
value of the Shares on the date of the Sale; (b) the transaction 
enabled the Plan and its participants and beneficiaries to avoid the 
continuing risks associated with holding the Shares; (c) the Plan 
incurred no loss or expense from the Sale; (d) the Trustees have 
determined that the transaction was in the best interests of the Plan 
and its participants and beneficiaries and was protective of their 
rights under the Plan.

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

Banc One Capital Corporation (Banc One) Located in Columbus, OH

[Application No. D-10046]

Proposed Exemption

Section I. Transactions
    A. Effective June 2, 1995, the restrictions of sections 406(a) and 
407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of 
the Code by reason of section 4975(c)(1) (A) through (D) of the Code 
shall not apply to the following transactions involving trusts and 
certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and an employee benefit plan when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to Subsection I.A. (1) or (2).
    Notwithstanding the foregoing, Section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan by any person who has discretionary authority or renders 
investment advice with respect to the assets of that Excluded 
Plan.11

     11 Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(a)(ii) and 
regulation 29 CFR 2510.3-21(c).
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    B. Effective June 2, 1995, the restrictions of sections 406(b)(1) 
and 406(b)(2) of the Act and the taxes imposed by section 4975 (a) and 
(b) of the Code by reason of section 4975(c)(1)(E) of the Code shall 
not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) A plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) Immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.12 For purposes of this 
paragraph B.(1)(iv) only, an entity will not be considered to service 
assets contained in a trust if it is merely a subservicer of that 
trust;

    \12\ For purposes of this exemption, each plan participating in 
a commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that the conditions 

[[Page 41128]]
set forth in paragraphs B.(1) (i), (iii) and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to Subsection I.B. (1) or (2).
    C. Effective June 2, 1995, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act, and the taxes imposed by section 4975 (a) 
and (b) of the Code by reason of section 4975(c) of the Code, shall not 
apply to transactions in connection with the servicing, management and 
operation of a trust, provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing arrangement; and
    (2) The pooling and servicing agreement is provided to or described 
in all material respects in the prospectus or private placement 
memorandum provided to investing plans before they purchase 
certificates issued by the trust.13

    \13\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions.
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    Notwithstanding the foregoing, Section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act or from 
the taxes imposed by reason of section 4975(c) of the Code for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in Section III.S.
    D. Effective June 2, 1995, the restrictions of sections 406(a) and 
407(a) of the Act, and the taxes imposed by sections 4975 (a) and (b) 
of the Code by reason of sections 4975(c)(1) (A) through (D) of the 
Code, shall not apply to any transactions to which those restrictions 
or taxes would otherwise apply merely because a person is deemed to be 
a party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider described in 
section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2) 
(F), (G), (H) or (I) of the Code), solely because of the plan's 
ownership of certificates.
Section II. General Conditions
    A. The relief provided under Section I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is in one of the three highest 
generic rating categories from either Standard & Poor's Corporation 
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc. 
(D&P) or Fitch Investors Service, Inc. (Fitch);
    (4) The trustee is not an affiliate of any member of the Restricted 
Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith; and
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Section I, if the provision of Subsection II.A.(6) above 
is not satisfied with respect to acquisition or holding by a plan of 
such certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in Subsection II.A.(6) above.
Section III. Definitions
    For purposes of this exemption:
    A. ``Certificate'' means:
    (1) A certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; and
    (b) that entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) A certificate denominated as a debt instrument--
    (a) that represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) within the meaning of section 860D(a) of the 
Internal Revenue Code of 1986; and
    (b) that is issued by and is an obligation of a trust; with respect 
to certificates defined in (1) and (2) above for which Banc One or any 
of its affiliates is either (i) the sole underwriter or the manager or 
co-manager of the underwriting syndicate, or (ii) a selling or 
placement agent.
    For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1) Either--
    (a) secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association);
    (b) secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in Section III.T);
    (c) obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, 

[[Page 41129]]
multi-family residential and commercial real property (including 
obligations secured by leasehold interests on commercial real 
property);
    (d) obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in Section III.U);
    (e) ``guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2);
    (f) fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this Section B.(1);
    (2) Property which had secured any of the obligations described in 
Subsection B.(1);
    (3) Undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to be 
made to certificateholders; and
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship and other credit support 
arrangements with respect to any obligations described in Subsection 
B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) The investment pool consists only of 
assets of the type which have been included in other investment pools, 
(ii) certificates evidencing interests in such other investment pools 
have been rated in one of the three highest generic rating categories 
by S&P's, Moody's, D&P, or Fitch for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. ``Underwriter'' means:
    (1) Banc One;
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
Banc One; or
    (3) Any member of an underwriting syndicate or selling group of 
which Banc One or a person described in (2) is a manager or co-manager 
with respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services loans contained in 
the trust, including the master servicer and any subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;
    (6) Any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) Any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer. 

[[Page 41130]]

    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as the 
trust would have if the equipment note were secured only by the 
equipment and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust holds a security interest in the lease;
    (2) The trust holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as the trust would receive 
under a motor vehicle installment loan contract.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    W. ``Banc One'' means Banc One Capital Corporation, an Ohio 
corporation, and its affiliates.
    The Department notes that this proposed exemption is included 
within the meaning of the term ``Underwriter Exemption'' as it is 
defined in Section V(h) of Prohibited Transaction Exemption (PTE) 95-60 
(60 FR 35925, July 12, 1995), the Class Exemption for Certain 
Transactions Involving Insurance Company General Accounts, at 35932.

Effective Date: If granted, this proposed exemption will be effective 
for transactions occurring on or after June 2, 1995.

Summary of Facts and Representations

    1. Banc One, formerly Meuse, Rinker, Chapman, Endres and Brooks, is 
the wholly owned, separately capitalized investment banking subsidiary 
of Banc One Corporation, a Columbus, Ohio-based holding company which 
had assets of $88.9 billion as of December 31, 1994 and operates 69 
affiliate banks with 1,418 offices in 12 states. Banc One Corporation 
also owns and operates subsidiaries that engage in data processing, 
trust, brokerage, investment management, equipment leasing, mortgage 
banking, consumer finance and insurance.
    Banc One was established in 1981 and it maintains its principal 
place of business in Columbus, Ohio. Banc One has branch operations 
located in Dallas, Milwaukee, Chicago, Indianapolis, Los Angeles, 
Phoenix, Louisville and Washington, D.C. As a member of the National 
Association of Securities Dealers, Banc One maintains a fixed income 
securities brokerage for the initial placement and remarketing of 
offerings originated by the firm as well as other issues traded in the 
secondary market. As of December 31, 1994, Banc One had total assets of 
$437,336,000.
    Since 1988, Banc One has been securitizing assets ranging from 
mobile home loans to development lots. Its professional staff has a 
combined experience of working as an underwriter and financial advisor. 
Banc One's investment bankers have extensive experience in creating 
taxable and tax-exempt obligations having a wide range of structural 
characteristics as well as security arrangements.
    Banc One represents that it has the legal authority to underwrite 
asset-backed securities. In an order dated July 16, 1990, the Federal 
Reserve Board granted Banc One the power to underwrite and deal in 
mortgage-backed securities and other asset-backed securities. This 
order is subject to the condition that Banc One does not derive more 
than 10 percent of its total gross revenues from such activities. In 
addition, Banc One's affiliates have the power to sell interests in 
their own assets in the form of asset-backed securities.

Trust Assets

    2. Banc One seeks exemptive relief to permit plans to invest in 
pass-through certificates representing undivided interests in the 
following categories of trusts: (1) Single and multi-family residential 
or commercial mortgage investment trusts; 14 (2) motor vehicle 
receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.15

    \14\ The Department notes that PTE 83-1 (48 FR 895, January 7, 
1983), a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. Banc One and its affiliates request relief for single-family 
residential mortgages in this exemption because it would prefer one 
exemption for all trusts of similar structure. However, Banc One has 
stated that it may still avail itself of the exemptive relief 
provided by PTE 83-1.
    \15\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, or the 
Federal National Mortgage Association. The Department's regulation 
relating to the definition of plan assets (29 CFR 2510.3-101(i)) 
provides that where a plan acquires a guaranteed governmental 
mortgage pool certificate, the plan's assets include the certificate 
and all of its rights with respect to such certificate under 
applicable law, but do not, solely by reason of the plan's holding 
of such certificate, include any of the mortgages underlying such 
certificate. The applicant is requesting exemptive relief for trusts 
containing guaranteed governmental mortgage pool certificates 
because the certificates in the trusts may be plan assets.
---------------------------------------------------------------------------

    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.16

    \16\ Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee. The sponsor or 
servicer of a trust selects assets to be included in the trust. These 
assets are receivables which may have been originated, in the ordinary 
course of business, by a sponsor or servicer of the trust, an affiliate 
of the sponsor or servicer, or by an unrelated lender and subsequently 
acquired by the trust sponsor or servicer.
    On or prior to the closing date, the sponsor acquires legal title 
to all assets selected for the trust, establishes the trust and 
designates an independent entity as trustee. On the closing date, the 
sponsor conveys to the trust legal title to the assets and the trustee 
issues certificates representing fractional undivided interests in the 
trust assets. Banc One, or one or more broker-dealers (which may 
include Banc One), acts as underwriter or placement agent with respect 
to the sale of the certificates. All of the public offerings of 
certificates presently contemplated have been or are to be underwritten 
by Banc One on a firm commitment basis. In addition, Banc One 
anticipates privately placing certificates on both a firm commitment 

[[Page 41131]]
and an agency basis. Banc One may also act as the lead underwriter for 
a syndicate of securities underwriters.
    Certificateholders are entitled to receive monthly, quarterly or 
semi-annual installments of principal and/or interest or lease payments 
due on the receivables, adjusted, in the case of payments of interest, 
to a specified rate--the pass-through rate--which may be fixed or 
variable.
    5. Some of the certificates will be multi-class certificates. Banc 
One requests exemptive relief for two types of multi-class 
certificates: ``strip'' certificates and ``fast-pay/ slow-pay'' 
certificates. Strip certificates are a type of security in which the 
stream of interest payments on receivables is split from the flow of 
principal payments and separate classes of certificates are 
established, each representing rights to disproportionate payments of 
principal and interest.17

    \17\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(l)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this 
exemption.
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    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. Interest and/or principal 
payments received on the underlying receivables are distributed first 
to the class of certificates having the earliest stated maturity of 
principal, and/or earlier payment schedule, and only when that class of 
certificates have been paid in full (or has received a specified 
amount) will distributions be made with respect to the second class of 
certificates. Distributions on certificates having later stated 
maturities will proceed in like manner until all the certificateholders 
have been paid in full. The only difference between this multi-class 
pass- through arrangement and a single-class pass-through arrangement 
is the order in which distributions are made to certificateholders. In 
each case, certificateholders will have a beneficial ownership interest 
in the underlying assets. In neither case will the rights of a plan 
purchasing a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.18

     18 If a trust issues subordinated certificates, holders of such 
subordinated certificates may not share in the amount distributed on 
a pro rata basis with the senior certificateholders. The Department 
notes that the exemption does not provide relief for plan investment 
in such subordinated certificates.
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    6. For tax reasons, the trust must be maintained as an essentially 
passive entity. Therefore, both the sponsor's discretion and the 
servicer's discretion with respect to assets included in a trust are 
severely limited. Pooling and servicing agreements provide for the 
substitution of receivables by the sponsor only in the event of defects 
in documentation discovered within a short time after the issuance of 
trust certificates (within 120 days, except in the case of obligations 
having an original term of 30 years, in which case the period will not 
exceed two years). Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed through to certificateholders.

Parties to Transactions

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

[[Page 41132]]
having been sold. To protect the investor's interest, the servicer 
ordinarily covenants that this ``sold flag'' will be included in all 
records relating to the sold receivables, including the master file, 
archives, tape extracts and printouts.
    The sold flags are invisible to the obligor and do not affect the 
manner in which the servicer performs the billing, posting and 
collection procedures relating to the sold receivables. However, the 
servicer uses the sold flag to identify the receivables for the 
purposes of reporting all activity on those receivables after their 
sale to the investors.
    Depending on the type of receivable and the details of the 
servicer's computer system, in some cases, the servicer's internal 
reports can be adapted for investor reporting with little or no 
modification. In other cases, the servicer may have to perform special 
calculations to fulfill the investor reporting responsibilities. These 
calculations can be performed on the servicer's main computer or on a 
small computer with data supplied by the main system. In all cases, the 
numbers produced for the investor are reconciled to the servicer's 
books and reviewed by public accountants.
    The underwriter will be a registered broker-dealer that acts as 
underwriter or placement agent with respect to the sale of the 
certificates. Public offerings of certificates are generally made on a 
firm commitment basis. Private placements of certificates may be made 
on a firm commitment or agency basis. It is anticipated that the lead 
or co-managing underwriter will make a market in certificates offered 
to the public.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (though they 
themselves may be related) will be unrelated to Banc One. However, 
affiliates of Banc One may originate or service receivables included in 
a trust or they may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    11. In some cases, the sponsor will obtain the receivables from 
various originators pursuant to existing contracts with such 
originators under which the sponsor continually buys receivables. In 
other cases, the sponsor will purchase the receivables at fair market 
value from the originator or the finance company pursuant to a purchase 
and sale agreement related to the specific offering of certificates. In 
other cases, the sponsor will originate the receivables, itself.
    As compensation for the receivables transferred to the trust, the 
sponsor receives cash or certificates representing the entire 
beneficial interest in the trust. The sponsor sells some or all of 
these certificates for cash to investors or securities underwriters.
    12. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables and expectations as to the 
likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.19 This rate is generally determined by the same market forces 
that determine the price of a certificate. The price of a certificate 
and its pass-through, or coupon rate, together determine the yield to 
investors. If an investor purchases a certificate at less than par, 
that discount augments the stated pass-through rate; conversely, a 
certificate purchased at a premium yields less than the stated coupon.

     19 The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
---------------------------------------------------------------------------

    13. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor or an affiliate thereof, and 
receive fees for acting as sponsor) will retain the difference between 
payments received on the receivables in the trust and payments payable 
(at the pass-through rate) to certificateholders, except that in some 
cases, a portion of the payments on receivables may be paid to a third 
party, such as a fee paid to a provider of credit support. The servicer 
may receive additional compensation by having the use of the amounts 
paid on the receivables between the time they are received by the 
servicer and the time they are due to the trust (which time is set 
forth in the pooling and servicing agreement). Typically, the servicer 
will be required to pay the administrative expenses of servicing the 
trust, including, in some cases, the trustee's fee, out of its 
servicing compensation.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid in a lump sum 
at the time the trust is established, or on the receivables in excess 
of the pass-through rate.
    14. The servicer may be entitled to retain certain administrative 
fees paid by a third party, usually the obligor. These administrative 
fees fall into three categories: (a) Prepayment fees; (b) late payment 
and payment extension fees; and (c) expenses, fees and charges 
associated with foreclosure or repossession or other conversion of a 
secured position into cash proceeds upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    15. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts in itself or to commingle such payments 
with its own funds prior to the distribution dates. In these cases, the 
servicer would be entitled to the benefit derived from the use of the 
funds between the date of payment on a receivable and the pass-through 
date. Commingled payments may not be protected from the creditors of 
the servicer in the event of the servicer's bankruptcy or receivership. 
In those instances when payments on receivables are held in non-
interest bearing accounts or are commingled with the servicer's own 
funds, the servicer is required to deposit these payments by a date 
specified in the pooling and servicing agreement into an account from 
which the trustee makes payments to certificateholders.
    16. The underwriter will receive a fee in connection with the 
securities underwriting or private placement of certificates. In a firm 
commitment underwriting, this fee would normally consist of the 
difference between what the underwriter receives for the certificates 
that it distributes and what it pays the sponsor for those 
certificates. In a private placement, the fee normally takes the form 
of an agency commission paid by the sponsor. In a best efforts 
underwriting in which the underwriter would sell certificates in a 
public offering on an agency basis, the underwriter would receive an 
agency commission rather than a fee based on the difference between the 
price at which the certificates are sold to the public and what it pays 
the sponsor. In some private placements, the 

[[Page 41133]]
underwriter may buy certificates as principal, in which case, its 
compensation would be the difference between what it receives for the 
certificates that it sells and what it pays the sponsor for these 
certificates.

Purchase of Receivables by the Servicer

    17. As the principal amount of the receivables in a trust is 
reduced by payments, the cost of administering the trust generally 
increases, making the servicing of the trust prohibitively expensive at 
some point. Consequently, the pooling and servicing agreement generally 
provides that the servicer may purchase the receivables remaining in 
the trust when the aggregate unpaid balance payable on the receivables 
is reduced to a specified percentage (usually 5 to 10 percent) of the 
initial aggregate unpaid balance.
    The repurchase price for such an option is set at a level such that 
the certificateholders will receive the full amount on all of the 
receivables held by the trust plus the full amount of property, if any, 
that has been acquired by the trust through collections on or 
liquidations of the receivables.

Certificate Ratings

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

Provision of Credit Support

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

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

[[Page 41134]]

    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms and their material legal aspects;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets and the trustee's remedy for any breach thereof; 
a description of the procedures for collection of payments on 
receivables and for making distributions to investors, and a 
description of the accounts into which such payments are deposited and 
from which such distributions are made; identification of the servicing 
compensation and any fees for credit enhancement that are deducted from 
payments on receivables before distributions are made to investors; a 
description of periodic statements provided to the trustee, and 
provided to or made available to investors by the trustee; and a 
description of the events that constitute events of default under the 
pooling and servicing contract and a description of the trustee's and 
the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors; and
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates.
    21. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    22. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many trusts obtain, by 
application to the Securities and Exchange Commission, a complete 
exemption from the requirement to file quarterly reports on Form 10-Q 
and a modification of the disclosure requirements for annual reports on 
Form 10-K. If such an exemption is obtained, these trusts normally 
would continue to have the obligation to file current reports on Form 
8-K to report material developments concerning the trust and the 
certificates. While the Securities and Exchange Commission's 
interpretation of the periodic reporting requirements is subject to 
change, periodic reports concerning a trust will be filed to the extent 
required under the Securities Exchange Act of 1934.
    23. At or about the time distributions are made to 
certificateholders, a report will be delivered to the trustee as to the 
status of the trust and its assets, including underlying obligations. 
Such report will typically contain information regarding the trust's 
assets, payments received or collected by the servicer, the amount of 
prepayments, delinquencies, servicer advances, defaults and 
foreclosures, the amount of any payments made pursuant to any credit 
support, and the amount of compensation payable to the servicer. Such 
report also will be delivered to or made available to the rating agency 
or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the trustee 
summarizing information regarding the trust and its assets. Such 
statement will include information regarding the trust and its assets, 
including underlying receivables. Such statement will typically contain 
information regarding payments and prepayments, delinquencies, the 
remaining amount of the guaranty or other credit support and a 
breakdown of payments between principal and interest.

Forward Delivery Commitments

    24. To date, Banc One has not entered into any forward delivery 
commitments in connection with the offering of pass-through 
certificates. However, Banc One may contemplate entering into such 
commitments. The utility of forward delivery commitments has been 
recognized with respect to the offering of similar certificates backed 
by pools of residential mortgages. As such, Banc One may find it 
desirable in the future to enter into such commitments for the purchase 
of certificates.

Secondary Market Transactions

    25. It is Banc One's normal policy to attempt to make a market for 
securities for which it is lead or co-managing underwriter. Banc One 
anticipates that it will make a market in certificates.

Retroactive Relief

    26. Banc One represents that it has not engaged in transactions 
related to mortgage-backed and asset-backed securities based on the 
assumption that retroactive relief would be granted prior to the date 
of this application. However, Banc One requests the exemptive relief 
granted to be retroactive to June 2, 1995, the date of this 
application, and would like to rely on such retroactive relief for 
transactions entered into prior to the date exemptive relief may be 
granted.

Summary

    27. In summary, Banc One represents that the transactions for which 
exemptive relief is requested satisfy the statutory criteria of section 
408(a) of the Act due to the following:
    (a) The trusts contain ``fixed pools'' of assets. There is little 
discretion on the part of the trust sponsor to substitute receivables 
contained in the trust once the trust has been formed;
    (b) Certificates in which plans invest will have been rated in one 
of the three highest rating categories by S&P's, Moody's, D&P or Fitch. 
Credit support will be obtained to the extent necessary to attain the 
desired rating;
    (c) All transactions for which Banc One seeks exemptive relief will 
be governed by the pooling and servicing agreement, which is made 
available to plan fiduciaries for their review prior to the plan's 
investment in certificates;
    (d) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (e) Banc One anticipates that it will make a secondary market in 
certificates.
Discussion of Proposed Exemption

I. Differences Between Proposed Exemption and Class Exemption PTE 83-1
    The exemptive relief proposed herein is similar to that provided in 
PTE 81-7 (46 FR 7520, January 23, 1981), Class Exemption for Certain 
Transactions Involving Mortgage Pool Investment Trusts, amended and 
restated as PTE 83-1 (48 FR 895, January 7, 1983).
    PTE 83-1 applies to mortgage pool investment trusts consisting of 
interest-bearing obligations secured by first or second mortgages or 
deeds of trust on single-family residential property. The exemption 
provides relief from sections 406(a) and 407 for the sale, exchange or 

[[Page 41135]]
transfer in the initial issuance of mortgage pool certificates between 
the trust sponsor and a plan, when the sponsor, trustee or insurer of 
the trust is a party-in-interest with respect to the plan, and the 
continued holding of such certificates, provided that the conditions 
set forth in the exemption are met. PTE 83-1 also provides exemptive 
relief from section 406 (b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the 
trust is a fiduciary with respect to the plan assets invested in such 
certificates, provided that additional conditions set forth in the 
exemption are met. In particular, section 406(b) relief is conditioned 
upon the approval of the transaction by an independent fiduciary. 
Moreover, the total value of certificates purchased by a plan must not 
exceed 25 percent of the amount of the issue, and at least 50 percent 
of the aggregate amount of the issue must be acquired by persons 
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1 
provides conditional exemptive relief from section 406(a) and (b) of 
the Act for transactions in connection with the servicing and operation 
of the mortgage trust.
    Under PTE 83-1, exemptive relief for the above transactions is 
conditioned upon the sponsor and the trustee of the mortgage trust 
maintaining a system for insuring or otherwise protecting the pooled 
mortgage loans and the property securing such loans, and for 
indemnifying certificateholders against reductions in pass-through 
payments due to defaults in loan payments or property damage. This 
system must provide such protection and indemnification up to an amount 
not less than the greater of one percent of the aggregate principal 
balance of all trust mortgages or the principal balance of the largest 
mortgage.
    The exemptive relief proposed herein differs from that provided by 
PTE 83-1 in the following major respects: (a) The proposed exemption 
provides individual exemptive relief rather than class relief; (b) the 
proposed exemption covers transactions involving trusts containing a 
broader range of assets than single-family residential mortgages; (c) 
instead of requiring a system for insuring the pooled receivables, the 
proposed exemption conditions relief upon the certificates having 
received one of the three highest ratings available from S&P's, 
Moody's, D&P or Fitch (insurance or other credit support would be 
obtained only to the extent necessary for the certificates to attain 
the desired rating); and (d) the proposed exemption provides more 
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
    After consideration of the representations of the applicant and 
information provided by S&P's, Moody's, D&P and Fitch, the Department 
has decided to condition exemptive relief upon the certificates having 
attained a rating in one of the three highest generic rating categories 
from S&P's, Moody's, D&P or Fitch. The Department believes that the 
rating condition will permit the applicant flexibility in structuring 
trusts containing a variety of mortgages and other receivables while 
ensuring that the interests of plans investing in certificates are 
protected. The Department also believes that the ratings are indicative 
of the relative safety of investments in trusts containing secured 
receivables. The Department is conditioning the proposed exemptive 
relief upon each particular type of asset-backed security having been 
rated in one of the three highest rating categories for at least one 
year and having been sold to investors other than plans for at least 
one year.\20\

    \20\ In referring to different ``types'' of asset-backed 
securities, the Department means certificates representing interests 
in trusts containing different ``types'' of receivables, such as 
single family residential mortgages, multi-family residential 
mortgages, commercial mortgages, home equity loans, auto loan 
receivables, installment obligations for consumer durables secured 
by purchase money security interests, etc. The Department intends 
this condition to require that certificates in which a plan invests 
are of the type that have been rated (in one of the three highest 
generic rating categories by S&P's, D&P, Fitch or Moody's) and 
purchased by investors other than plans for at least one year prior 
to the plan's investment pursuant to the proposed exemption. In this 
regard, the Department does not intend to require that the 
particular assets contained in a trust must have been ``seasoned'' 
(e.g., originated at least one year prior to the plan's investment 
in the trust).
III. Limited Section 406(b) and Section 407(a) Relief for Sales
    Banc One represents that in some cases a trust sponsor, trustee, 
servicer, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates may be a pre-existing party 
in interest with respect to an investing plan.\21\ In these cases, a 
direct or indirect sale of certificates by that party in interest to 
the plan would be a prohibited sale or exchange of property under 
section 406(a)(1)(A) of the Act.\22\ Likewise, issues are raised under 
section 406(a)(1)(D) of the Act where a plan fiduciary causes a plan to 
purchase certificates where trust funds will be used to benefit a party 
in interest.

    \21\ In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which Banc One or 
any of its affiliates is either (a) the sole underwriter or manager 
or co-manager of the underwriting syndicate, or (b) a selling or 
placement agent.
    \22\ The applicant represents that where a trust sponsor is an 
affiliate of Banc One, sales to plans by the sponsor may be exempt 
under PTE 75-1, Part II (relating to purchases and sales of 
securities by broker-dealers and their affiliates), if Banc One is 
not a fiduciary with respect to plan assets to be invested in 
certificates.
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    Additionally, Banc One represents that a trust sponsor, servicer, 
trustee, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates representing an interest in 
a trust may be a fiduciary with respect to an investing plan. Banc One 
represents that the exercise of fiduciary authority by any of these 
parties to cause the plan to invest in certificates representing an 
interest in the trust would violate section 406(b)(1), and in some 
cases section 406(b)(2), of the Act.
    Moreover, Banc One represents that to the extent there is a plan 
asset ``look through'' to the underlying assets of a trust, the 
investment in certificates by a plan covering employees of an obligor 
under receivables contained in a trust may be prohibited by sections 
406(a) and 407(a) of the Act.
    After consideration of the issues involved, the Department has 
determined to provide the limited sections 406(b) and 407(a) relief as 
specified in the proposed exemption.

Notice to Interested Persons

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

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

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest of disqualified 
person from certain other 

[[Page 41136]]
provisions of the Act and/or the Code, including any prohibited 
transaction provisions to which the exemption does not apply and the 
general fiduciary responsibility provisions of section 404 of the Act, 
which among other things require a fiduciary to discharge his duties 
respecting the plan solely in the interest of the participants and 
beneficiaries of the plan and in a prudent fashion in accordance with 
section 404(a)(1)(b) of the act; nor does it affect the requirement of 
section 401(a) of the Code that the plan must operate for the exclusive 
benefit of the employees of the employer maintaining the plan and their 
beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete and accurately describe all 
material terms of the transaction which is the subject of the 
exemption. In the case of continuing exemption transactions, if any of 
the material facts or representations described in the application 
change after the exemption is granted, the exemption will cease to 
apply as of the date of such change. In the event of any such change, 
application for a new exemption may be made to the Department.

    Signed at Washington, DC, this 7th day of August, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-19871 Filed 8-10-95; 8:45 am]
BILLING CODE 4510-29-P