[Federal Register Volume 60, Number 228 (Tuesday, November 28, 1995)]
[Notices]
[Pages 58651-58680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28910]
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DEPARTMENT OF LABOR
[Application No. D-09840, et al.]
Proposed Exemptions; World Omni Financial Corporation
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, 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.
[[Page 58652]]
World Omni Financial Corporation and its Affiliates, Located in
Deerfield Beach, Florida
[Application No. D-09840]
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).
Section I--Transactions
A. Effective June 27, 1994, the restrictions of sections 406(a) and
407(a) of the Act and the taxes imposed by section 4975(a) and (b) of
the Code, by reason of section 4975(c)(1)(A) through (D) of the Code,
shall not apply to the following transactions involving trusts and
certificates evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of that Excluded Plan.1
\1\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective June 27, 1994, the restrictions of sections 406(b)(1)
and 406(b)(2) of the Act and the taxes imposed by section 4975(a) and
(b) of the Code, by reason of section 4975(c)(1)(E) of the Code, shall
not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if
(i) The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group,
as defined in Section III.L., and at least 50 percent of the aggregate
interest in the trust is acquired by persons independent of the
Restricted Group;
(iii) A plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.2 For purposes of this
paragraph B.(1)(iv) only, an entity shall not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
\2\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that conditions set forth in paragraphs B.(1)(i), (iii), and
(iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.B.(1) or (2).
C. Effective June 27, 1994, the restrictions of sections 406(a),
(b) and 407(a) of the Act and the taxes imposed by section 4975(a) and
(b) of the Code, by reason of section 4975(c) of the Code, shall not
apply to transactions in connection with the servicing, management and
operation of a trust, provided;
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.3
\3\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, Section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed by reason of section 4975(c) of the Code, for the
receipt of a fee by the servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in Section III.S. below.
D. Effective June 27, 1994, the restrictions of sections 406(a) and
407(a) of the Act and the taxes imposed by sections 4975(a) and (b) of
the Code, by reason of sections 4975(c)(1)(A) through (D) of the Code,
shall not apply to any transaction to which those restrictions or taxes
would otherwise apply merely because a person is deemed to be a party
in interest or disqualified person (including a fiduciary) with respect
to a plan by virtue of providing services to the plan (or by virtue of
having a relationship to such service provider as described in section
3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H)
or (I) of the Code), solely because of the plan's ownership of
certificates.
Section II--General Conditions
A. The relief provided under Section I 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 such terms would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poors Corporation,
Moody's Investor Service,
[[Page 58653]]
Inc., Duff & Phelps Inc., or Fitch Investors Service, Inc.
(collectively, the Rating Agencies);
(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 or retained by the sponsor pursuant to the assignment of obligations
(or interest therein) to the trust represents not more than the fair
market value of such obligation (or interest); and the sum of all
payments made to and retained by the servicer represents not more than
reasonable compensation for the servicer's services under the pooling
and servicing agreement and reimbursement of the servicer's reasonable
expenses in connection therewith;
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933;
(7) To the extent that the pool of leases used to create a
portfolio for a trust is not closed at the time of the issuance of
certificates by the trust, additional leases may be added to the
portfolio for a period of no more than 15 consecutive months from the
cut-off date used for the initial allocation of leases that was made to
create such portfolio, provided that:
(a) all such additional leases meet the same terms and conditions
for eligibility as the original leases used to create the portfolio (as
described in the prospectus or private placement memorandum for such
certificates), which terms and conditions have been approved by the
Rating Agencies. Notwithstanding the foregoing, the terms and
conditions for an ``eligible lease'' (as defined in Section III.X
below) may be changed if such changes receive prior approval either by
a majority vote of the outstanding certificateholders or by the Rating
Agencies; and
(b) such additional leases do not result in the certificates
receiving a lower credit rating from the Rating Agencies, upon
termination of the period during which additional leases may be added
to the portfolio, than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(8) Any additional period described in Section II.A.(7) shall be
described in the prospectus or private placement memorandum provided to
investing plans;
(9) The average annual percentage lease rate (the Average Lease
Rate) for the pool of leases in the portfolio for the trust, after the
additional period described in Section II.A.(7), shall not be more than
200 basis points greater than the Average Lease Rate for the original
pool of leases that was used to create such portfolio for the trust;
(10) For the duration of the additional period described in Section
II.A.(7), principal collections that are reinvested in additional
leases are first reinvested in the ``eligible lease contract'' (as
defined in Section III.X. below) with the earliest origination date,
then in the ``eligible lease contract'' with the next earliest
origination date, and so forth, beginning with any lease contracts that
have been reserved specifically for such purposes at the time of the
initial allocation of leases to the pool of leases used to create the
particular trust, but excluding those specific lease contracts reserved
for allocation to or allocated to other pools of leases used to create
other trusts; and
(11) The trustee of the trust is a substantial financial
institution or trust company experienced in trust activities and is
familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, enforces all the rights created in favor of
certificateholders of such trust, including employee benefit plans
subject to the Act.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Section I, if the provision in Section II.A.(6) above is
not satisfied for the acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees shall be required to
make a written representation regarding compliance with the condition
set forth in Section II.A.(6).
C. World Omni and its Affiliates abide by all securities and other
laws applicable to any offering of interests in securitized assets,
such as certificates in a trust as described herein, including those
laws relating to disclosure of material litigation, investigations and
contingent liabilities.
Section III--Definitions
For purposes of this proposed exemption:
A. ``Certificate'' means:
(1) A certificate
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal
(except during the period described in Section II.A.(7), if any),
interest, and/or other payments made in connection with the assets of
such trust; or
(2) A certificate denominated as a debt instrument that is issued
by and is an obligation of a trust;
With respect to certificates defined in Section III.A. (1) and (2)
above, the underwriter shall be an entity which has received from the
Department an individual prohibited transaction exemption relating to
certificates which is substantially similar to this proposed exemption
(as noted below in Section III.C.) and shall be either (i) the sole
underwriter or the manager or co-manager of the underwriting syndicate,
or (ii) a selling or placement agent.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either
(a) Qualified motor vehicle leases (as defined in Section III.T.);
or
(b) Fractional undivided interests in a trust containing assets
described in paragraph (a) of this Section III.B.(1), where such
fractional interest is not subordinated to any other interest in the
same pool of qualified motor vehicle leases held by such trust; 4
\4\ It is the Department's view that the definition of
``Trust'' contained in Section III.B. includes a two-tier trust
structure under which certificates issued by the first trust, which
contains a pool of receivables described above, are transferred to a
second trust which issues certificates that are sold to plans.
However, the Department is of the further view that, since the
exemption provides relief for the direct or indirect acquisition or
disposition of certificates that are not subordinated, no relief
would be available if the certificates held by the second trust were
subordinated to the rights and interests evidenced by other
certificates issued by the first trust.
[[Page 58654]]
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(2) Property which has secured any of the obligations described in
Section III.B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders, except during the period described in
Section II.A.(7) above when temporary investments are made until such
cash can be reinvested in additional leases described in paragraph (a)
of this Section III.B.(1); and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under motor vehicle dealer agreements, any
insurance policies, third-party guarantees, contracts of suretyship and
other credit support arrangements for any obligations described in
Section III.B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the investment pool consists only of
assets of the type which have been included in other investment pools,
(ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest categories by the Rating
Agencies for at least one year prior to the plan's acquisition of
certificates pursuant to this exemption, and (iii) certificates
evidencing interests in such other investment pools have been purchased
by investors other than plans for at least one year prior to the plan's
acquisition of certificates pursuant to this exemption.
C. ``Underwriter'' means any investment banking firm that has
received an individual prohibited transaction exemption from the
Department that provides relief for so-called ``asset-backed''
securities that is substantially similar in format and structure to
this proposed exemption (the Underwriter Exemptions); 5 or any
person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with such investment
banking firm; and any member of an underwriting syndicate or selling
group of which such firm or person described above is a manager or co-
manager with respect to the certificates.
\5\ For a current listing of the Underwriter Exemptions, see
Section V(h) of Prohibited Transaction Exemption (PTE) 95-60 (60 FR
35925, July 12, 1995).
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D. ``Sponsor'' means an entity, independent of World Omni or
affiliated with World Omni, that organizes a trust by depositing
obligations therein in exchange for certificates provided that, if such
entity is independent of World Omni, the servicer of the trust is an
affiliate of World Omni.
E. ``Master Servicer'' means World Omni or an entity affiliated
with World Omni 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 World Omni or an entity affiliated with
World Omni which, under the supervision of and on behalf of the master
servicer, services leases contained in the trust, but is not a party to
the pooling and servicing agreement.
G. ``Servicer'' means World Omni or an entity affiliated with World
Omni which services leases contained in the trust, including the master
servicer and any subservicer.
H. ``Trustee'' means an entity that is independent of World Omni
and its affiliates which is the trustee of the trust. In the case of
certificates which are denominated as debt instruments, ``trustee''
also means the trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust. In
addition, a person is not an insurer if such person merely provides:
(1) Property damage or liability insurance to an Obligor with respect
to a lease or leased vehicle; or (2) property damage, excess liability
or contingent liability insurance to any lessor, sponsor or servicer,
if such entities are included in the same insurance policy, with
respect to a lease or leased vehicle.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments for a lease in the trust. For any qualified
motor vehicle leases contained in a trust as described herein,
``obligor'' shall include any owner of property subject to a lease
included in the trust, or subject to a lease securing an obligation in
the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust and at
the end of the period described in Section II.A.(7); or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person shall be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in Section III.Q. below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this proposed
exemption applicable to sales are met.
Q. ``Forward Delivery Commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
[[Page 58655]]
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable Compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing for the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust shall not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The trust 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.
U. ``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.
V. ``Lease Rate'' means an implicit rate in each lease calculated
as an annual percentage rate on a constant yield basis, based on the
capitalized cost of the leased vehicle as determined under the
particular lease contract for the vehicle. With respect to the
determination of a ``Lease Rate'', each lease will provide for equal
monthly payments such that at the end of the lease contract term the
capitalized cost will have been amortized to an amount equal to the
residual value of the leased vehicle established at the time of
origination of such contract. The amount to which the capitalized cost
has been amortized at any point in time will be the outstanding
principal balance for the lease.
W. ``Average Lease Rate'' means the average annual percentage lease
rate, as defined in Section III.V. above, for all leases included at
any particular time in a portfolio used to create a trust from which
certificates are issued.
X. ``Eligible Lease'' or ``Eligible Lease Contract'' means a
Qualified Motor Vehicle Lease, as defined in Section III.T. above,
which meets the eligibility criteria established for, among other
things, the term of the lease, place of origination, date of
origination, and provisions for default, as described in the particular
prospectus or private placement memorandum for the certificates
provided to investors, if such terms and conditions have been approved
by the Rating Agencies prior to the issuance of such certificates.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
for all transactions described herein which occurred on or after June
27, 1994.
Summary of Facts and Representations
1. World Omni Financial Corporation (World Omni) is a Florida
corporation which is a wholly-owned subsidiary of J.M. Family
Enterprises, Inc. (JMFE). JMFE also owns Southeast Toyota Distributors,
Inc., which is the exclusive distributor of Toyota cars and light duty
trucks in Alabama, Florida, Georgia, North Carolina and South Carolina
(the Five-State Area). World Omni provides consumer lease and
installment contract financing to retail customers of, and floorplan
financing to, automobile and light-duty truck dealers located primarily
in the Five-State Area.
World Omni Lease Securitization L.P. is a Delaware limited
partnership, the sole general partner of which is World Omni Lease
Securitization, Inc., a Delaware corporation that is a wholly-owned
subsidiary of World Omni, and the sole limited partner of which is
World Omni.
Auto Lease Finance L.P. is a Delaware limited partnership, the sole
general partner of which is Auto Lease Finance, Inc., a Delaware
corporation that is a wholly-owned subsidiary of World Omni, and the
sole limited partner of which is World Omni.
2. World Omni and its Affiliates, including World Omni Lease
Securitization, L.P., and Auto Lease Finance L.P., seek an exemption to
permit employee benefit plans to invest in certificates indirectly
representing undivided interests in a trust which contains motor
vehicle leases and the motor vehicles related to those leases. The
exemption World Omni seeks is substantially similar to the Underwriter
Exemptions granted by the Department to various broker-dealers and
banks to permit investments in, among other things, motor vehicle
receivable investment trusts. In the exemption sought by World Omni,
the primary asset of the trust in which investors have beneficial
interests (i.e. the Securitization Trust) is a special unit of
beneficial interest (SUBI) in a separate trust that actually holds the
motor vehicle leases and related motor vehicles (i.e. the Origination
Trust). The Underwriter Exemptions may also include such a two-tier
trust structure (as noted above in Footnote 5). However, unlike the
trusts described in the Underwriter Exemptions, the Origination Trusts
established by World Omni do not contain fixed pools of assets (i.e.
qualified motor vehicle leases and related motor vehicles) for at least
a year, as discussed further below. World Omni states that the
Securitization Trusts meet all other requirements of the Underwriter
Exemptions. Such requirements include: (i) That investor certificates
covered by the exemption have one of the three highest ratings from the
Rating Agencies; (ii) that there be no subordination of investor
certificates purchased by employee benefit plans to the rights and
interests evidenced by other certificates of the same trust; and (iii)
that there be a pass-through of principal, interest and other payments
received by the trust relating to the receivables beneficially owned by
the trust, less certain specified servicing fees which are disclosed
and approved by the investors prior to the acquisition of any trust
certificates.
3. The Origination Trust is formed pursuant to a trust agreement
between the sponsor of the Origination Trust and its trustee (the
Origination Trustee). The sponsor of the Origination Trust is generally
a wholly-owned subsidiary of World Omni (or a limited partnership in
which such a wholly-owned subsidiary is the sole general partner), but
could be an entity independent of World Omni and its affiliates. The
Origination Trustee is a wholly-owned subsidiary of an independent
entity qualified to provide trust services, and in fact
[[Page 58656]]
provides such services to the Origination Trust under contract with its
subsidiary (i.e. the Trust Agent). Currently, the Trust Agent is Bank
of America Illinois (Bank of America). Bank of America is not
affiliated in any way with World Omni, other than as a service
provider. World Omni or an affiliate acts as servicer (the Servicer)
for all of the leases and leased vehicles owned by the Origination
Trust, pursuant to a servicing agreement with the Origination Trustee
(the Servicing Agreement).
4. The assets of the Origination Trust include retail closed-end
automobile and light-duty truck lease contracts assigned to the
Origination Trust by dealers in the World Omni family, the automobiles
and light duty trucks relating thereto, all proceeds thereof (including
any sale of such vehicles), and payments made under certain insurance
policies relating to such leases or the related lessees or leased
vehicles. World Omni is the initial holder of a sole beneficial
interest (i.e. the ``Undivided Trust Interest'' or ``UTI'') in the
Origination Trust.
The Origination Trusts are open-ended; that is, as leases are
originated, they and the related vehicles are assigned to the
Origination Trust by World Omni. When the aggregate dollar amount of
leases and leased vehicles in the Origination Trust grows large enough
to justify a securitization, World Omni, as holder of the UTI, may
direct the trustee of the Origination Trust to segregate from among all
the leases and leased vehicles within the Origination Trust a specified
portfolio of leases and related leased vehicles. The trustee then
issues to World Omni a separate certificate representing a ``Separate
Unit of Beneficial Interest'' or ``SUBI'' in that segregated portfolio.
It is this SUBI that becomes the basis for a securitization and the
creation of a separate Securitization Trust.
Any leases and leased vehicles held by the Origination Trust that
are not included in a SUBI portfolio at the time of such segregation,
as well as any new leases and related vehicles acquired subsequent to
the ``cut-off date'' on which the new SUBI portfolio is identified,
remain part of the UTI portfolio, and the original UTI continues to
represent a beneficial interest therein.
New leases and related leased vehicles are added to the SUBI's
segregated portfolio by World Omni in an aggregate amount approximately
equal to principal collections on the leases and leased vehicles
already allocated to the SUBI,6 for a fixed period (which will be
no more than fifteen consecutive months) after the cut-off date used
for the initial allocation of leases made to create the SUBI. (This
period is referred to hereafter as the ``revolving period''). The
applicant represents that this fixed ``revolving period'' for principal
collections on the leases and leased vehicles is established so that
the investor certificates issued by the Securitization Trust are
treated as debt for Federal and state income tax purposes, but does not
affect the characterization of those certificates as beneficial
interests in the Securitization Trust property for accounting and other
state law purposes.
\6\ World Omni represents that the aggregate amount of new
leases added to a SUBI portfolio is approximately equal, rather than
exactly equal, to principal collections on the existing leases
because, when additional leases are added, the outstanding principal
balance of the new leases is not always equal to the principal
collections available for reinvestment. The uninvested principal
amounts are held by the Securitization Trust in a cash account and
temporarily invested in short-term investments, with interest
thereon accruing to the Securitization Trust, until such amounts can
be reinvested in additional leases for the SUBI portfolio. World
Omni states that any uninvested principal amounts, and interest on
such amounts, held by the Securitization Trust are distributed to
the certificateholders once principal payments on the leases in the
SUBI portfolio are passed-through to investors.
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After the ``revolving period'', the pool of leases and leased
vehicles allocated to the SUBI (i.e. the SUBI portfolio) remains fixed.
Any leases which are added to the SUBI portfolio during the ``revolving
period'' must meet the same terms and conditions for eligibility as the
original leases in the portfolio, as described in the prospectus or
private placement memorandum, which terms and conditions have been
approved by the Rating Agencies prior to the ``revolving period''.
However, World Omni states that the terms and conditions for an
``eligible lease'' (as defined in Section III.X above) may be changed
if such changes receive prior approval either by a majority vote of the
outstanding certificateholders or by the Rating Agencies. Further,
under the conditions of the proposed exemption, World Omni must ensure
that the additional leases added to the SUBI portfolio do not result in
the certificates receiving a lower credit rating from the Rating
Agencies at the end of the ``revolving period'' than the rating that
was obtained at the time of the initial issuance of the certificates by
the trust (see Section II.A.(7)(b) above).
World Omni states that for the duration of the ``revolving
period'', principal collections that are reinvested in additional
leases are first reinvested in the ``eligible lease contract'' (as
defined in Section III.X. above) with the earliest origination date,
then in the ``eligible lease contract'' with the next earliest
origination date, and so forth (i.e. on a ``FIFO basis), beginning with
any lease contracts that have been reserved by World Omni specifically
for such purposes at the time of the initial allocation of leases to
the particular SUBI portfolio. However, those lease contracts reserved
for allocation to, or actually allocated to, other pools of leases
(i.e. other SUBI portfolios used to create different trusts) will be
excluded from the available additional leases to be added to the
particular SUBI portfolio. World Omni states that no adverse selection
procedures may be employed in selecting leases during the ``revolving
period''. Thus, World Omni represents that it will not be able to
manipulate the order in which leases are added to a particular SUBI
portfolio during the ``revolving period'' in order to improve its
economic position with respect to the assets held in a particular SUBI
portfolio. World Omni states further that at all times there will be a
clear identification within the Origination Trust of which leases and
leased vehicles belong in each SUBI portfolio and which belong in the
UTI or ``residual'' portfolio. The holders of beneficial interests in
each SUBI have also agreed in writing to rely solely upon the assets
contained within their respective portfolios to satisfy any payment
obligations.
This ``revolving period'' arrangement differs from the Underwriter
Exemptions wherein each trust contains a ``fixed pool'' of assets and
substitution of receivables by the trust sponsor is permitted only in
the event of defects in documentation discovered within a limited time
after the issuance of trust certificates. The applicant states that in
the present case, during the ``revolving period'', the outstanding
principal balance of the SUBI's portfolio of leases remains unchanged
and the certificateholders receive only interest payments with respect
to their certificates. Once the ``revolving period'' ends, principal
payments are no longer reinvested but rather are paid out to
certificateholders.
To the extent that leases added to the SUBI portfolio during the
``revolving period'' have a higher Lease Rate (as defined in Section
III.V. above) than do the original leases in the SUBI portfolio at the
time of the initial offering of the certificates to investors, total
returns on the ultimate lease pool in excess of that promised to
investors on the trust certificates may inure to affiliates of the
Servicer. However, the applicant states
[[Page 58657]]
that the Average Lease Rate (as defined in Section III.W. above) for
the pool of leases allocated to a SUBI portfolio owned by a particular
Securitization Trust, after accounting for all the leases added to the
SUBI portfolio during the ``revolving period'', shall not be more than
200 basis points (i.e. 2 percent) greater than the Average Lease Rate
for the leases in the SUBI portfolio on the cut-off date used for the
initial allocation of leases to the SUBI portfolio owned by the
Securitization Trust.
The Average Lease Rate for the leases in the trust at the time of
the initial offering of the certificates is described in the prospectus
or offering memorandum provided to investors. The applicant represents
that changes to the Average Lease Rate based on new leases added to a
trust during the ``revolving period'' depend on current interest rates
and market conditions as well as the amount of lessee prepayments and
repossessions on the leased vehicles. Thus, potential plan investors at
the time of the initial offering of trust certificates know the total
dollar amount of leases in the trust, the Average Lease Rate on those
leases, the fact that principal received by the trust during the
``revolving period'' is used to invest in additional leases, and the
length of the ``revolving period''. Under the terms of the proposed
exemption, potential plan investors shall also be provided with a
statement disclosing the fact that the relief provided by the exemption
shall be available to the Servicer and its affiliates only if the
additional leases do not cause the Average Lease Rate for the leases in
the pool after the ``revolving period'' to increase by more than 200
basis points.
5. Pursuant to a supplement to the Origination Trust Agreement and
a supplement to the Servicing Agreement, World Omni, acting as Servicer
on behalf of the Origination Trustee, selects the assets to be
represented by each SUBI (as discussed above). Certificates
representing the entire beneficial interest in each SUBI are issued to
the sponsor of the Securitization Trust. The sponsor is usually a
wholly-owned subsidiary of World Omni (or a partnership in which such a
subsidiary is the sole general partner), but in some cases could be an
entity that is independent of World Omni and its affiliates provided
that World Omni or an affiliate acts as the Servicer of the trust. The
sponsor creates the Securitization Trust and transfers a certificate
representing approximately a 99.8 percent beneficial interest in the
SUBI to the Securitization Trust, pursuant to a trust agreement between
the sponsor and the trustee of the Securitization Trust (the
Securitization Trustee).7 The Securitization Trustee is an
unrelated commercial institution with trust powers, meeting certain
specified requirements. Currently, the trustee of the Securitization
Trusts is the Bank of America. In addition, pursuant to the
Securitization Trust agreement, the Securitization Trust issues to its
sponsor investor certificates representing fractional undivided
interests in the assets of the Securitization Trust (i.e. the 99.8
percent interest in the SUBI, which itself represents a beneficial
interest in a portfolio of motor vehicle leases and related leased
motor vehicles held by the Origination Trust).
\7\ World Omni or an affiliate retains a de minimis interest in
each SUBI portfolio which represents a subordinated interest in the
portfolio, under requirements established by the Rating Agencies, in
order to meet certain Federal tax code objectives.
---------------------------------------------------------------------------
6. The sponsor of the Securitization Trust sells approximately 96
percent of the certificates to various outside investors, including
employee benefit plans subject to the Act. World Omni retains a
subordinated interest in the Securitization Trust of approximately 4
percent, as required by the Rating Agencies, so that unanticipated
losses with the SUBI portfolio will first by borne by World Omni. With
respect to the certificates sold to outside investors, there may be two
or more classes of securities. The investor certificates are either
publicly or privately offered. In the public lease securitizations
completed by World Omni thus far, approximately 92.5 percent of the
certificates were sold to investors publicly and approximately 3.5
percent of the certificates were sold to investors privately. The
public investor certificates had a AAA/Aaa rating from the Rating
Agencies. The private investor certificates had a single ``A'' rating
from the Rating Agencies because such certificates were subordinated to
the public investor certificates.8 Except under rare
circumstances, physical certificates are not issued to investors in a
public senior class of certificates. Instead, the Securitization Trust
uses a book entry registration system through the Depository Trust
Company (DTC), a limited-purpose trust company organized under New York
law, which is a member of the Federal Reserve system, and a clearing
agency under Section 17A of the Securities Exchange Act of 1934.
\8\ The applicant is not requesting an exemption for the
purchase of any subordinated class of certificates by employee
benefit plans. However, the applicant is requesting relief for
prohibited transactions that may occur as a result of the
investments in a trust made by an insurance company's general
account which are considered to be ``plan assets'' under the recent
U.S. Supreme Court decision in John Hancock Mutual Life Insurance
Co. v. Harris Trust & Savings Bank, 114 S.Ct. 517 (1993) (Harris
Trust). As a result of the decision in Harris Trust and the
Department's plan assets regulation (see 29 CFR 2510.3-101), an
insurance company investing general account assets could be viewed
as a ``benefit plan investor'' for purposes of calculating the 25
percent significant participation test in section 2510.3- 101(f)(1)
of the regulation.
The Department notes that Section III of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts
(PTE 95-60, 60 FR 35925, July 12, 1995) provides an exemption for
transactions in connection with the operation of asset pool
investment trusts notwithstanding that the certificates acquired by
the general account are subordinated to the rights and interests
evidenced by other certificates of the same trust. In this regard,
the Department has included a paragraph at the end of the operative
language of the proposed exemption which states that this exemption,
if granted, will be included within the definition of the term
``Underwriter Exemption'' under Section V(h) of PTE 95-60.
Therefore, the exemptive relief provided by PTE 95-60 will be
available for subordinated investments in a trust described herein
by insurance company general accounts.
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Investors are entitled to receive monthly payments of interest at a
fixed certificate rate, and after the ``revolving period'' described
above, payments of principal. Principal payments are based on the
decline in the value of the pool of leases and vehicles allocated to
each SUBI, based on certain standard depreciation schedules for the
related motor vehicles. All net collections collected for the assets
underlying each SUBI, including all net proceeds from the sale of a
vehicle upon repossession, early lease termination or maturity of the
related lease, are available to make payments on the investor
certificates.
The price of the investor certificates, both in the initial
offering and in the secondary market, is affected by market forces
including investor demand and the Average Lease Rate for the leases
allocated to the particular SUBI. The applicant states that the Average
Lease Rate generally is determined by the same market forces that
determine the price of the investor certificates. Certificate interest
rates are set at the time of the pricing of each securitization. While
the Average Lease Rate for the particular lease portfolio is a factor
in the interest rates a Securitization Trust will be able to pay, the
actual interest rate set for the certificates issued is determined by a
combination of additional factors. Specifically, these factors include:
(a) the then-current yields on U.S. Treasury Notes with a remaining
term equivalent to the anticipated average life of the particular
Securitization Trust, and (b) the then-current ``spreads'' on
similarly-rated competitive investments available in the marketplace,
as determined by
[[Page 58658]]
the Rating Agencies. Once the certificate rate is set for the
certificates issued by the Securitization Trust, that rate remains
fixed for its duration, regardless of any changes to the Average Lease
Rate of the SUBI portfolio occurring during the ``revolving period''.
The price of an investor certificate and the certificate rate together
determine the yield to investors. If an investor purchases a
certificate at less than par, that discount augments the certificate
rate; conversely, a certificate purchased at a premium yields less than
the stated coupon.
7. The origination of the leases held by the Origination Trust
begins with World Omni, which enters into arrangements with its network
of dealers allowing it to cause the assignment of leases and related
vehicles originated by those dealers either directly to World Omni or
to any other specified entity, including the Origination Trust. Once
assigned to the Origination Trust for ultimate inclusion in a portfolio
of SUBI assets for securitization as described above, this mechanism
enables World Omni to go to the capital markets directly for financing
and thereby enhance its leasing capacity without outside financing.
World Omni and/or one or more wholly-owned subsidiaries of World
Omni, or partnerships in which such a wholly-owned subsidiary is the
sole general partner, are responsible for creating each SUBI, creating
the Origination Trust and each Securitization Trust, and designating
the Trust Agent and the Securitization Trustee.
The Trust Agent, its subsidiary the Origination Trustee, and the
Securitization Trustee, are each independent entities, unrelated to
World Omni, the underwriter or placement agent. The Origination Trustee
is the legal owner of the motor vehicle leases and related leased motor
vehicles allocated to a SUBI. The Securitization Trustee is the legal
owner of the obligations in the Securitization Trust and is responsible
for enforcing all the rights created thereby in favor of
certificateholders, whether independently or through the Origination
Trustee. The applicant represents that each Securitization Trustee and
Trust Agent are substantial financial institutions or trust companies
experienced in trust activities. The Trust Agent and Securitization
Trustee receive a fee for their services, which is paid out of assets
of the Origination Trust or the Securitization Trust, as applicable.
The method of compensating each for its service related to a SUBI is
specified in the Origination Trust Agreement or Securitization Trust
Agreement, as applicable, and disclosed in the prospectus or private
placement memorandum relating to the offering of the investor
certificates.
8. The Servicer administers the leases on behalf of the beneficial
owners of the Origination Trust, including the holders of SUBI
certificates and, indirectly, the holders of the investor certificates.
The Servicer's functions involve monitoring of leases, maintenance of
records, institution of proceedings in the event of default, and sale
of vehicles after lease maturity, as well as certain functions relating
to the qualifications and permits required to be obtained by the
Origination Trustee.9 The Servicer, the sponsor of the Origination
Trust, and the sponsor of the Securitization Trust are unrelated to the
underwriter and to DTC. DTC has public senior investor certificates
registered in its name (or that of its nominee) and maintains
procedures for the distribution of notices, reports, distributions and
statements to certificateholders.
\9\ World Omni states that these functions are necessary since,
as noted in Paragraph 4 above, the Origination Trust is the owner
of, and holds title to, the vehicle unless the lessee chooses to
purchase such vehicle under the terms of the lease.
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As compensation for performing its servicing duties for the
Origination Trust, the Servicer is paid a fee equal to a specified
percentage (usually no more than one percent) of the balance of the
leases it services, including those leases allocated to the SUBI. The
Servicer may receive additional compensation related to the SUBI in the
form of interest on various accounts of the Origination Trust and/or
the Securitization Trust containing proceeds of the leases and related
leased motor vehicles allocated to each SUBI as well as interest on
certain cash deposits. The Servicer is required to pay the
administrative expenses of servicing the Origination Trust out of its
servicing compensation.
The Servicer is also compensated to the extent it may provide
credit enhancement to the Securitization Trust or otherwise arranges to
obtain credit support from another party. This ``credit support fee''
may be aggregated with other servicing fees, and may be either paid out
of the income received on the leases in excess of the certificate rate
or paid in a lump sum at the time the Securitization Trust is
established. The Servicer may be entitled to retain certain
administrative fees paid by a third party, usually the obligor under a
lease, provided that such fees are ``qualified administrative fees'' as
defined under Section III.S. These administrative fees fall into three
categories: (a) prepayment processing fees; (b) late payment fees; and
(c) fees and charges associated with the purchase of a leased vehicle
by an obligor as well as any repossession of such vehicle, or other
conversion of a secured position into cash proceeds, upon default of an
obligation.
Payments on leases may be made by lessees to the Servicer at
various times during the period preceding any date on which payments to
the Origination Trust are due. In some cases, the Servicing Agreement
may permit the Servicer to place these payments in non-interest bearing
accounts in itself or to commingle such payments with its own funds
prior to the distribution dates. In these cases, the Servicer would be
entitled to the benefit derived from the use of the funds between the
date of payment on a lease and the date payment is due to the
Origination Trust. Commingled payments may not be protected from the
creditors of the Servicer in the event of the Servicer's bankruptcy or
receivership. In those instances when payments on leases are held in
non-interest bearing accounts or are commingled with the Servicer's own
funds, the Servicer is required to deposit these payments into an
Origination Trust account by a date specified in the Servicing
Agreement.
All compensation payable to the Servicer with regard to the leases
allocated to a SUBI is set forth or referred to in the Servicing
Agreement, and described in reasonable detail in the prospectus or
private placement memorandum relating to the investor certificates.
9. Participating underwriters or placement agents receive a fee in
connection with the securities underwriting or private placement of
investor certificates. In a firm commitment underwriting, this fee
would consist of the difference between what such underwriter receives
for the certificates that it distributes and what it pays the sponsor
of the Securitization Trust for those certificates.10 In a private
placement, the fee normally takes the form of an agency commission paid
by the sponsor of the Securitization Trust.
\10\ World Omni represents that a ``best efforts'' underwriting
would not ordinarily be used for the investor certificates because
of their high credit ratings.
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The arrangements among underwriters typically are set forth in an
``Agreement Among Underwriters'', which gives the managing underwriter,
as lead manager of the offer, the authority to act on behalf of all the
underwriters. This agreement also
[[Page 58659]]
imposes customary restrictions on the underwriters' dealings in the
offered securities as are necessary to comply with securities laws and
to ensure the orderly distribution of the offered securities.
10. The applicant represents that as the principal amount of the
leases allocated to a SUBI is reduced by payments thereon and
recoveries on the disposition of leased vehicles, the cost of
separately administering the assets allocated to that SUBI generally
increases, making the servicing of those assets prohibitively expensive
at some point. Consequently, the Securitization Trust Agreement
generally provides that the sponsor of the Securitization Trust may
repurchase the 99 percent interest in the SUBI when the aggregate
principal balance of the investor certificates is reduced to a
specified percentage (usually between 5 and 10 percent) of the initial
aggregate investor certificate balance. The terms of such repurchase
are specified therein and are at least equal to the unpaid principal
balance on the investor certificates plus accrued interest. The
supplement to the Origination Trust Agreement generally provides that
upon such a repurchase of the Securitization Trust's interest in the
SUBI by its sponsor, the Origination Trust may repurchase the entire
SUBI from the sponsor and thereby terminate the SUBI. The terms of such
repurchase are specified therein and generally are at least equal to
the value of the pool of leases and leased vehicles allocated to the
SUBI.
11. The senior class of investor certificates must receive one of
the three highest ratings available from the Rating Agencies. Insurance
or other credit support is obtained by the sponsor of the
Securitization Trust or the Origination Trust 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 expected to be
a multiple of the worst historical net credit loss experience for
leases of automobiles and light-duty trucks such as those allocated to
the SUBI.
World Omni states that the Rating Agencies, before granting AAA/Aaa
ratings for the publicly issued securitization certificates, review the
underlying portfolio of assets securing payment to the investors to
determine, among other things, if (a) The principal value of the assets
is sufficiently greater than the aggregate face amount of the investor
certificates as to provide protection against defaults or losses, and
(b) there is a sufficient ``spread'' between the overall yield, based
on the Average Lease Rate, being earned on the portfolio and the
certificate rate to cover servicing costs, expenses and losses. In the
case of World Omni's current public securitizations of leases, the
Rating Agencies have required that (i) The face value of public
investor senior certificates not exceed 92.5 percent of the principal
value of the underlying assets, and (ii) the ``spread'' (after the
discounting procedure described below) between the overall yield, based
on the Average Lease Rate, of the SUBI portfolio and the certificate
rate be approximately 200 basis points. Thus, for example, a SUBI
portfolio with a principal value of $100,000,000 would support the
issuance of certificates with a face value of only $92,500,000, and a
certificate rate of 6 percent per annum would require an overall yield,
based on the Average Lease Rate, for that SUBI portfolio of
approximately 8 percent per annum. World Omni states that the Rating
Agencies will always require a specific ``spread'' between the
certificate rate and the overall yield for leases in the particular
SUBI portfolio before providing their initial credit ratings for the
certificates. World Omni must maintain this ``spread'' when leases are
added to the SUBI portfolio during the ``revolving period'' or risk a
lower credit rating for the certificates (see Section II.A.(7)(b)
above).
For purposes of the securitization described above, World Omni
represents that each individual lease should yield a rate of return,
based on the Lease Rate (as defined in Section III.V. above), which is
at least equal to the certificate rate plus approximately 200 basis
points. However, where the spread required by the Rating Agencies is
not met as to any lease based solely on the Lease Rate, the Rating
Agencies require that World Omni ``discount'' the principal value of
that lease so that such lease is treated as having a ``net investment
value'' less than its actual outstanding principal balance. In such
instances, the lease is discounted to a level at which the actual lease
charges to be collected under the lease (including expected principal
payments) would yield, on a percentage basis, an overall rate of return
which exceeds the certificate rate by the amount specified by the
Rating Agencies. Thus, for each individual lease included in a
securitization, its principal value is either: (a) Its outstanding
principal balance, if its Lease Rate is equal to or greater than the
``spread'' required by the Rating Agencies; or (b) its discounted net
investment value, if its Lease Rate is less than the ``spread'' so
required.11 World Omni states that the use of discounted aggregate
net investment values in measuring the ratio of certificate face values
to the discounted principal balance of the SUBI portfolio can only
further assure that investors are paid interest and principal on their
certificates on a timely basis.
\11\ For example, if the certificate rate for a transaction were
8 percent, then, in determining the aggregate face value amount of
certificates that could be issued with respect to a given SUBI
portfolio, World Omni could include each lease with a Lease Rate of
10 percent or more at its current outstanding principal balance
without any discounting. However, if the portfolio included
individual leases each with outstanding principal balances of
$20,000 and Lease Rates of only 5 percent, then World Omni would
have to ``discount'' the value of each such lease for purposes of
the securitization to a low enough net investment value
(approximately $18,000) so that the same overall monthly lease
payment for each lease would now yield a Lease Rate of 10 percent.
World Omni notes that any ``discounting'' of leases added to the
SUBI portfolio during the ``revolving period'' will result in more
leases being added to the portfolio in order to maintain a constant
outstanding principal balance during such period. Thus, when
interest rates used to determine the Lease Rate for leases added to
a SUBI portfolio are declining, the ``discounting'' of leases adds
more ``collateral'' to secure payments of the certificate rate.
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12. In some cases, the Servicer may provide temporary or permanent
credit support to the trust (i.e. act as an insurer). As a temporary
provider of credit support, the Servicer typically would advance funds
to the full extent that it determines that such advances are
recoverable (a) Out of late payments by the lessees, (b) from a
permanent credit support provider (which may be itself) or, (c) in the
case of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates. The
Servicer would advance such funds in a timely manner. When the Servicer
temporarily advances funds, the amount so advanced is recoverable by
the Servicer out of future payments on or for leases or leased vehicles
allocated to the SUBI to the extent that such amounts are not covered
by the other sources described above, including payments from a
permanent credit support provider.
In some cases, the Servicer may be called upon to provide permanent
credit support in the form of funds to cover defaulted payments to the
full extent of its obligations as insurer. When the Servicer is the
provider of permanent credit support and provides its own funds to
cover defaulted payments, it does so either on the initiative of the
Origination Trustee or Securitization Trustee, or on its own initiative
on behalf of such trustees. The applicant states that in either event
the Servicer
[[Page 58660]]
provides such funds to cover payments to the full extent of its
obligations under the credit support mechanism. If the Servicer fails
to advance funds, fails to call upon a credit support mechanism to
provide funds to cover defaulted payments, or otherwise fails in its
duties, the Securitization Trustee would be required to enforce the
investor certificateholders' rights, in its capacity as a third-party
beneficiary of the Servicing Agreement, as owner of the estate of the
Securitization Trust, and as an indirect beneficial owner of the
Origination Trust assets allocated to a SUBI (including rights under
any credit support mechanism). Therefore, the Securitization Trustee,
who is independent of the Servicer, ultimately has the right to enforce
any credit support arrangement.
13. The applicant represents that there are protections in place to
guard against a delay in calling upon the credit support to take
advantage of the fact that the credit support declines proportionally
with the decrease in the principal amount of the leases allocated to a
SUBI as payments for these leases and the related vehicles are used to
make payments to the Securitization Trust, as holder of an interest in
the SUBI, and then to investors. These safeguards include the
following:
(a) There is a disincentive to postponing credit losses because the
sooner repossession or sale activities are commenced, the more value
generally will be realized on the leased vehicle.
(b) The Servicer has servicing guidelines which include a general
policy as to the allowable delinquency period after which a lessee's
obligations ordinarily are deemed uncollectible. The Servicing
Agreement requires the Servicer to follow its normal servicing
guidelines. In addition, a supplement to the Servicing Agreement sets
forth the Servicer's general policy as to the period of time after
which delinquent obligations ordinarily will be considered
uncollectible.
(c) As frequently as payments are due on the investor certificates
(monthly, quarterly or semi-annually, as set forth in the
Securitization Trust Agreement), the Servicer is required to report to
the Securitization Trustee the amount of all past-due payments and the
amount of all Servicer advances, along with other current information
as to collections on the leases, recoveries on the related leased
vehicles, and draws upon the credit support. Further, the Servicer is
required to deliver to the trustee annually a certificate from an
executive officer of the Servicer stating that a review of the
servicing activities has been made under such officer's supervision,
and either stating that the Servicer has fulfilled all of its
obligations under the Servicing Agreement or, if the Servicer has
defaulted under any of its obligations, specifying any such default.
The Servicer's reports are reviewed at least annually by independent
accountants to ensure that the Servicer is following its normal
servicing standards and that the reports conform to the Servicer's
internal account records. The results of the independent accountants'
review are delivered to the Securitization Trustee.
(d) In cases where the Servicer and an insurer providing credit
support are affiliated or are the same entity, the credit support has a
``floor'' dollar amount that protects investors against the possibility
that a large number of credit losses might occur towards the end of the
life of the SUBI, whether due to Servicer advances or any other cause.
The floor amount may be a fixed dollar amount or a multiple of the
balance of one or more of the largest obligations outstanding. Once the
floor amount has been reached, the Servicer lacks an incentive to
postpone the recognition of credit losses because the credit support
amount becomes a fixed dollar amount, subject to reduction only for
actual draws on such amount. From the time that the floor amount is
effective until the end of the life of the trust, there are no
proportionate reductions in the credit support amount caused by
reductions in the principal balance of the leases allocated to the
SUBI. The applicant states that where the floor is a fixed dollar
amount, the amount of credit support ordinarily would increase as a
percentage of the principal balance during the period that the floor is
in effect.
14. In connection with the original issuance of investor
certificates, a prospectus or private placement memorandum is furnished
to investing plans. The prospectus or private placement memorandum
contains information material to a plan fiduciary's decision to invest
in the certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the Origination Trust and Securitization Trust
as legal entities and a description of how they were formed by their
respective sponsors;
(c) Identification of the Trust Agent, Origination Trustee and
Securitization Trustee;
(d) A description of the leases and related leased vehicles
allocated to each SUBI, including the diversification of the leases and
vehicles, the principal terms of the leases, and their material legal
aspects;
(e) A description of the sponsors of the Origination Trust and the
Securitization Trust, and of the Servicer;
(f) A description of the servicing arrangements set forth in the
Servicing Agreement, and the agreements governing the Origination Trust
and the Securitization Trust, including a description of the Servicer's
principal representations and warranties as to the leases and leased
vehicles allocated to each SUBI and the remedies for any breach
thereof;
(g) A description of the procedures for collection of payments on
or for leases and related leased vehicles and for making distributions
to the Securitization Trust, as holder of an interest in the SUBI, and
then to investor certificateholders, and a description of the accounts
into which such payments are deposited and from which such
distributions are made;
(h) Identification of the servicing compensation and any fees for
credit support that are deducted from payments on or for leases or
related leased vehicles before distributions are made to investors;
(i) A description of periodic statements provided to the
Securitization Trustee, and such statements that are provided or made
available to investors by the Securitization Trustee;
(j) A description of the events that constitute events of default
under the Servicing Agreement and a description of the Securitization
Trustee's and the investors' remedies;
(k) A description of any credit support;
(l) A general discussion of the principal Federal income tax
consequences of the purchase, ownership and disposition of the investor
certificates by a typical investor;
(m) A description of the underwriters' plan for distributing the
certificates to investors; and
(n) Information about the scope and nature of the secondary market
for the certificates.
Reports indicating the amount of payments of principal and interest
are provided to investors at least as frequently as distributions are
made to investors. Investors are also provided with periodic
information statements setting forth material information concerning
the leases and related vehicles allocated to each SUBI, including
information as to the amount
[[Page 58661]]
and number of delinquent and defaulted leases.
15. In the case of the offer and sale of investor certificates in a
registered public offering, the Securitization Trustee, the Servicer or
the sponsor of the Securitization Trust will file periodic reports as
required by the Securities Exchange Act of 1934 (the 1934 Act).
Although some trusts that offer certificates in a public offering 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
(SEC), 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 or
available for the Securitization Trust, it normally would continue to
have the obligation to file current reports on Form 8-K to report
material developments concerning the Securitization Trust and the
investor certificates. World Omni states that while the SEC's
interpretation of the periodic reporting requirements is subject to
change, periodic reports concerning the Securitization Trust shall be
filed to the extent required under the 1934 Act.
At the time distributions are made to certificateholders, a report
is delivered to the trustee as to the status of the Securitization
Trust and each SUBI, including the assets allocated to the SUBI. Such
report contains information regarding, among other things, the leases
and related vehicles allocated to the SUBI, payments received or
collected by the Servicer, the amount of prepayments, delinquencies,
Servicer advances, defaults and foreclosures, the amount of any
payments made pursuant to any credit support, and the amount of
compensation payable to the Servicer. Such report is also delivered to
or made available to the Rating Agency or Agencies that have rated the
investor certificates. A statement based on this report is also
provided to certificateholders either by the Securitization Trustee,
the Servicer, or DTC as depository of the investor certificates,
including a summary statement regarding the Securitization Trust and
the assets allocated to the SUBI. The statement contains information
regarding payments and prepayments, delinquencies, the remaining amount
of credit support, a breakdown of payments between principal and
interest and other information concerning the leases and leased
vehicles allocated to the SUBI.
With respect to payments on the certificates, World Omni states
that such payments are legally obligated to be made by the
Securitization Trustee to DTC, the record owner of the certificates.
World Omni represents that DTC makes payments to the beneficial owners
of the certificates as required by New York Stock Exchange Regulations,
SEC Regulations and the rules of the U.S. Federal Reserve Board.
16. In general, it is the policy of many underwriters to make a
market for securities for which they are the lead or co-managing
underwriter. It is also the policy of many placement agents to
facilitate sales by investors who purchase certificates if the
placement agent has acted as a principal or agent in the original
private placement of the certificates and if the investors request the
placement agent's assistance. In this regard, the applicant states that
many underwriters have made a secondary market in certificates
sponsored by World Omni and its Affiliates and that the wide range of
investors involved have made such certificates fairly liquid
investments.\12\
\12\ The Department notes that on April 3, 1995, World Omni and
a number of respondents involving some 55 Toyota dealers (the Toyota
Dealers) entered into an agreement with the State of Florida (the
Agreement) following an investigation by the State. The
investigation apparently resulted from allegations by Florida
consumers of unfair trade practices by various Florida dealers,
including but not limited to certain Toyota Dealers. Under the terms
of the Agreement, a restitution fund of up to $4.5 million (the
Restitution Fund) was created for consumers in connection with
certain leases originated by the Toyota Dealers from January 1, 1989
through December 31, 1994. Initial ``advance'' payments into the
Restitution Fund were made by an affiliate of World Omni. However,
the Toyota Dealers ultimately will be responsible for most of the
restitution payments made to consumers.
World Omni and its Affiliates represent that they will abide by
all securities and other laws applicable to any offering of
interests in securitized assets, such as certificates in a trust as
described herein, including those laws relating to disclosure of
material litigation, investigations and contingent liabilities.
World Omni represents that the Agreement did not require any
payment from or adjustment to any assets of a Securitization Trust
and, according to the applicant, is not material to World Omni as
Servicer or to any such trust.
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17. World Omni has requested that the relief proposed herein be
made retroactive to June 27, 1994, which is the date upon which World
Omni states that the conditions of this proposed exemption were
satisfied. World Omni does not believe that it has engaged in any
prohibited transactions that would be covered by the requested
exemption. However, since June 27, 1994, it is possible that some
transactions may have occurred that would be prohibited. For example,
because many certificates are held in street or nominee name, the
applicant states that it is not always possible to identify whether the
percentage interest of plans in a trust is or is not ``significant''
for purposes of the Department's ``plan asset'' regulation (see 29 CFR
2510.3-101(f)). These problems are compounded as transactions occur in
the secondary market. In addition, with respect to the ``publicly-
offered security'' exception contained in that regulation (29 CFR
2510.3-101(b)), the applicant states that it is difficult to determine
whether each purchaser of a certificate is independent of all other
purchasers. Thus, World Omni requests an exemption which would provide
the relief described herein as of June 27, 1994.
18. In summary, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act because:
(a) The Securitization Trust holds an interest in a SUBI, which
generally represents a ``fixed pool'' of leases and related leased
vehicles, other than the obligation to reinvest principal collections
on the leases and leased vehicles in additional qualifying leases and
leased vehicles during a fixed ``revolving period'' of no more than 15
months.
(b) The Average Lease Rate for the leases in the portfolio used to
create a trust, after accounting for all leases added to such portfolio
during the ``revolving period'', will not exceed by more than 200 basis
points the Average Lease Rate for the original portfolio of leases used
to create the trust.
(c) Certificates in which employee benefit plans invest have been
rated in one of the three highest rating categories by the Rating
Agencies. Credit support is obtained to the extent necessary to attain
the desired rating. In addition, leases added to a trust portfolio
during the ``revolving period'' will not result in the certificates
receiving a lower credit rating from the Rating Agencies, at the end of
the ``revolving period'', than the rating that was obtained at the time
of the initial issuance of the certificates by the trust.
(d) All transactions for which the applicant seeks exemptive relief
are governed by the Origination Trust Agreement, the Servicing
Agreement and any applicable supplements thereto, and the
Securitization Trust Agreement. These agreements as well as the
prospectus or private placement memorandum are made available to plan
fiduciaries for their review prior to the plan's investment in the
certificates.
(e) Exemptive relief from sections 406(b) and 407(a) of the Act for
sales to employee benefit plans is substantially limited.
[[Page 58662]]
(f) Many underwriters have made, and the applicant anticipates that
such underwriters will continue to make, a secondary market in investor
certificates sponsored by World Omni and its Affiliates.
FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
General Motors Hourly-Rate Employes Pension Plan (the Hourly Plan),
General Motors Retirement Program for Salaried Employes, Saturn
Individual Retirement Plan for Represented Team Members and Saturn
Personal Choices Retirement Plan for Non-Represented Team Members (the
Saturn Plans), and Employees' Retirement Plan for GMAC Mortgage
Corporation (the GMAC Plan; collectively, the Plans) Located in New
York, New York
[Application Nos. D-09930 & D-09931]
Proposed Exemption
(a) General Exemption. The restrictions of section 406(a)(1)(A)
through (D) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(D) of the Code, shall not apply to any transaction arising in
connection with the acquisition, ownership, management, development,
leasing, financing, or sale of real property (including the
acquisition, ownership or sale of any joint venture or partnership
interest in such property) or the borrowing or lending of money in
connection therewith, between a party in interest and the Plans,
provided that the following conditions are satisfied:
(1) The terms of the transaction are negotiated on behalf of the
Plans by, or under the authority and general direction of, General
Motors Investment Management Corporation (GMIMCo), as described in the
summary of facts in the notice of proposed exemption, and GMIMCo makes
the decision to invest the assets of the Plans in such transaction.
Notwithstanding the foregoing, a transaction involving an amount of $20
million or more, which has been negotiated on behalf of a Plan by
GMIMCo will not fail to meet the requirements of this section (a)(1)
solely because General Motors Corporation or its designee retains the
right to veto or approve such transaction;
(2) Any such party in interest is not--
(i) GMIMCo or any person directly or indirectly controlling,
controlled by, or under common control with GMIMCo, any officer,
director or employee of GMIMCo or any of its subsidiaries, or any
partnership in which GMIMCo is a 10 percent or more (directly or
indirectly in capital or profits) partner;
(ii) General Motors Corporation (GM) or any of its subsidiaries,
any officer or director of GM or any of its subsidiaries;
(iii) any named fiduciary of any Plan, or any person who has
discretionary authority in the selection, supervision or operation of
GMIMCo or any of its officers, directors or employees;
(iv) a sponsor of any of the Plans (Plan Sponsor) or any subsidiary
of a Plan Sponsor, or a ten percent or more shareholder, partner, or
joint venturer of a Plan Sponsor, or any officer or director of any of
them;
(v) any person who exercises discretionary authority,
responsibility or control, or who provides investment advice [within
the meaning of 29 CFR 2510.3-21(c)], with respect to the investment of
Plan assets involved in the transaction;
(3) The transaction is not part of an agreement, arrangement or
understanding designed to benefit a party in interest;
(4) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of GMIMCo, the terms of the transaction are at least as
favorable to the Plans as the terms generally available in arm's-length
transactions between unrelated parties;
(4) GM or GMIMCo shall maintain for a period of six years from the
date of each transaction mentioned above the records necessary to
enable the persons described in subparagraph (5) of this section (a) to
determine whether the conditions of this exemption have been met,
except that: (i) A prohibited transaction will not be deemed to have
occurred if, due to circumstances beyond the control of GM and GMIMCo,
the records are lost or destroyed prior to the end of the six-year
period, and (ii) no party in interest except GM and GMIMCo shall be
subject to the civil penalty which may be assessed under section 502(i)
of the Act, or to the taxes imposed by section 4975(a) and (b) of the
Code, if the records are not maintained, or are not available for
examination as required by subparagraph (5) below;
(5)(i) Except as provided in subsection (ii) of this subparagraph
(5) and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in subparagraph (4) of
this section (a) are unconditionally available at GM's headquarter
offices, or, upon prior arrangement with GM, at any other customary
location for the maintenance and/or retention of such records, for
examination during normal business hours by:
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service,
(B) Any fiduciary of a Plan or any duly authorized employee or
representative of such fiduciary, and
(C) Any participant or beneficiary of any Plan or any duly
authorized representative of such participant or beneficiary.
(ii) None of the persons described in subdivisions (i)(B) and
(i)(C) of this subparagraph (5) shall be authorized to examine GM's
trade secrets or commercial or financial information which is
privileged, confidential or of a proprietary nature.
(b) Specific exemption. The restrictions of sections 406(a)(1) (A)
through (D) and sections 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 furnishing of services, facilities, and any goods
incidental thereto by a place of public accommodation which is or may
be considered an asset of a Plan if the services, facilities or
incidental goods are furnished on a comparable basis to the general
public, and if the requirements of subparagraphs (a) (4) and (5) of
this exemption are met.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
July 1, 1994.
TEMPORARY NATURE OF THE EXEMPTION: The exemption proposed herein, if
granted, will be temporary in nature and will expire on the date of
publication by the Department of the final class exemption for plan
asset transactions determined by in-house asset managers, which was
proposed by the Department on March 24, 1995 at 60 FR 15597
(application no. D-09602).
Summary of Facts and Representations
1. The Plans are defined benefit plans sponsored by the General
Motors Corporation (GM) and subsidiaries of GM. As of December 31,
1994, there were approximately 835,700 active participants in the
Plans, and the Plans held assets totaling approximately $44.2 billion.
Approximately 5.6 percent of the Plans' total assets is currently
invested, or committed for specific investment, in real estate or real
estate related investments.
2. The Plans are administered by the Finance Committee of GM's
board of directors (the Finance Committee) as the
[[Page 58663]]
named fiduciary with respect to each of the Plans, except for the
Employee's Retirement Plan for GMAC Mortgage Corporation (the GMAC
Plan), discussed below. The Finance Committee, among other functions,
is responsible for the direction and oversight of each Plan's
investment policy, monitors each Plan's performance, and adopts broad
investment policy guidelines. The Finance Committee receives assistance
from an Investment Policy Committee (IPC), which periodically reviews
and makes recommendations on investment policy guidelines. The IPC is
comprised of officers of GM and officers of the General Motors
Investment Management Corporation (GMIMCo), a wholly-owned subsidiary
of GM. Further, the Finance Committee has authorized the IPC to approve
all investment commitments involving more than one percent of the
assets of any Plan's trust. The Finance Committee has also appointed
GMIMCo to act as an investment manager with respect to the Plans. In
that regard, GMIMCo is actively involved in real estate transactions
undertaken by the Plans, including transactions under the direct
management of third party investment managers.
The named fiduciary of the GMAC Plan is the GMAC Mortgage
Corporation Pension Committee (GMAC Committee). The assets of the GMAC
Plan have been commingled with the assets of the Hourly Plan and Saturn
Plans for investment purposes. As a result, GMIMCo acts also as an
investment manager with respect to the GMAC Plan.
Real estate transactions involving the Plans' assets may be
undertaken directly by GMIMCo's real estate portfolio group (the R.E.
Group) or indirectly through a third party asset manager with the R.E.
Group's involvement. The R.E. Group's functions include the
identification and analysis of real estate investments. The R.E. Group
is comprised of six investment professionals, four attorneys and
administrative personnel.
3. GM requests an exemption to allow the Plans to engage in real
estate transactions which may otherwise be prohibited under the Act, as
described herein. GM represents that all prospective transactions will
be effected on behalf of the Plans by GMIMCo and will not involve
parties in interest who have fiduciary authority over the particular
investments of the Plans. GM represents that due to its size and
complexity, the normal operation of the Plans with respect to their
real estate investments may involve party in interest transactions. The
Department recognizes this situation and, to date, has proposed and
granted various individual exemptions on behalf of large plans for real
estate transactions involving parties in interest who maintain no
authority over the investments involved. GM is requesting similar
exemptive relief.
4. GM represents that the Plans' investments in real estate are
made in various forms. Such forms involve real estate partnerships,
joint ventures, leases, and mortgages. As a result of such real
property investment arrangements, prohibited transactions by and
between a Plan and party in interest lenders, lessees, joint venturers,
partnership partners, and service providers may occur. Such parties
would maintain no authority with respect to the Plan assets involved in
such transactions.
5. GM represents that the Plans' investments in real estate take on
various forms, including limited partnerships, joint ventures, leases,
mortgages, sale-leasebacks, and convertible mortgage arrangements. With
respect to each investment structure, the projects in question are
typically office buildings, shopping centers, hotels and other
commercial or multi-family residential projects. GM represents that the
owners/operators/developers with whom the Plan invests are carefully
chosen and are experienced in the evaluation, ownership, management,
financing and, in the case of new projects, development of real estate.
Parties in interest with respect to the Plans which may become involved
in these various types of real estate transactions include bank
lenders, lessees, joint venturers, and partnership partners. The
proposed exemption would not include transactions involving any parties
in interest with any authority with respect to the Plans' investment in
the subject transaction.
6. The applicant states that it is possible that the investment by
the Plans in places of public accommodation may result in the use of
such facilities by parties in interest. Therefore, such transactions
involving these places of public accommodation may constitute
prohibited transactions as described in the Act.
7. GM represents that regardless of the structure involved, each
potential real estate investment on behalf of the Plans receives
thorough and careful analysis by GMIMCo and by its professional staff.
The investment process operates as follows: potential real estate
investments are generally brought to the attention of one or more
members of GMIMCo's professional staff by real estate professionals,
brokers, or advisers. A staff of real estate professionals under the
direction of GMIMCo's managing director then inspects and appraises
prospective properties, considers existing and prospective tenants, and
evaluates numerous other financial and non-financial aspects such as
size, location, actual and potential use, financing, taxes, insurance,
title requirements and compliance with zoning and other applicable
laws. Sophisticated computer models are utilized as a tool to assist
the real estate professionals and to evaluate risk and reward
potential.
Upon completion of this analysis, the potential real estate
investment is either rejected or approved by a manager. If the manager
approves the proposed transaction, it is then presented to GMIMCo's
Pension Investment Review Team (PIRT). Approval by the PIRT is final as
to transactions involving $30 million or less. Transactions involving
more than $30 million are referred for further consideration by the
Chief Investment Funds Officer of GM, who retains the right to approve
or veto such transaction. Transactions involving more than 1% of the
assets of a Plan's trust are referred for further consideration to the
IPC, which retains approval and veto authority with respect to such
transactions. GMIMCo's investment professionals are aided in the review
process by GMIMCo's in-house legal staff.
8. GM represents that by means of the arrangements described above,
rigorous financial standards and procedures have been established to
ensure sound real estate investments with appropriate rates of return.
GM represents that any covered transactions will be on terms not less
favorable to the Plans than those available between the Plan and
unrelated parties. GM represents that given the size and scope of the
Plans and their investment, and GM's relationship to numerous financial
institutions, denial of the requested exemption would substantially
inhibit the Plans from investing in many prime quality real estate
projects of substantial size.
9. In summary, the applicant represents that the requested
exemption will satisfy the criteria of section 408(a) of the Act for
the following reasons: (a) All investments will be subject to the
discretion and control of GMIMCo and its professional staff, which have
extensive experience in real property investments and which will
conduct complete analyses with respect to potential Plan investments;
(b) The Plans will be able to enter into transactions which, although
prohibited, are necessary for the prudent conduct of the Plans'
operation;
[[Page 58664]]
(c) All transactions will involve parties who are independent from GM
and who have no discretion, authority or control with particular
transactions; and (d) All transactions will be conducted on an arm's-
length basis on terms not less favorable to the Plan than those
available in arm's-length transactions with unrelated parties.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Ventura County National Bancorp 401(k) and Employee Stock Ownership
Plan (the Plan) Located in Oxnard, California
[Application No. D-10024]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2),
and 407(a) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply for the period from May 12, 1995 until
June 21, 1995 (the Offering Period), to: (1) The receipt of certain
stock rights (the Rights) by the Plan, which is sponsored by Ventura
County National Bancorp (Ventura) and its affiliates, pursuant to a
stock rights offering (the Rights Offering) by Ventura to shareholders
of record of Ventura's common stock (the Employer Stock) as of May 10,
1995; (2) the holding of the Rights by the Plan during the Offering
Period; and (3) the exercise of the Rights by the Plan, provided the
following conditions were met:
(a) The Plan's acquisition and holding of the Rights resulted from
an independent act of Ventura as a corporate entity, and all holders of
the Employer Stock were treated in a like manner, including the Plan;
(b) With respect to the ``401(k) portion'' of the Plan, the Rights
were acquired, held and controlled by individual Plan participant
accounts pursuant to plan provisions for individually directed
investment of such accounts; and
(c) With respect to the ``ESOP portion'' of the Plan, the authority
for all decisions regarding the acquisition, holding and control of the
Rights was exercised by an independent fiduciary which made
determinations as to whether and how the Plan should exercise or sell
the Rights acquired through the Rights Offering.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective for the period from May 12, 1995 until June 21, 1995.
Summary of Facts and Representations
1. Ventura is a registered bank holding company conducting business
in Southern California through its wholly-owned subsidiaries, Ventura
County National Bank (VCNB) and Frontier Bank (Frontier; together, the
Banks). The principal executive offices of Ventura are located at 500
Esplanade Drive, Oxnard, California.
2. The Employer Stock is registered under Section 12 of the
Securities Exchange Act of 1934. The Employer Stock is publicly traded
on the National Association of Securities Dealers Automated Quotation
National Market System (NASDAQ). The applicant states that the Employer
Stock is issued by Ventura, an employer of employees covered by the
Plan, and further represents that such stock is a ``qualifying employer
security'' under section 407(d)(5) of the Act and section 4975(e)(8) of
the Code.\13\
\13\ In the case of an employee benefit plan that is an
``eligible individual account plan'' (as defined under section
407(d)(3) of the Act), section 407(d)(5) of the Act states, in
pertinent part, that the term ``qualifying employer security'' means
an employer security which is stock. However, the Department is
providing no opinion in this proposed exemption as to whether the
Employer Stock is a ``qualifying employer security'' under section
407(d)(5) of the Act.
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3. The applicant represents that due to declining earnings
beginning in 1991, the Banks entered into Formal Agreements with the
Office of the Comptroller of the Currency (OCC) in 1992 and 1993 which
imposed higher minimum regulatory capital requirements than had
previously applied to the Banks. The deadline for reaching this goal
was June 30, 1995.
The applicant represents further that new management personnel
brought in by Ventura's Board of Directors in September 1993 instituted
a plan to restore core profitability to the Banks. Ventura states that
these efforts have been largely successful. However, as of May 1995,
VCNB had not yet reached the capital ratio required under the Formal
Agreement. Therefore, Ventura initiated the Rights Offering as a means
to raise capital necessary for VCNB to attain the requisite capital
ratio levels and reimburse interest in accordance with the Formal
Agreements.
4. The Plan comprises an employee stock ownership plan (the ``ESOP
portion'') with a cash or deferred arrangement (the ``401(k)
portion''). The trustee of the Plan is Dai-Ichi Kangyo Bank of
California (the Trustee). The Trustee is independent of, and does not
have any other business relationship with, Ventura and its
subsidiaries. The Trustee has investment authority over Plan assets
other than participants' individually directed 401(k) accounts in the
Plan.
The Plan is an individual account plan as described in section
3(34) of the Act. Participants' individual accounts are divided into
subaccounts, which include the following: (i) The Deferred Income
Account, which contains a participant's salary deferrals under the
401(k) portion of the Plan; (ii) the Employer Contribution Account,
which contains discretionary employer matching contributions that are
allocated to the participant's account; (iii) the Employer Stock
Account, which contains shares of employer securities allocated to the
participant under the ESOP portion of the Plan; and (iv) the Rollover
Account, containing distributions from other qualified retirement
plans.
As of May 10, 1995, the Plan had 134 participants and total assets
of approximately $1,182,254. On such date, the Plan was the record
holder of 415,854 shares of the Employer Stock, of which 236,860 shares
were allocated to participants' individual accounts, and 178,994
unallocated shares were held in a suspense account under the Plan as
collateral for a loan to the Plan.14
\14\ In this regard, the applicant states that there is a loan
outstanding between Ventura and the Plan which was made by Ventura
to enable the ESOP portion of the Plan to acquire Employer Stock
from Ventura (the ESOP Loan). Ventura represents that the ESOP Loan
met all of the requirements for a statutory exemption under section
408(b)(3) of the Act. However, the Department is providing no
opinion in this proposed exemption as to whether the ESOP Loan met
the conditions necessary for exemptive relief under section
408(b)(3) of the Act.
---------------------------------------------------------------------------
Investment of Plan assets is different under the 401(k) and ESOP
portions of the Plan. The 401(k) portion of the Plan permits each Plan
participant to direct the investment of his or her Deferred Income
Account, containing participants' salary deferrals, and Employer
Contribution Account, which contains discretionary employer matching
contributions, by choosing among the different investment funds
available under the Section 401(k) portion of the Plan. Participants
may also invest a portion of these accounts in shares of the Employer
Stock. Participants who have elected to invest a portion of their
Deferred Income Account or Employer Contribution Account in shares of
the Employer
[[Page 58665]]
Stock are referred to herein as ``Invested Participants''.
With respect to the ESOP portion of the Plan, the Trustee exercises
exclusive investment authority over Plan assets, subject to the
requirement that Plan assets be primarily invested in the Employer
Stock. In this regard, the applicant states that the Trustee must take
into consideration its fiduciary duties to act prudently with respect
to Plan investments and to invest Plan assets in the best interests of
Plan participants and their beneficiaries.
5. Effective May 12, 1995, Ventura instituted a Rights Offering in
connection with the Employer Stock. The Rights Offering called for the
issuance to all holders of the Employer Stock as of the close of
business on May 10, 1995 (the Record Date) transferable subscription
rights (i.e. the Rights) in the ratio of one Right for each 3.17 shares
of the Employer Stock held. No fractional rights were issued. The
number of Rights issued to each shareholder was rounded up to the
nearest whole Right.
Each Right conferred upon its holder an entitlement (the Basic
Privilege) to purchase one share of the Employer Stock at $2.25 per
share (the Exercise Price).15 Each Right also conferred upon its
holder a second privilege (the Oversubscription Privilege) allowing
each Right holder exercising the Basic Privilege in full to subscribe
for an additional number of shares of the Employer Stock (Excess
Shares), also at the Exercise Price. Excess Shares were subject to
certain availability, proration and reduction restrictions imposed by
Ventura. The applicant states that where an insufficient number of
Excess Shares was available to satisfy fully all exercises of the
Oversubscription Privilege, the available Excess Shares were prorated
among shareholders who exercised their Oversubscription Privilege based
upon the respective number of shares of the Employer Stock owned as of
the Record Date.
\15\ The price per share of the Employer Stock, as quoted on
NASDAQ, was $2.37 as of the end of the day on May 11, 1995, and was
approximately the same price per share at the end of the Offering
Period on June 21, 1995.
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The Basic Privilege was freely transferable. The Oversubscription
Privilege was not transferable. The Rights were traded on NASDAQ under
the symbol ``VCNBR'' through the close of trading on June 20, 1995, the
date prior to the expiration of the Rights Offering on June 21, 1995.
The proceeds of any Rights that were sold were credited to the accounts
of the Invested Participants according to the investments and
percentages which had been specified in such accounts.
6. The applicant states that all Invested Participants received by
mail: (i) a copy of the Prospectus published by Ventura; (ii) a letter
from the Trustee describing the procedures for participant directions
with respect to the Rights Offering; and (iii) a direction form
(Direction Form). The Direction Forms enabled the Invested Participants
to direct the Trustee either to (i) exercise the Rights allocable to
their accounts, or (ii) sell such Rights on the open market. The
Direction Forms also permitted Invested Participants to elect not to
participate in the Rights Offering.
The date that notification of the Rights Offering was mailed to
Invested Participants was May 17, 1995 (the Notification Date), which
was the same date that such information was received by the other
shareholders of record. In addition, Direction Forms necessary to
participate in the Rights Offering were provided to Invested
Participants on May 18, 1995. A postage paid envelope addressed to the
Trustee was provided with each Direction Form. The applicant states
that an informational meeting about the Rights Offering was held for
employees on May 22, 1995.
Invested Participants had to return the Direction Forms to the
Trustee within fourteen (14) days after the Notification Date (i.e. May
31, 1995) because the Trustee needed approximately twenty-one (21) days
to process such forms (as noted in Paragraph 8 below). In order for the
Rights to be exercised, the Subscription Agent had to receive the
Direction Form, together with payment for the shares which were to be
purchased, by 5:00 p.m., Pacific Time, on June 21, 1995 (the Expiration
Time). Rights not exercised prior to the Expiration Time became
worthless.
7. The applicant represents that the Rights Offering was an
independent act of Ventura as a corporate entity, under which all
holders of the Employer Stock, including the Plan, were treated in a
like manner. With respect to the 401(k) portion of the Plan, the Rights
were acquired, held and controlled by Invested Participants' individual
Plan accounts pursuant to Plan provisions for individually-directed
investment of such accounts. With respect to the ESOP portion of the
Plan, the Trustee made all decisions regarding whether to exercise or
sell Rights allocated to shares of the Employer Stock held in the Plan.
8. For each Invested Participant who directed the Trustee to
exercise Rights attributable to his or her Deferred Income or Employer
Contribution Accounts in the 401(k) portion of the Plan, the funds
which were needed to pay the exercise price were obtained by selling
specific investments in the Invested Participant's accounts. The order
of withdrawal was made at the direction of the Invested Participant or,
if no direction was given, specific investments were sold pro-rata from
the funds in the Invested Participant's accounts.
The Plan provided that amounts sold from the investment funds prior
to the last day of the Rights Offering were deposited by the Trustee in
a special short-term investment account pending the Trustee's payment
to the Subscription Agent of the exercise price for the subscribed
shares of the Employer Stock. Rights were exercisable by an Invested
Participant only to the extent of funds available in his or her
accounts in the Plan. If amounts in an Invested Participant's accounts
were insufficient to pay the exercise price for all shares of the
Employer Stock subscribed for, the Plan provided that the Trustee would
sell any Rights not exercised. The proceeds of any Rights that were
sold and any income from the special short-term investment account were
credited to the accounts of the Invested Participants. In the case of
such sale proceeds, credits were made to the accounts of the Invested
Participants whose allocable Rights were sold. In the case of such
income, credits were made to the accounts of the Invested Participants
whose redemption proceeds were deposited in the special short-term
investment account. In either case, the credits were made to each
account according to the investments and percentages that were
currently specified for such account.
The Direction Forms containing the Invested Participants'
instructions for the Rights Offering had to be returned to the Trustee
within twenty-one (21) working days before the date of the Expiration
Time (the Filing Date),16 in order to give the Trustee sufficient
time to perform the administrative procedures required to review
participant Direction Forms and implement directions, including the
liquidation of other Plan investments. With respect to any Invested
Participant who failed to submit a Direction Form to the Trustee by the
Filing Date, or submitted an invalid Direction Form, the Plan provided
that the Trustee had to sell the Rights on the open market.
[[Page 58666]]
These possible consequences were disclosed in the information sent to
shareholders of the Employer Stock prior to the Rights Offering.
\16\ The Filing Date was June 1, 1995. The Filing Date was
supposed to be fourteen (14) days after the Notification Date (i.e.
May 17, 1995, as noted in Paragraph 6), but was extended one day
because May 31st was the Memorial Day holiday. Thus, Invested
Participants had approximately two weeks following notification to
provide their instructions to the Trustee.
---------------------------------------------------------------------------
In the event that the market price for the Employer Stock,
including the effect of any applicable brokerage commissions and other
expenses, at the time the Trustee submitted the Rights for exercise,
was less than the exercise price under the Offering, the Plan provided
that the Trustee would not automatically attempt to exercise such
Rights. In such situations, an Invested Participant was permitted to
direct the Trustee to either: (i) use the available funds to purchase
shares of the Employer Stock on the open market; or (ii) reinvest the
available funds pursuant to the investment elections and percentages
specified for the Invested Participant's accounts. In addition, the
Trustee could, at the direction of the Invested Participant, either:
(i) allow the Rights to expire, or (ii) attempt to sell the Rights on
the open market. If the latter option was chosen, the Trustee was
required, as directed by the Invested Participant, to either: (i) apply
the available funds toward the purchase of shares of the Employer Stock
on the open market, or (ii) reinvest the available funds pursuant to
the investment elections and percentages specified for the Investment
Participant's accounts.
9. With respect to the ESOP portion of the Plan, the Trustee had
exclusive authority to exercise or sell the Rights allocable to shares
of the Employer Stock held in the ESOP portion of the Plan. The Trustee
represents that it's decision to exercise or sell the Rights was made
in accordance with the fiduciary duty to act prudently with respect to
Plan investments and to invest Plan assets in the best interests of the
Plan's participants and beneficiaries.
In this regard, the Trustee decided to sell the Rights allocated to
the ESOP portion of the Plan on the open market. The applicant states
that the Trustee did not solicit the views of participants with respect
to this decision because investment decisions are not generally passed-
through under the ESOP portion of the Plan. The proceeds of the sale of
the Rights were allocated to each participant's ESOP Employer Stock
Account in the Plan in the same ratio as that particular Employer Stock
Account bore to all other Employer Stock Accounts in the Plan on the
record date.
Prior to making the decision on behalf of the ESOP portion of the
Plan to sell the Rights, the Trustee consulted with a financial
consulting firm, the Financial Valuation Group (FVG), whose consultants
were acquainted with ESOPs and regional banks such as Ventura. The
Trustee considered, with the assistance of FVG, a variety of factors
that it deemed relevant to whether the Plan should exercise or sell the
Rights. These factors included: (a) any transaction and financing costs
which may be involved in exercising the Rights; (b) future per share
value expectations of market analysts who follow the Employer Stock;
(c) the recent trading history of shares of the Employer Stock, and the
Rights, and how that trading compared to the trading of similar
offerings of comparable financial institutions; (d) the price/earnings
ratio of the Employer Stock; (e) a comparison of the Employer Stock's
price/earnings ratio and pro forma book value to that of other
financial institutions and the relation of such values to the
respective market values of those institutions; (f) the current market
price of the Employer Stock; and (g) the market price of the Rights.
The Trustee represents that it also considered the investment
objectives of the participants in the ESOP portion of the Plan, the
risks of each available alternative for the Rights, and the financial
resources of the ESOP portion of the Plan. After considering all these
factors, the Trustee determined that the sale of the Rights was
appropriate for the ESOP portion of the Plan and in the best interests
of the affected Plan participants.
10. The Trustee received a total of 131,185 Rights, of which 74,718
represented Rights attributable to allocated shares of Employer Stock
in the Plan and 56,467 represented Rights attributable to unallocated
shares. The Rights, as listed on NASDAQ, were initially valued at $.156
per Right on May 24, 1995.17 The Rights were valued at $.125 per
Right at the close of the Offering Period. The approximate volume of
trading in the Rights during the Rights Offering was as follows: (i)
32,127 Rights were traded between May 10 and May 31, 1995, and (ii)
816,417 Rights were traded between June 1 and June 21, 1995.
\17\ In this regard, the applicant states that the Rights were
not traded in sufficient volume prior to May 24, 1995 to be listed
on NASDAQ.
---------------------------------------------------------------------------
All of the Rights received by the Trustee in connection with the
Plan's ownership of the Employer Stock in the ESOP portion of the Plan,
as well as the Rights received for the 401(k) portion of the Plan which
Invested Participants elected to sell rather than exercise (as
discussed further below), were sold by the Trustee on the open market.
The Rights were sold in two separate transactions on June 13 and June
14, 1995 for $.093 per Right, which was the market price for the Rights
on the date of the transactions as quoted on NASDAQ. The Trustee states
that the sale of the Rights was executed by an unrelated party.
With respect to the 401(k) portion of the Plan, the applicant
states that there were 134 Invested Participants who collectively
received a total of 6,989 Rights as a result of the Rights Offering. As
noted above in Paragraph 8, Invested Participants who elected to sell
their Rights could make such an election up until the Filing Date (i.e.
June 1, 1995). For those Invested Participants who elected to sell
their Rights, the Trustee sold such Rights (along with the other Rights
received by the ESOP portion of the Plan) as part of the two separate
transactions on June 13 and 14, 1995. The Rights were sold for $.093
per Right, which was the market price on such dates. In this regard,
the Trustee believed that it would be more efficient and fair to all
affected Invested Participants in the Plan for the Rights to be sold at
about the same time, rather than gradually as the Direction Forms were
received. The proceeds from all such sales were allocated to the Plan
accounts of those Invested Participants who elected to sell their
Rights, in direct proportion to the number of Rights they elected to
sell. The applicant states that of the 6,989 Rights received by the
Plan on behalf of Invested Participants, a total of 1,024 Rights (with
rounding) were exercised, a total of 470 Oversubscription Privileges
were exercised, a total of 5,901 Rights were sold, and a total of 64
Rights were allowed to expire.
11. The total number of shares of Employer Stock outstanding prior
to the Rights Offering was 6,333,835, of which approximately 415,854
shares, or 6.56 percent, were held by the Plan. The total number of
shares of the Employer Stock outstanding after the Rights Offering was
9,226,723, an increase of 2,888,888 shares.18 Of these additional
shares, approximately 1,685,652 were sold to shareholders upon exercise
of the Rights, or to investors who purchased the Rights on the open
market, and the other 1,203,236 shares were sold to outside investors
pursuant to certain standby purchase agreements. The applicant
represents that following the Rights Offering, VCNB attained the
[[Page 58667]]
capital ratio required under the OCC Formal Agreements.
\18\ The applicant notes that the number used to show the
increase due to the Rights Offering does not include an additional
4,000 shares which were added to the post-Rights Offering total
following the exercise of a stock option by a former employee of
VCNB.
---------------------------------------------------------------------------
12. In summary, the applicant represents that the transactions
satisfied the statutory criteria of section 408(a) of the Act because,
among other things: (a) the Plan's acquisition of the Rights resulted
from an independent act of Ventura, an employer of employees covered by
the Plan; (b) with respect to all aspects of the Offering, all holders
of the Employer Stock were treated in the same manner, including the
Plan; (c) individual participants whose Deferred Income and Employer
Contribution Accounts under the 401(k) portion of the Plan held
interests in the Employer Stock were responsible for directing the
Trustee to exercise or sell Rights under the Rights Offering; and (d)
with respect to the ESOP portion of the Plan, investment decisions
regarding whether to sell or exercise the Rights received by the Plan
were made by a qualified, independent fiduciary acting for the Plan
(i.e. the Trustee).
Notice to Interested Persons
The applicant states that notice of the proposed exemption shall be
made by first class mail to all Plan participants within fifteen (15)
days following the publication of the proposed exemption in the Federal
Register. This notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and a supplemental
statement (see 29 CFR 2570.43(b)(2)) which informs interested persons
of their right to comment on and/or request a hearing with respect to
the proposed exemption. Comments and requests for a public hearing are
due within forty-five (45) days following the publication of the
proposed exemption 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.)
Life Insurance Corporation Retirement Savings Plan (The Plan) Located
in Dallas, Texas
[Application No. D-10048]
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 32847, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a) and 406(b) (1) and (2) of
the Act and the sanctions resulting from the application of section
4975(c)(1) (A) through (E) of the Code shall not apply to the proposed
cash sale of 16 residential mortgage loans (the Loans) by the Life
Insurance Company of the Southwest Holding Corporation Retirement
Savings Plan (the Plan) to the Life Insurance Company of the Southwest
(the Employer), a party in interest with respect to the Plan, provided
the following conditions are satisfied:
(a) The Employer will pay on a Loan by Loan basis as of the date of
sale the greater of: (1) The outstanding principal balance plus any
accrued, unpaid interest on each of the Loans, or (2) the fair market
value of each of the Loans, as determined by a contemporaneous
independent appraisal;
(b) The proposed sale will be a one-time cash transaction; and
(c) The Plan will pay no costs or commissions as a result of this
transaction.
Summary of the Facts and Representations
1. The Plan, in effect since June 16, 1988, is a profit sharing
plan with a 401(k) feature providing for participant directed accounts.
The Plan covered 122 employees as of January 1, 1993. As of December
31, 1993, the Plan had $3,945,285 in total assets. The Employer is a
privately held Texas Corporation. The Trustee is the Texas Commerce
Trust Company, N.A.
2. It is represented that during the 1980's, the Plan Trustees
purchased the Loans for the Plan as a part of the Plan's General
Investment Fund. It is represented that during the mid 1980's the
percentage of Plan assets invested in mortgage loans (calculated based
on the outstanding loan balance of the mortgage loan portfolio (Loan
Portfolio)) approached 35%. Most of the Loans were purchased at various
times from Couch Mortgage, a mortgage banking firm in Houston, Texas.
Couch Mortgage is independent of the Plan and Employer. All Loans
purchased by the Plan were originated between August 17, 1973 and July
17, 1990, with various original durations and all were secured by first
lien positions on residential real properties located in Greater
Houston. All the Loans were purchased for their remaining principal
balance at the time of the purchase from Couch Mortgage. Eleven of the
16 Loans have fixed rates that range from 10.00% to 16.50%. The
remaining five Loans have variable rates that currently range between
7.560% and 10.625%. The borrowers were all independent of the Plan and
the Employer.
The Loans which are the subject of this application represent 100%
of the Loan Portfolio held by the Plan. As of June 2, 1995, the
percentage of the fair market value of the Plan assets invested in the
Loans was 8.53%. The Loans are residential real estate mortgage loans
and one land only loan.19
\19\ The Department notes that the decisions of the fiduciaries
on behalf of the Plan, in connection with the acquisition and
holding of the Loans are governed by the fiduciary responsibility
requirements of part 4, Subpart B, of Title I. The Department
expresses no opinion, herein, as to whether any of the relevant
provisions of part 4, Subpart B, of Title I have been violated
regarding the Plan's investment in and subsequent holding of the
Loans, and no exemption from such provisions is proposed herein.
---------------------------------------------------------------------------
3. Coopers & Lybrand L.L.P. (Coopers & Lybrand), an independent
third party appraiser estimated the fair market value for each of the
16 Loans held in the Loan Portfolio, and the outstanding principal
balance, as of March 31, 1995. The methodology used to determine the
fair market value of the Loans is more fully discussed in paragraph
number 6.
4. The Employer proposes to purchase each of the Loans held in the
Loan Portfolio from the Plan for cash. It is represented that the
Employer will pay on a Loan by Loan basis as of the date of sale the
greater of: (a) The outstanding principal balance plus any accrued,
unpaid interest on each of the Loans, or (b) the fair market value of
each of the Loans. It is represented that the Employer will compare the
principal balance plus accrued but unpaid interest on the loans with
the fair market value for each of the Loans. If this amount is higher
than the fair market value on the date of the sale, the Employer will
pay the higher amount. In the event that the fair market value of each
of the Loans is higher than the principal balance plus accrued but
unpaid interest, the Employer will pay the fair market value on the
date of the sale. In this regard, as of March 31, 1995, seven of the 16
Loans had a fair market value which was less than the outstanding
principal balance of the Loan, and nine of the Loans had a fair market
value which was greater than the outstanding principal balance of such
Loans. Based on calculations as of March 31, 1995, it is estimated that
the total amount the Plan will receive as a result of the sale will be
approximately $275,939.08.
5. The applicant represents that since 1988 the Plan has sought a
buyer for the total Loan Portfolio. Offers received have been deeply
discounted from the par value. Potential purchasers considered the
package expensive to administer due to the average size of the
outstanding loan balance, lack of uniformity in the loan terms (i.e.
interest rate, maturity date), and lack of
[[Page 58668]]
original background information from the original loan underwriting.
6. The applicant submitted an appraisal of the fair market value of
the Loans (the Appraisal) prepared on March 31, 1995, by Coopers &
Lybrand. Coopers & Lybrand is a member of Coopers & Lybrand
International, incorporated in Switzerland. It is represented that
Coopers & Lybrand has no relationship to the Employer or the Plans and
less than 1% of its annual income comes from business derived from the
Employer and its affiliates. The value of each of the Loans was
appraised using an Income Approach, specifically, the Discounted Free
Cash Flow Method. Employing this method, the net cash flow from each of
the Loans was forecast over the remaining life of each Loan and
discounted to the present value. Monthly principal and interest
payments received from each of the Loans were considered to be the
Loan's cash flow. For the purpose of determining this cash flow, the
following assumptions were made: the next set of payments was assumed
to occur on the date of the Appraisal, with the remaining payments made
monthly thereafter; rates on the five variable rate loans were assumed
constant at their current levels; and payments were assumed to occur on
their monthly due date, with no prepayments or late payments. The net
cash flow from each of the Loans was then discounted to present value
on a monthly basis.
The Market Approach was not utilized, as Coopers & Lybrand was
unable to locate institutions who would be desirous of a portfolio with
similar characteristics to the Plan's Loan Portfolio. In order to
determine the market's interest in this type of loan portfolio, Coopers
& Lybrand analyzed an attempt made by the Plan to market the Loan
Portfolio. Specifically, Coopers & Lybrand noted correspondence from
the Vice President of Institutional Sales for Meridian Capital Markets,
the firm which attempted to sell the Loan Portfolio for the Plan.
Meridian concluded that the Loans lacked marketability due to various
reasons including the Loan Portfolio's small size, varying maturities,
cost of servicing, location of the collateral, and the non-uniform
nature of the Loans.
Based on the valuation analysis, and the facts and circumstances as
of the valuation date, the aggregate fair market value and aggregate
outstanding principal balance of the 16 Loans held by the Plan, as of
March 31, 1995 was estimated to be $266,483.41 and $267,915.37,
respectively.
7. The best offer for purchase of these assets is from the
Employer. In this regard, if the Plan had sold the 16 Loans at the
aggregate outstanding principal on March 31, 1995, it would have
received $267,915.37, based on the Appraisal. If the Plan had sold the
16 Loans at the aggregate fair market value on March 31, 1995, it would
have received $266,483.41, based on the Appraisal. However, treating
each note as an individual asset and requiring the Employer to pay on a
Loan by Loan basis the greater of the fair market value or outstanding
principal balance on each Loan, then, as of March 31, 1995, the Plan
would have received an additional $8,023.71 when compared to the
aggregate principal balance and $267,915.37. When compared to the
aggregate fair market value of $266,483,41 the Plan will receive an
additional $9,455.67.
8. The Plan's Advisory Committee, which consists entirely of
employees and officers of the Employer, desires to offer participants a
new selection of nationally known investment funds and other features
such as daily valuation and 24-hour a day access to fund balances.
However, the Plan cannot do so while the Loans constitute a portion of
the General Investment Fund. The General Investment Fund and the other
investment options available to participants are presently managed by
the Trustees. The applicant represents that of the investment advisors
interviewed by the Advisory Committee, no firm would manage the Loan
Portfolio without charging the Plan a fee for such services. No
investment advisor interviewed could manage the Loans and offer daily
valuation, 24-hour access to fund balances, or daily investment changes
to the Participants. The Plan as drafted currently would permit
valuations as frequently as daily, but because of the existence of the
Loans, no nationally known investment advisor of which the Committee is
aware, is willing to offer daily valued funds for participant
direction. Therefore, the current Trustee-managed funds are valued on a
quarterly basis, and permit participant-directed trades only on a
quarterly basis. The applicant represents that daily valuations allows
the participants to make daily changes to their investment decisions
and better react to violative market conditions.
9. The applicant represents that the proposed transaction is in the
interest of and protective of the Plan. The applicant represents that
by granting the Plan this exemption, the Plan would be receiving at
least par value for the Loans which it has not been able to obtain on
the open market. The administrative burdens in record keeping for the
Plan would be reduced. Plan participants could be offered faster
service regarding account balances and options for changing investment
choices if they were participating in a Plan whose assets were wholly
managed and directed by the Trustee.
10. The applicant maintains that the proposed sale is
administratively feasible as the transaction will be a one-time cash
sale. The transaction is protective and in the interest of the Plan
because the Plan will pay no fees in connection with the sale and the
Employer will pay on a Loan by Loan basis as of the date of sale the
greater of: (1) The outstanding principal balance plus any accrued,
unpaid interest on each of the Loans; or (2) the fair market value of
each of the Loans, as determined by a contemporaneous independent
appraisal.
11. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) The Employer will pay on a Loan by Loan basis on the date of
sale the greater of: (1) The outstanding principal balance plus any
accrued, unpaid interest on each of the Loans; or (2) the fair market
value of each of the Loans, as determined by a contemporaneous
independent appraisal;
(b) The proposed sale will be a one-time cash transaction; and
(c) The Plan will pay no costs or commissions as a result of this
transaction.
FOR FURTHER INFORMATION CONTACT: Janet L. Schmidt of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Fidelitone, Inc. Employees' Profit Sharing and Savings Plan & Trust
(the Plan) Located in Wauconda, Illinois
[Application No. D-10077]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale by the Plan of certain
securities to Fidelitone, Inc. (Fidelitone), a party in interest with
respect to the Plan, provided that the following conditions are
satisfied: (1) the sale is a one-time
[[Page 58669]]
transaction for cash; (2) the Plan pays no commissions nor any other
expenses relating to the sale; and (3) the purchase price is the
greater of: (a) the fair market value of the securities as determined
by a qualified, independent appraiser, or (b) the Plan's initial
capital investment plus opportunity costs attributable to the
securities, less cash dividends received.
Summary of Facts and Representations
1. The Plan is a profit sharing plan sponsored by Fidelitone. As of
March 31, 1995, the Plan had approximately 185 participants and total
assets of approximately $2.3 million. The trustee of the Plan is Ronald
Comm, Chief Financial Officer of Fidelitone. Fidelitone, an Illinois
corporation, is a distributor of electronic repair parts and
accessories and is located in Wauconda, Illinois.
2. Among the assets of the Plan are shares in two real estate
investment trusts, the Krupp Government Income Trust (Krupp I) and the
Krupp Government Income Trust II (Krupp II), both of which invest
primarily in insured mortgage obligations. On November 14, 1990, the
Plan invested in 5000 Krupp I shares at a cost of $20/share, a total of
$100,000. On April 2, 1992, the Plan invested in 4500 Krupp II shares
at $20/share, a total of $90,000. The Krupp funds are both close-ended
trusts having a fixed number of outstanding shares and no unissued
shares. They were both set up to last approximately 10 to 12 years and
consequently have seven to eight years remaining. Barring any defaults
in the portfolios, the Krupp Co. reports that all remaining capital
will be paid to shareholders.
The Krupp Trusts have returned both income and principal to the
Plan. A portion of the dividends was used to acquire additional Krupp
shares through the dividend reinvestment plan. From November 1990 to
November 1993, the Plan purchased 1421.91 Krupp I shares at an average
price of $19.11 per share. From April 1992 through November 1993, the
Plan purchased 576.34 Krupp II shares at an average price of $19.30 per
share. From February 14, 1994 through October 1995, rather than
reinvesting the dividends, the Plan has received cash in the aggregate
amount of $25,677.28. Specifically, the cumulative cash dividends with
respect to the Krupp I shares have been $14,588.24, while the
cumulative cash dividends with respect to the Krupp II shares have been
$11,089.04
3. The applicant obtained an independent appraisal of the Krupp
investments from Mark S. Loftus, First Vice President, Investments, at
Dean Witter Reynolds' Rolling Meadows, Illinois office. The letter from
Mr. Loftus notes that neither Krupp fund trades on any public
exchange.20 However, each fund's own dividend reinvestment plan
buys back shares quarterly using a sealed bid auction method. As of
June 1, 1995, the dividend reinvestment plan was repurchasing Krupp I
shares at $14.40 per share, and Krupp II shares at $14.90 per share.
Mr. Loftus stated that the Krupp Co. also annually computes a net asset
value for ERISA purposes by marking securities to comparable Treasury
market securities. As of December 31, 1994, Krupp I shares had a net
asset value of $15.10 per share, while Krupp II shares had a net asset
value of $15.32 per share. Besides the dividend reinvestment plan, Mr.
Loftus notes the existence of a few third party companies not
affiliated with Dean Witter Reynolds, Inc. nor with the Krupp Co. who
attempt to match buyers and sellers on a secondary basis. Prices
obtained on such third party transactions are often at substantial
discounts to par value and net asset value prices.
\20\ The Department expresses no opinion herein on whether the
acquisition and holding of the Krupp shares by the Plan violated any
of the provisions of Part 4 of Title I in the Act.
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The applicant represents that the Plan trustee and Fidelitone have
attempted to sell the Krupp shares at the cost paid by the Plan. Mr.
Loftus, in his summary of the Plan's transaction history, indicates
that Fidelitone attempted on two different occasions in 1994 to sell
the Krupp shares using the sealed bid auction method but was
unsuccessful because average buy back prices had declined.
4. Because the Plan has been modified to permit the participants to
direct the investment of their respective individual accounts among six
mutual funds, all Plan assets have been liquidated, with the exception
of the Krupp shares. Fidelitone now proposes to purchase all the Krupp
shares in the Plan, including those purchased with reinvested
dividends, for the greater of: (a) the aggregate fair market value of
the Krupp shares as determined by a qualified, independent appraiser,
or (b) the Plan's initial capital investment plus opportunity costs
attributable to the Krupp shares, less cash dividends received. Because
the aggregate fair market value of the Krupp shares is less than the
Plan's initial capital investment, Fidelitone will purchase them from
the Plan for the latter amount. Accordingly, Fidelitone will pay the
Plan a total purchase price of $245,289.72. The purchase price was
calculated by taking the Plan's initial capital investment in the Krupp
shares (i.e., $190,000) and (i) adding to that amount an assumed 10%
annual return for each of the years since the Plan's initial investment
in the shares through October 14, 1995 (i.e., $80,967), and (ii)
subtracting from that amount the aggregate cash dividends received
(i.e., $25,677.28). The sale will be a one-time transaction for cash,
and the Plan will pay no commissions nor any other expenses relating to
the sale.
The applicant represents that the proposed transaction is in the
interests of the Plan because if the Plan is forced to attempt a sale
of the Krupp shares on the open market, the Plan will receive
substantially less than the amount the applicant is willing to pay. In
addition, the sale will enable the Plan to divest itself of illiquid
assets that are difficult to value and give participants the
opportunity to direct the investment of the total value of their
accounts, including that portion attributable to the Krupp shares.
5. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) the sale will
be a one-time transaction for cash; (2) the Plan will pay no
commissions nor any other expenses relating to the sale; (3) the sale
will enhance the liquidity of the assets of the Plan; and (4) the
purchase price will be the greater of: (a) the fair market value of the
Krupp shares as determined by a qualified, independent appraiser, or
(b) the Plan's initial capital investment plus opportunity costs
attributable to the Krupp shares, less cash dividends received.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and therefore
must be examined under applicable provisions of the Code, including
sections 401(a)(4), 404 and 415.
Notice to Interested Persons
Notice of the proposed exemption shall be given to all interested
persons by personal delivery and by first-class mail within 10 days of
the date of publication of the notice of pendency in the Federal
Register. Such notice shall
[[Page 58670]]
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/or to request a hearing with respect to the proposed
exemption. Comments and requests for a hearing are due within 40 days
of the date of publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Intrenet Employee Retirement Savings Plan (the Plan) Located in
Milford, OH
[Application No. D-10095]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of section 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the proposed sale by the Plan of certain
units of limited partnership interests (the Units) to Intrenet Inc.
(Intrenet), a party in interest with respect to the Plan, provided that
the following conditions are satisfied: (a) the sale is a one-time
transaction for cash; (b) the Plan suffers no loss, taking into account
all cash distributions received as a result of owning the Units; (c)
the Plan pays no commissions nor any other expenses relating to the
sale; and (d) the purchase price is the greater of $48,850 or the fair
market value of the Units as of the date of the sale as determined by a
qualified, independent appraiser.
Summary of Facts and Representations
1. The Plan is a defined contribution, profit sharing plan with
approximately 1,821 participants and beneficiaries and total assets of
approximately $2,224,567 as of December 31, 1994. The trustee of the
Plan is the SBS Trust Company. Intrenet, the Plan sponsor, is a holding
company for six truckload carrier subsidiaries providing general and
specialized carrier services throughout the United States.
2. Among the assets of the Plan are investments in two limited
partnerships, the ML Venture Partners II, L.P. (the Venture Fund) and
the ML LEE Acquisition Fund, L.P. (the Acquisition Fund). In April
1987, the Plan purchased 50 Units of the Venture Fund at a cost of
$1000 per Unit. In October 1989, the Plan purchased 40 Units of the
Acquisition Fund at a cost of $1000 per Unit. The Venture Fund invests
primarily in securities of new and developing companies. The
Acquisition Fund invests primarily in subordinated debt and preferred
stock securities issued in connection with friendly leveraged
acquisitions, recapitalizations, and other leveraged financing. The
Units are not tradable on any public securities market.21
\21\ The Department expresses no opinion herein on whether the
acquisition and holding of the Units by the Plan violated any of the
Provisions of Part 4 of Title I in the Act.
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The Units have returned both income and principal to the Plan in
the form of cash distributions. With respect to the Venture Fund, the
Plan has received cumulative cash distributions of $790 per Unit
($39,500/50 Units), as of October 1995. With respect to the Acquisition
Fund, the Plan has received cumulative cash distributions of $950.31
per Unit ($38,012.40/40 Units), as of August 14, 1995.
3. An estimate of the value of the Units is provided to Merrill
Lynch by an independent valuation service on an annual basis. The most
recent statement, dated May 31, 1995, provided to the Plan by Merrill
Lynch, reports a value of $561 per Unit of the Venture Fund ($28,050/50
Units), and $520 per Unit of the Acquisition Fund ($20,800/40 Units), a
total of $48,850 for all the Units. The Merrill Lynch statement
indicates that these investments are generally illiquid and that
investors may not be able to sell them nor realize the amounts shown
above upon a sale or liquidation. Thus although there is no readily
available market for the Units, the valuation methodology used by the
independent valuation service determines the most probable price as of
a specified date that the Plan could expect to receive if it sold the
Units in an arm's length transaction in a competitive market.
4. In mid-1994, the Plan liquidated all of its assets, with the
exception of the Units, and permitted the participants to direct the
investment of their respective individual accounts among six mutual
funds. In order to enable participants to direct the investment of the
total value of their accounts, including that portion attributable to
the Units, and to facilitate any required distributions, Intrenet
proposes to purchase the Units from the Plan for the greater of $48,850
or the fair market value of the Units as of the date of the sale, as
reported in the then most recent Merrill Lynch statement. Taking into
account an assumed purchase price of $48,850, the original costs of the
Units, and all cash distributions received, the Plan will receive the
following rates of return on its original investment in the Units. The
applicant represents that the Plan will receive a simple average annual
return of 4.13% with respect to the Venture Fund for the period from
April 1987 to October 1995, and of 7.84% with respect to the
Acquisition Fund for the period from October 1989 to October 1995. The
sale will be a one-time transaction for cash, and the Plan will pay no
commissions nor any other expenses relating to the sale.
The applicant represents that the proposed transaction is in the
interests of the Plan because if the Units are sold to an unrelated
third party, the Plan will receive substantially less than the
appraised value of the Units, due to their lack of marketability. In
addition, the sale will enable the Plan to divest itself of illiquid
assets and facilitate any required distributions. Finally, the sale
will enhance the diversification of the assets of the Plan by providing
participants the opportunity to reinvest the value attributable to the
Units in their accounts.
5. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) the sale will
be a one-time transaction for cash; (b) the Plan will pay no
commissions nor any other expenses relating to the sale; (c) the price
paid by the applicant will be the greater of $48,850 or the fair market
value of the Units as of the date of the sale as determined by a
qualified, independent appraiser; and (d) the sale will enhance the
liquidity and diversification of the assets of the Plan.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
persons by first-class mail within 10 days of the date of publication
of the notice of pendency in the Federal Register. Such notice will
include a copy of the notice of proposed exemption as published in the
Federal Register and inform interested persons of the right to comment
and/or to request a hearing. Comments with respect to the notice of the
proposed exemption are due within 40 days after the date of publication
of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 58671]]
ContiFinancial Services Corporation (ContiFinancial) Located in New
York, New York
[Application No. D-10102]
Proposed Exemption
Section I. Transactions
A. 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.22
\22\ 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. 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 assets
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.23 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;
\23\ For purposes of this exemption, each plan participating in
a commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Subsection I.B.(1) or (2).
c. 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.24 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.
\24\ 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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D. 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
[[Page 58672]]
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 (the SEC) under the Securities Act
of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under 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) for which
ContiFinancial or any of its affiliates is either (i) the sole
underwriter or the manager or co-manager of the underwriting syndicate,
or (ii) a selling or placement agent.
For purposes of this exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) Either
(a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in Section III.T);
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property, (including obligations
secured by leasehold interests on commercial real property);
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in Section III.U);
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this Section B.(1); 25
\25\ The Department wishes to take the opportunity to clarify
its view that the definition of Trust contained in Section III.B.(1)
(a) through (e) includes a two-tier trust structure under which
certificates issued by the first trust, which contains a pool of
receivables described above, are transferred to a second trust which
issues certificates that are sold to plans. However, the Department
is of the further view that, since the exemption provides relief for
the direct or indirect acquisition or disposition of certificates
that are not subordinated, no relief would be available if the
certificates held by the second trust were subordinated to the
rights and interests evidenced by other certificates issued by the
first trust.
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(2) Property which had secured any of the obligations described in
Subsection B.(1);
(3) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to made
to certificateholders; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
arrangements with respect to any obligations described in Section
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) ContiFinancial;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
ContiFinancial; or
(3) Any member of an underwriting syndicate or selling group of
which ContiFinancial 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 assets contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services assets 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.
[[Page 58673]]
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 III.Q. below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) The amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(a) Which is secured by equipment which is leased;
(b) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(c) 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:
(a) The trust holds a security interest in the lease;
(b) The trust holds a security interest in the leased motor
vehicle; and
(c) 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.
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.
Summary of Facts and Representations
1. ContiFinancial is an investment banking firm that specializes in
asset securitization, asset-backed financing and the placement of
asset-backed securities. The firm serves major regional banking and
thrift institutions and national and regionally-based consumer and
commercial finance companies. ContiFinancial provides a range of
services in all aspects of structuring securitization transactions, as
well as arranging for interim lending facilities and credit enhancement
alternatives for issuers of asset-backed securities. It is a broker-
dealer registered with the National Association of Securities Dealers.
ContiFinancial is a wholly owned subsidiary of ContiFinancial
Corporation, which is, in turn, owned in excess of 80 percent by
Continental Grain Company and the remaining ownership of which will be
offered to the public pursuant to a Registration Statement filed with
the SEC on October 11, 1995. As of June 30, 1995, the total assets of
ContiFinancial Corporation were $482,007,000.\26\
\26\ As described herein, the term ``ContiFinancial'' refers to
ContiFinancial Services Corporation and its affiliates unless the
context otherwise requires.
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2. ContiFinancial seeks exemptive relief to permit plans to invest
in pass-through certificates representing undivided interests in the
following
[[Page 58674]]
categories of trusts: \27\ (1) single and multi-family residential or
commercial mortgage investment trusts; \28\ (2) motor vehicle
receivables pool investment trusts; (3) consumer or commercial
receivables investment trusts; and (4) guaranteed governmental mortgage
pool certificate investment trusts.\29\
\27\ A given trust may include receivables of the type described
below in one or more of the categories of trusts discussed herein.
\28\ The Department notes that Prohibited Transaction Exemption
(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-l are met. ContiFinancial requests
relief for single-family residential mortgages in this exemption
because it would prefer one exemption for all trusts of similar
structure. However, ContiFinancial has stated that it may still
avail itself of the exemptive relief provided by PTE 83-1.
\29\ Guaranteed governmental mortgage pool certificates are
mortgage- backed securities with respect to which interest and
principal payable is guaranteed by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation
(FHLMC), or the Federal National Mortgage Association (FNMA). The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in the trusts may be plan
assets.
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3. Residential and 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 lease pledged to secure leasehold mortgages will in all
cases be at least ten years longer than the term of such mortgage.\30\
\30\ Trust assets may also include obligations that are secured
by leasehold interests on residential real property. See PTE 90-32
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6,
1990) at 23150.
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Trust Structure
4. Each trust is established under a pooling and servicing
agreement or equivalent 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 or certificates
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. Typically, prior to the
closing date, the sponsor conveys to the trust legal title to all such
assets. In some cases, legal title to some or all of such assets
remains with the originator until the closing date. On or prior to the
closing date, the sponsor and/or the originator conveys to the trust
legal title to the assets, and the trustee issues certificates
representing fractional undivided interests in the trust assets.
ContiFinancial, alone or together with other broker-dealers, acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates to be underwritten by
ContiFinancial will generally be made on a firm commitment basis.
Private placements of certificates may be made on a firm commitment or
agency basis. ContiFinancial may also act as the manager or co-manager
of an underwriting syndicate or selling group with respect to the
certificates.
Certificateholders will be entitled to receive periodic
installments of principal and/or interest, or other payments due on the
trust assets.
5. Some of the certificates will be multi-class certificates.
ContiFinancial 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.\31\
\31\ 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 trust assets are distributed first
to the class of certificates having the earliest stated maturity of
principal and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class pass-through arrangement is
the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying trust assets. In neither case will the rights of a
plan purchasing certificates 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 will share in the amount
distributed on a pro rata basis.\32\
\32\ If a trust issues subordinate certificates, holders of such
subordinate certificates may not share in the amount distributed on
a pro rata basis. 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 trust assets 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 included in trusts which are to be treated as REMICs, 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 homeowner or automobile
purchaser, or
[[Page 58675]]
leases property to a lessee. The originator may either retain a
receivable in its portfolio or sell it to a purchaser, such as a trust
sponsor (or sell it directly to a trust).
Originators of receivables included in the trusts will be entities
that originate receivables of the type included in a trust. 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 duties of a trust sponsor (other than a sponsor which is
also the servicer) are typically limited to acquiring the assets to be
included in the trust, establishing the trust, designating the trustee,
and assigning the assets 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 ContiFinancial, the trust sponsor or the servicer.
ContiFinancial 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, the sponsor, or out of trust assets. 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 trust assets 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.
The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of
certificates. Public offerings of certificates are generally made on a
firm commitment basis 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 assets to be included
in a trust and the sponsor of the trust (though they themselves may be
related) will be unrelated to ContiFinancial. However, affiliates of
ContiFinancial may originate or service assets included in a trust, or
may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
11. In some cases, the sponsor will obtain the assets from various
originators or other secondary market participants 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 another
secondary market participant pursuant to a purchase or sale agreement
related to the specific offering of certificates. In other cases, the
sponsor will originate the receivables, itself.
As compensation for the assets transferred to the trust, the party
(or parties) which conveys legal title to the trust (i.e., the sponsor
and/or the originator) receives cash, or certificates representing the
entire beneficial interest in the trust. If such party receives
certificates from the trust, such party sells some or all of these
certificates for cash to investors or securities underwriters. In some
transactions, such party or an affiliate may retain a portion of the
certificates for its own account.
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 assets included in the trust minus a specified servicing
fee.33 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.
\33\ The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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13. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting as sponsor) will retain the difference between
payments received on the assets in the trust and payments payable (at
the pass-through rate) to certificateholders, except that in some
cases, a portion of the payments on assets in the trust 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 assets between the time they are received by the
servicer and the time they are due to the trust (which time is set
forth in the pooling and servicing agreement). The servicer, typically,
will be required to pay the administrative expenses of servicing the
trust, including in some cases the trustee's fee, out of its servicing
compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid in a lump sum
at the time the trust is established, or out of the payments received
on the assets in the trust.
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 of assets in the trust, 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.
[[Page 58676]]
15. Payments on assets in the trust 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 an asset and the
certificate payment. 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 trust assets are held
in non-interest bearing accounts or are commingled with the servicer's
own funds, the servicer is required to deposit these payments by a date
specified in the pooling and servicing agreement into an account from
which the trustee makes payments to certificateholders.
16. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would consist of the difference
between what the underwriter receives for the certificates that it
distributes and what it pays the sponsor for those certificates. In a
private placement, the fee normally takes the form of an agency
commission paid by the sponsor. In a best efforts underwriting in which
the underwriter would sell certificates in a public offering on an
agency basis, the underwriter would receive an agency commission rather
than a fee based on the difference between the price at which the
certificates are sold to the public and what it pays the sponsor. In
some private placements, the underwriter may buy certificates as
principal, in which case its compensation would be the difference
between what the underwriter receives for the certificates and what it
pays the sponsor for these certificates.
Purchase of Receivables by the Servicer
17. The applicant represents that as the principal amount of the
assets in a trust is reduced by payment, the cost of administering the
trust generally increases in proportion to the unpaid balance of the
assets in the trust, 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 included in the trust when the aggregate unpaid balance
payable on the receivables is reduced to a specified percentage
(usually between 5 and 10 percent) of the initial balance.
The purchase price of the receivables is specified in the pooling
and servicing agreement and will be at least equal to either: (a) the
unpaid principal balance on the receivables plus accrued interest, less
any unreimbursed advances of principal made by the servicer; or (b) the
greater of (i) the amount in (a), or (ii) the fair market value of such
obligations in the case of a REMIC, or the fair market value of the
certificates in the case of a trust that is not a REMIC.
Certificate Ratings
18. The certificates will have received one of the three highest
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance
or other credit support (such as 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 servicer, or an affiliate of the servicer,
may provide credit support to the trust (i.e., act as an insurer).
Typically in these cases, the 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. In some transactions, the
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 servicer typically
can recover advances either from the provider of credit support or 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 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 pursuant to the
pooling and servicing agreement. Therefore, the trustee, who is
independent of the servicer, will have the ultimate right to enforce
the credit support arrangement.
When a servicer advances funds, the amount so advanced is
recoverable by the servicer out of future payments on assets held by
the trust to the extent not covered by credit support. However, where
the servicer provides credit support to the trust, there are
protections, including those described below, 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
assets are passed through to investors. These protective 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 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 servicer to follow its normal servicing
guidelines and will set forth the servicer's general policy as to the
period of time after which delinquent obligations ordinarily will be
considered uncollectible;
(c) As frequently as payments are due on the assets included in the
trust (monthly, quarterly, or semi-annually as set forth in the pooling
and servicing agreement), the 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 assets and draws upon the credit support. Further,
the servicer is required to deliver to the trustee annually a
certificate of an executive officer of the servicer stating that a
review of the servicing activities has been made under such officer's
supervision, and either stating that the servicer has fulfilled all of
its obligations under the pooling and servicing agreement or, if the
servicer has defaulted under any of its obligations, specifying any
such default. The servicer's reports are reviewed at least annually by
independent accountants to ensure that the servicer is following its
normal servicing standards and that the master servicer's
[[Page 58677]]
reports conform to the servicer's internal accounting records. The
results of the independent accountants' review are delivered to the
trustee;
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount becomes a fixed dollar
amount, subject to reduction only for actual draws. From the time that
the floor amount is effective until the end of the life of the trust,
there are no proportionate reductions in the credit support amount
caused by reductions in the pool principal balance. Indeed, since the
floor is a fixed dollar amount, the amount of credit support ordinarily
increases as a percentage of the pool principal balance during the
period that the floor is in effect. The protection provided by a floor
dollar amount to the credit support applies particularly where the
servicer and the insurer are affiliated or are the same entity. (An
entity should not be considered an insurer solely because it holds
subordinated certificates.)
Disclosure
20. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates, including:
(a) Information concerning the payment terms of the certificates,
the rating of the certificates, and any material risk factors with
respect to the certificates;
(b) A description of the trust as a legal entity and a description
of how the trust was formed by the seller/servicer or other sponsor of
the transaction;
(c) Identification of the independent trustee for the trust;
(d) A description of the assets contained in the trust, including
the types of assets, the diversification of the assets, 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 certificates 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 certificate holders 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 assets.
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 SEC, 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 SEC'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 typically contain information regarding payments and
prepayments, delinquencies, the remaining amount of the guaranty or
other credit support and a breakdown of payments between principal and
interest.
Secondary Market Transactions
24. At times, ContiFinancial will facilitate sales by investors who
purchase certificates if ContiFinancial has acted as agent or principal
in the original private placement of the certificates and if such
investors request ContiFinancial's assistance. Other underwriters have
made, and ContiFinancial anticipates that such underwriters will
continue to make, a secondary market in publicly-offered certificates
sponsored by ContiFinancial.
Summary
25. In summary, the applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The trusts contain ``fixed pools'' of assets. There is little
discretion on the part of the trust sponsor to substitute assets
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 ContiFinancial seeks exemptive
relief will be governed by the pooling and servicing agreement, which
is made available to plan fiduciaries for their
[[Page 58678]]
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) Other underwriters have made, and the applicant anticipates
that such underwriters will continue to make a secondary market in the
publicly-offered certificates sponsored by the applicant.
Discussion of Proposed Exemption
I. Differences between Proposed Exemption and Class Exemption PTE 83-1
The exemptive relief proposed herein is similar to that provided in
PTE 81-7 (46 FR 7520, January 23, 1981), Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts, amended and
restated as PTE 83-1 (48 FR 895, January 7, 1983).
PTE 83-1 applies to mortgage pool investment trusts consisting of
interest-bearing obligations secured by first or second mortgages or
deeds of trust on single-family residential property. The exemption
provides relief from sections 406(a) and 407 for the sale, exchange or
transfer in the initial issuance of mortgage pool certificates between
the trust sponsor and a plan, when the sponsor, trustee or insurer of
the trust is a party-in-interest with respect to the plan, and the
continued holding of such certificates, provided that the conditions
set forth in the exemption are met. PTE 83-1 also provides exemptive
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the
trust is a fiduciary with respect to the plan assets invested in such
certificates, provided that additional conditions set forth in the
exemption are met. In particular, section 406(b) relief is conditioned
upon the approval of the transaction by an independent fiduciary.
Moreover, the total value of certificates purchased by a plan must not
exceed 25 percent of the amount of the issue, and at least 50 percent
of the aggregate amount of the issue must be acquired by persons
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1
provides conditional exemptive relief from section 406(a) and (b) of
the Act for transactions in connection with the servicing and operation
of the mortgage trust.
Under PTE 83-1, exemptive relief for the above transactions is
conditioned upon the sponsor and the trustee of the mortgage trust
maintaining a system for insuring or otherwise protecting the pooled
mortgage loans and the property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to defaults in loan payments or property damage. This
system must provide such protection and indemnification up to an amount
not less than the greater of one percent of the aggregate principal
balance of all trust mortgages or the principal balance of the largest
mortgage.
The exemptive relief proposed herein differs from that provided by
PTE 83-1 in the following major respects: (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 assets, 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.34
\34\ 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).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales.
ContiFinancial represents that in some cases a trust sponsor,
trustee, servicer, insurer, and obligor with respect to assets
contained in a trust, or an underwriter of certificates may be a pre-
existing party in interest with respect to an investing plan.35 In
these cases, a direct or indirect sale or 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.36 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.
\35\ In this regard, we note that the exemptive relief proposed
herein is limited to certificates with respect to which
ContiFinancial or any of its affiliates is either (a) the sole
underwriter or manager or comanager of the underwriting syndicate,
or (b) a selling or placement agent.
\36\ The applicant represents that where a trust sponsor is an
affiliate of ContiFinancial, 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
ContiFinancial is not a fiduciary with respect to plan assets to be
invested in certificates.
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Additionally, ContiFinancial represents that a trust sponsor,
servicer, trustee, insurer, and obligor with respect to assets
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. ContiFinancial 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, ContiFinancial 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 section 406(b) and section 407(a)
relief as specified in the proposed exemption.
[[Page 58679]]
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.)
LEGENT Retirement Security Plan (the Plan) Located In Pittsburgh, PA
[Application No. D-10113]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reasons of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the cash sale by the Plan of a limited
partnership interest (the Interest) in Consolidated Capital
Institutional Properties Two Limited Partnership (CCIP/2) to LEGENT
Corporation (LEGENT), a party in interest with respect to the Plan.
This proposed transaction 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
commissions, costs or other expenses in connection with the sale; and
(4) the Plan receives a sales price which is not less than the greater
of: (a) The fair market value of the CCIP/2 Interest as determined by a
qualified, independent appraiser, or (b) the total acquisition cost
plus opportunity costs attributable to the CCIP/2 Interest.
Summary of Facts and Representations
1. The Plan is a defined contribution plan sponsored by LEGENT, a
publicly-held Pennsylvania corporation engaged in supplying systems
management solutions to large users of computer technology. As of
September 30, 1994, the Plan had net assets available for benefits that
totaled $55,577,555. As of June 30, 1995, the Plan had 2,400
participants.
Prior to September 1, 1993, Mellon Bank (Mellon Bank) served as the
Plan trustee. Effective September 1, 1993, Fidelity Investments became
the trustee of all of the Plan's assets with the exception of certain
limited partnership interests in BPT Union City Associates, Inc. and
CCIP/2. Although Mellon Bank continues to serve as Plan trustee with
respect to the CCIP/2 Interest,37 since 1989 the Plan has
permitted each participant to direct the investments held in his or her
individual account among several funds selected by LEGENT.
\37\ On September 13, 1995, the Department issued Prohibited
Transaction Exemption 95-84 at 60 FR 47612. This exemption permitted
the cash sale by the Plan of the BPT Interest to LEGENT.
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2. On July 1, 1977, Morino Inc. (Morino), a Delaware corporation
engaged in supplying systems management solutions to users of computer
technology, adopted the Morino Associates, Inc. Money Purchase Pension
Plan (the Morino Pension Plan) and the Morino Associates, Inc. Profit
Sharing Plan (the Morino Profit Sharing Plan; collectively, the Morino
Plans). On October 1, 1989, Morino merged with Duquesne Systems, Inc.
(Duquesne) and formed LEGENT. Effective October 1, 1989, the Morino
Pension Plan merged into the Duquesne Systems, Inc. Pension Plan and
the Morino Profit Sharing Plan merged into the Duquesne Systems, Inc.
Profit Sharing Plan. The resulting merged plans were amended and
restated, effective October 1, 1989, as the LEGENT Corporation Pension
Plan and the LEGENT Corporation Savings Plan, respectively.
Subsequently, on October 1, 1992, the LEGENT Corporation Savings Plan
was amended and restated as the LEGENT Retirement Security Plan (i.e.,
the Plan) to reflect the merging of the LEGENT Corporation Pension Plan
and the Goal Systems International, Inc. Profit Sharing Plan into the
LEGENT Corporation Savings Plan due to the merger of Goal Systems
International Inc. into LEGENT.
3. As noted above, currently among the assets of the Plan is a 0.02
percent interest in CCIP/2, a South Carolina limited partnership whose
underlying assets generate income from leasing space in office
buildings primarily in Southfield, Michigan. The CCIP/2 Interest has no
maturity date. To the extent known, LEGENT has never invested in CCIP/
2. In addition, none of the general partners of CCIP/2 or investors in
CCIP/2 are parties in interest with respect to the Plan or its
predecessors.
The Morino Pension Plan acquired the CCIP/2 Interest from unrelated
parties on March 21, 1984 for a total purchase price of $15,400 (or
$110 per unit for 140 units). The acquisition of the CCIP/2 Interest
was made at the direction of Morino. Although the Morino Pension Plan
(and subsequently the Plan) received income totaling $154 from CCIP/2,
no further income payments were made to the Plan after 1991. In
addition, the Plan never paid any holding costs in connection with its
ownership of the CCIP/2 Interest.
4. When Morino merged with Duquesne, the existing Plan accounts
invested in the CCIP/2 Interest were not initially frozen. Because the
former Morino Plans did not offer individual participant investment
elections, the Plan has held the CCIP/2 Interest as a general asset
with a portion of such interest allocated to all participants in the
Morino Pension Plan. As these participants terminated their employment
with Duquesne, their allocable portion of the CCIP/2 Interest was
purchased by the Plan using cash generated from such interest. The
remaining portions of the participant accounts that were invested in
the CCIP/2 Interest were frozen when Mellon Bank determined that the
CCIP/2 Interest had no value and there was insufficient cash to
purchase any additional portions from terminating employees.
Accordingly, LEGENT froze the remaining accounts invested in the CCIP/2
Interest. As of January 13, 1995, the CCIP/2 Interest was allocated to
the accounts of 86 former Morino employees.
5. LEGENT represents that the CCIP/2 Interest is a highly illiquid
investment for which there is a very limited secondary market.38
Mellon Bank represents, in a letter dated November 29, 1993, that it
made every effort to sell the CCIP/2 Interest to unrelated parties.
However, due to the insufficient secondary market, no purchaser has
been found. Accordingly, LEGENT requests an administrative exemption
from the Department in order to purchase the CCIP/2 Interest from the
Plan.
\38\ The Department expresses no opinion, in this proposed
exemption, on whether Plan fiduciaries violated any of the fiduciary
responsibility provisions of Part 4 of Title I of the Act in
acquiring the CCIP/2 Interest.
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6. Mellon Bank proposes to sell the CCIP/2 Interest to LEGENT for
not less than the greater of (a) the fair market value of the CCIP/2
Interest as
[[Page 58680]]
determined by a qualified, independent appraiser; or (b) the total
acquisition cost and opportunity costs attributable to the CCIP/2
Interest. The proposed sale will be a one-time transaction for cash. In
addition, the Plan will not be required to pay any fees, commission or
expenses in connection with the sale. Mellon Bank represents that it
will determine, prior to the sale, whether such transaction is
appropriate for the Plan and is in the best interest of the Plan and
its participants and beneficiaries.
7. CCIP/2 and its underlying assets were valued by Mr. Brad
Davidson, President of Partnership Valuations, Inc. of Annapolis,
Maryland. A qualified, independent appraiser, Mr. Davidson values non-
traded securities for banks and brokerage firms. As of December 31,
1994, Mr. Davidson determined that the fair market value of each unit
in CCIP/2 was worth $45. He also concluded that a 29 percent discount
factor was appropriate to his appraisal of CCIP/2 due to its lack of
marketability. Therefore, based upon Mr. Davidson's valuation of CCIP/
2, the fair market value of the CCIP/2 Interest held by the Plan is
$6,300 ($45 x 140 units).
8. Because the fair market value of the CCIP/2 Interest is less
than its acquisition cost, LEGENT will purchase the CCIP/2 Interest for
the latter amount. In addition, LEGENT represents that because the Plan
did not receive an adequate rate of return on the CCIP/2 Interest, it
will pay $3,059 to make up for the Plan's lost opportunity
costs.39 Accordingly, LEGENT will purchase the CCIP/2 Interest
from the Plan for an aggregate purchase price of $18,459.40
\39\ LEGENT represents that the average rates of return for the
remaining assets that were held each year by its predecessor Plans
is a fair measure of the Plan's lost opportunity costs. Therefore,
LEGENT has calculated interest on the amount invested in the CCIP/2
Interest for the Plan Years beginning October 1, 1991 since CCIP/2
paid income to the Plan through the Plan Year ending September 30,
1994. Using this method of calculation, LEGENT represents that the
CCIP/2 Interest would have earned aggregate opportunity costs of
$3,059.
\40\ The applicant represents that the amount by which the
purchase price for the CCIP/2 Interest exceeds its fair market
value, if treated as an employer contribution to the Plan, when
added to the annual additions to such Plan, will not exceed the
limitation prescribed by section 415 of the Code.
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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
commissions, costs or other expenses in connection with the sale; (d)
the Plan will receive a sales price which is not less than the greater
of (i) the fair market value of the CCIP/2 Interest as determined by a
qualified, independent appraiser or (ii) the total acquisition cost
plus opportunity costs that are attributable to the CCIP/2 Interest;
and (e) Mellon Bank will determine that the sale is an appropriate
transaction for the Plan and in the best interests of the Plan and its
participants and beneficiaries.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or affiliate thereof) results in the plan either paying less than or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan and therefore
must be examined under applicable provisions of the Code, including
section 401(a)(4), 404 and 415.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
persons by first-class mail within 30 days of the date of publication
of the notice of proposed exemption in the Federal Register. 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 on and/or to request a hearing. Comments with
respect to the notice of proposed exemption are due within 60 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,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 21st day of November, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-28910 Filed 11-27-95; 8:45 am]
BILLING CODE 4510-29-P