[Federal Register Volume 61, Number 216 (Wednesday, November 6, 1996)]
[Notices]
[Pages 57461-57479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28504]


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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10079, et al.]


Proposed Exemptions; Pikeville National Bank

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,

[[Page 57462]]

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.Pikeville National Bank & 
Trust Company; Trust Company of Kentucky; and First American Bank 
(collectively, the Banks) Located in Pikeville and Ashland, Kentucky 
[Application Numbers D-10079 through D-10082]

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 
406(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: (1) the cash sales on 
December 28, 1994 and January 13, 1995, of certain collateralized 
mortgage obligations (CMOs) and other mortgage-backed securities 
(collectively, the Securities) held by eighty-nine (89) employee 
benefit plans, Keogh plans and individual retirement accounts (IRAs) 
for which the Banks act as trustee (the Plans) to Pikeville National 
Corporation (PNC), a party in interest with respect to the Plans; (2) 
the ``makewhole'' payments made by PNC to the Plans on January 20, 
1995, in connection with the sale of certain Securities by the Plans on 
the open market on November 2, 1994; and (3) the proposed additional 
``makewhole'' and interest payments to be made by PNC to the Plans, as 
of the date the exemption is granted, as a result of: (i) the 
additional amounts owed to such Plans based on the amortized cost of 
the Securities at the time of the transactions in situations where the 
amortized cost exceeded the outstanding principal balance of the 
Securities (plus a reasonable rate of interest on such amounts), and 
(ii) the additional accrued but unpaid interest on the Securities which 
was owed to the Plans at the time of the sale to PNC on December 28, 
1994 (plus a reasonable rate of interest on such amounts); provided 
that the following conditions are met:
    (a) Each sale was a one-time transaction for cash;
    (b) Each Plan has received or will receive a total amount for the 
Securities owned by the Plan, including the sale proceeds and 
``makewhole'' payments for transactions that occurred either on the 
open market or with PNC, which is equal to the greater of: (i) the 
outstanding principal balance for each Security owned by the Plan, plus 
accrued but unpaid interest, at the time of the sale; (ii) the 
amortized cost for each Security owned by the Plan on the date of the 
sale, plus accrued but unpaid interest, as determined by the Banks; or 
(iii) the fair market value of each Security owned by the Plan as 
determined by the Banks from broker-dealers or pricing services 
independent of the Banks at the time of the sale;
    (c) With respect to the ``makewhole'' payments made by PNC to the 
Plans on January 20, 1995, the Plans receive a reasonable rate of 
interest for the period from November 2, 1994 (the date of the sale of 
certain Securities on the open market) until January 20, 1995 (the date 
such payments were made), to the extent this amount is not already 
accounted for under the additional ``makewhole'' payments which are due 
for the Securities based on the amounts referred to above in Item 
(3)(i);
    (d) The Plans did not pay any commissions or other expenses with 
respect to the transactions;
    (e) The Banks, as trustee of the Plans, determined that the sale of 
the Securities was in the best interests of each of the Plans and their 
participants and beneficiaries at the time of the transaction;
    (f) The Banks took all appropriate actions necessary to safeguard 
the interests of the Plans and their participants and beneficiaries in 
connection with the transactions; and
    (g) Each Plan received a reasonable rate of return on the 
Securities during the period of time that it held the Securities.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
as of December 28, 1994, and January 13, 1995, for the sales of the 
Securities made to PNC, and as of January 20, 1995, for the 
``makewhole'' payments made by PNC in connection with the sale of the 
Securities to an unrelated party on November 2, 1994. In addition, this 
proposed exemption will be effective for the additional ``makewhole'' 
and interest payments due to the Plans as of the date such payments are 
made to the affected Plans.

Summary of Facts and Representations

    1. The Banks are wholly-owned subsidiaries of PNC, a bank holding 
company organized under federal and Kentucky laws which is located at 
208 North Mayo Trail in Pikeville, Kentucky. The Banks are: (a) the 
Pikeville National Bank and Trust Company, located at 208 North Mayo 
Trail in Pikeville, Kentucky; (b) the Trust Company of Kentucky, 
located at 1544 Winchester Avenue in Ashland, Kentucky; and (c) the 
First American Bank, located at 1544 Winchester Avenue in Ashland, 
Kentucky. The Banks offer traditional banking services (e.g. checking, 
savings, loans and trusts) to both individuals and entities in their 
localities.
    2. The Banks serve as trustees for the Plans and have investment 
discretion for either some or all of the assets of such Plans. The 
Plans consist of a total of eighty-nine (89) plans, including various 
profit sharing plans, money purchase pension plans, 401(k) plans, 
simplified employee benefit plans (SEPs), Keogh plans and IRAs. The 
Plans that are employee benefit plans covered under Title I of the Act, 
such as the profit sharing and money purchase pension plans, are 
maintained by small businesses in the Pikeville and Ashland, Kentucky 
areas. All of these Plans have fewer than 100 participants.\1\
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    \1\ Examples of some of these Plans are: (i) the Sandy Valley 
Explosive Co., 401(k) Plan, which had 28 participants and total 
assets of $90,398 as of September 30, 1994; (ii) the Corbin Coal 
Co., Inc. Profit Sharing Plan, which had 9 participants and total 
assets of $440,772 as of September 30, 1994; and (iii) the Baird, 
Baird, Baird & Jones P.S.C. Retirement Plan, which had 49 
participants and total assets of $2,539,844 as of September 30, 
1994.

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[[Page 57463]]

    Some of the Plans are Keogh plans   (a/k/s HR 10 plans) and IRAs 
which are not employee benefit plans covered under the Act.\2\ Of the 
eighty-nine (89) Plans involved in the subject transactions by the 
Banks, twenty-nine (29) are IRAs and ten (10) are Keogh plans.
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    \2\ Pursuant to 29 CFR 2510.3-2(d) and 2510.3-3(b), the IRAs and 
Keogh plans would not be employee benefit plans under of Title I of 
the Act. However, such plans are subject to the provisions of Title 
II of the Act and, specifically, the prohibited transaction 
provisions of section 4975 of the Code.
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    3. The Banks represent that at various times during the period from 
July 1992 until January 1994, assets of the Plans were invested in the 
Securities. The Securities were purchased from broker-dealers that were 
independent of the Plans and their sponsoring employers as well as the 
Banks and their affiliates.
    The Securities are collateralized mortgage obligations (i.e. CMOs) 
and other mortgage-backed securities. The Securities are investment 
products through which investors purchase interests in pools of 
residential mortgage loans. In general, investors in these securities 
receive payments of principal and interest or, in some cases, either 
principal or interest only, depending upon the type of security 
purchased. Interest payments change monthly in relation to a specific 
index, such as the London Interbank Offered Rate (LIBOR) or the U.S. 
Federal Reserve's Cost of Funds Index (COFI), contained in a formula 
used to calculate the interest rate for such securities. Principal 
payments on the Securities vary in amount and timing depending upon how 
quickly the outstanding principal amounts on the underlying mortgages 
held in the mortgage pools are prepaid by the obligors. The repayment 
of principal and interest on the underlying mortgages in the various 
pools is usually guaranteed by U.S. Government Agencies, such as the 
Federal Home Loan Mortgage Corporation (FHLMC or ``Freddie Mac'') or 
the Federal National Mortgage Association (FNMA or ``Fannie Mae'').
    4. The Securities consisted of twenty-six (26) separate securities. 
All of the Securities were CMOs or Real Estate Mortgage Investment 
Conduits (REMICs), except for one ``structured'' note issued by the 
Federal Home Loan Bank (FHLB) and three fixed coupon notes issued by 
FNMA, which were backed by pools of residential mortgages.
    The CMOs are described as follows: (a) FHLMC REMIC--Planned 
Amortization Class (PAC) Series 1059, Class F, CUSIP #312905MB5; (b) 
FHLMC REMIC--PAC Series 1459, Class P, CUSIP #312914DV3; (c) FHLMC 
REMIC--PAC Series 1551, Class E, CUSIP #312916XX2; (d) FHLMC REMIC--
Targeted Amortization Class (TAC) Series 1580, Class H, CUSIP 
#3133TOA7; (e) FNMA REMIC--Scheduled Amortization Class Series 1993-
168, Class N, CUSIP #31359DQH9; (f) General Electric (GE) Capital 
Mortgage Services REMIC--PAC Series 1993-13, Class A6, CUSIP 
#36157LSB5; (g) FHLMC REMIC--Z Tranche Series 1393, Class J, CUSIP 
#312912SQ2; (h) FHLMC REMIC--Z Tranche Series 1411, Class ZA, CUSIP 
#312912X45; (i) FHLMC REMIC--Inverse Floater Series 1438, Class F, 
CUSIP #312913TJ5; (j) FHLMC REMIC--Inverse Floater Series 1625, Class 
SB, CUSIP #3133T22Q2; (k) FHLMC REMIC--Inverse Floater Series 1660, 
Class S, CUSIP #3133T3QK7; (l) FHLMC REMIC--Inverse Floater Series 
1665, Class S, CUSIP #3133T3RD2; (m) FNMA REMIC--Inverse Floater Series 
1993-102, Class S, CUSIP #31359AR43; (n) FNMA REMIC--Inverse Floater 
Series 1993-115, Class SE, CUSIP #31359BDT1; (o) FNMA REMIC--Inverse 
Floater Series 1993-185, Class SH, CUSIP #31359DU50; (p) FNMA REMIC--
Inverse Floater Series G93-31, Class SD, CUSIP #31359DZW6; (q) FHLMC 
REMIC--Inverse Floater Series 1385, Class S, CUSIP #312912KK3; (r) FNMA 
REMIC--Z Tranche Series 1992-123, Class Z, CUSIP #31358N4F6; (s) FNMA 
REMIC--Inverse Floater Series 1992-129, Class S, CUSIP #31358N7D8; (t) 
FNMA REMIC--Inverse Floater Series G93-14, Class S, CUSIP #31358TX87; 
(u) FNMA REMIC--Principal Only (PO) Series 1993-161, Class GC, CUSIP 
#31359BXX0; and (v) GE Capital Mortgage Services REMIC--Inverse Floater 
Series 1993-17, Class A20, CUSIP #36157LUY2.
    The other Securities that were not CMOs are described as follows: 
(a) FHLB Structured Note, CUSIP #313389FC7, an inverse floater indexed 
bond with a coupon formula based on six-month LIBOR; (b) FNMA Note, 
CUSIP #31359CAL9, a fixed coupon note paying 6.43 percent annually, due 
to mature on January 13, 2004, but callable on or after January 13, 
1997; (c) FNMA Medium Term Note, CUSIP #31364AJ37, a fixed coupon note 
paying 6.17 percent annually, due to mature on December 2, 2003, but 
callable on or after December 2, 1996; and (d) FNMA Medium Term Note, 
CUSIP #31364AVX7, a fixed coupon note paying 6.80 percent annually, due 
to mature on October 23, 2002, but callable on or after October 23, 
1995.
    Of the twenty-six (26) Securities, twenty-four (24) had their 
underlying mortgages guaranteed by either the FNMA, FHLMC, or FHLB. The 
Banks represent that most of the CMOs would be considered ``guaranteed 
governmental mortgage pool certificates'' (see 29 CFR 2510.3-
101).3 The Banks state that it is unclear whether the Securities 
that are not CMOs would be so considered because they are debt, rather 
than equity, instruments issued by a U.S. Government agency. However, 
the Banks state that all of the Securities are ``publicly-offered 
securities'' (see 29 CFR 2510.3-101(a)(2) and (b)).4
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      3  In this regard, under 29 CFR 2510.3-101(i), if a plan 
acquires a ``guaranteed governmental mortgage pool certificate'', 
the plan's assets would include the certificate but not any of the 
mortgages underlying such certificate. A ``guaranteed governmental 
mortgage pool certificate'' is a certificate (i) that is backed by, 
or evidences an interest in, specified mortgages or participation 
interests, and (ii) whose interest and principal payments are 
guaranteed by the Government National Mortgage Association (GNMA), 
FHLMC (i.e. ``Freddie Mac'') or FNMA (i.e. ``Fannie Mae''). Thus, 
the Banks represent that since most of the CMOs that were owned by 
the Plans had interest and principal payments payable under the CMOs 
guaranteed by FHLMC or FNMA, the assets of the Plans did not include 
any of the mortgages underlying such CMOs.
      4  In addition, under 29 CFR 2510.3-101(a)(2) and (b), if 
a plan acquires a ``publicly-offered security'' that grants the plan 
an equity interest in an entity, the plan's assets would include the 
security but not any of the underlying assets of the entity. 
Therefore, the Banks represent that the assets of the Plans that 
owned the CMOs issued by GE Capital Mortgage Services did not 
include any of the mortgages underlying such CMOs even though such 
CMOs would not be considered a ``guaranteed governmental mortgage 
pool certificate'' under the Department's ``plan assets'' 
regulation.
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    5. All of the CMOs mentioned above were structured as REMICs 
pursuant to section 860D of the Code. The various classes of these 
Securities receive principal and, possibly, interest payments in 
differing portions and at differing times from the cash flows provided 
from the monthly payments received on the underlying mortgages.
    The repayment of principal from the underlying mortgages fluctuates 
significantly. To facilitate the structuring of such REMICs, the 
prepayments on the pools of mortgages are commonly measured relative to 
a variety of prepayment models. The model used for these REMICs is the 
Public Securities Association's standard prepayment model or ``PSA''. 
For example, this model may assume that mortgages will prepay at an 
annual rate of .2 percent in the first month after origination, then 
the prepayment rate would increase at an annual rate of .2

[[Page 57464]]

percent per month up to the 30th month after origination and then the 
prepayment rate would remain constant at 6 percent per annum in the 
30th and later months. Such an assumption is called 100 PSA.
    The REMIC structure allocates principal payments to the various 
classes or ``tranches'' in varying amounts as principal payments are 
made according to the allocations specified in the prospectuses. The 
exact date of repayment of all principal to any REMIC class is not 
known until the mortgage-backed securities are paid in full. The 
maturity for the various classes is referred to as the ``weighted 
average life'' (WAL). The WAL for a particular class of securities 
refers to the average amount of time, expressed in years, which will 
elapse from the date of the issuance of such securities until each 
dollar of principal has been repaid to the investor based on the PSA 
assumption. The holders of all classes will receive all of their 
principal back. The timing of when that principal is returned is 
dependent on how quickly the underlying mortgages are repaid or 
refinanced. However, in no event will the time for the recovery of 
principal exceed the final maturity date of the underlying mortgages.
    Each month the monthly payments on the underlying mortgages are 
collected and distributed to the holders of the various REMIC classes. 
Depending upon the structure of the REMIC, interest may be paid monthly 
according to a specific formula. The CMOs owned by the Plans, referred 
to above, included ``principal only'' (POs) tranches, ``Z class'' 
tranches, and inverse floating rate classes (i.e. so-called ``inverse 
floaters'') with coupon rate formulas based on either LIBOR or COFI.
    The ``principal only'' CMOs are similar to other bonds where an 
investor purchases the security at a discount and receives the 
principal cash flow off the collateral. The difference in the principal 
amount invested and the face value equates to the investment's yield. 
The timing of the cash flows received determines the ultimate yield on 
the investment. With a ``principal only'' CMO, the faster the 
collateral pays down, the higher the yield the investor receives. 
Income is recognized by accreting the discount over the expected life 
of the security. There are no regular interest payments received on 
``principal only'' CMOs.
    There is no loss of principal because the investor will ultimately 
receive the face value of the CMO, assuming that the underlying 
mortgages are guaranteed by a U.S. Government agency (e.g. FNMA or 
FHLMC). However, there is no guarantee as to the timing of the cash 
flows for such CMO's and the ultimate yields to the investors can be 
difficult to predict.
    The CMOs that are ``Z tranche'' classes of such Securities are the 
last tranches entitled to repayment of principal from the underlying 
mortgages. Therefore, such CMOs are the most susceptible to principal 
payment extensions which lengthen the duration of the security beyond 
the initially determined WAL, based on the PSA assumptions for 
prepayments on the underlying mortgages. As noted above, the timing for 
when all principal payments will be made is dependent on how quickly 
the underlying mortgages are repaid or refinanced. If interest rates 
increase significantly for a period of time, then there will be 
significantly fewer mortgages that are repaid or refinanced. Such 
interest rate increases can dramatically change the WAL for a ``Z 
tranche'' CMO, as well as other lower ranked CMO tranches. In addition, 
the amount of principal payments that a ``Z tranche'' CMO investor will 
receive during such periods will be much less.
    The CMOs that are ``inverse floaters'' are so described because the 
formulas used to calculate the interest payments, which adjust monthly 
for each class of the Security, usually raise the interest rate when 
the index falls and lower the interest rate when the index rises.
    Most of the coupon rate formulas are based on an interest rate 
index known as ``LIBOR''. LIBOR refers to the arithmetic mean of the 
London Interbank offered quotations for one-month Eurodollar deposits. 
LIBOR moves up or down as interest rates move up or down. The movement 
of LIBOR has an inverse relationship with respect to the interest paid 
on the inverse floating rate classes. The CMOs with interest rate 
formulas based on the COFI rate operate in the same manner. Therefore, 
significant interest rate increases can have a dramatically adverse 
affect on the investor's coupon rate and can lower the market value of 
the security vis a vis other fixed income securities of comparable 
duration (see Paragraph 7 below).
    6. The Securities were purchased by the Banks, as trustee of the 
Plans, from the following entities: (a) Kemper Securities; (b) Crews & 
Associates; (c) Marcus, Stowell & Beye; (d) Bear Stearns; (e) Morgan 
Keegan; (f) Merrill Lynch; and (g) First Institutional Securities. As 
noted earlier, these entities were all independent of the Plans as well 
as the Banks and their affiliates. In addition, the applicant notes 
that the Banks acted as a trustee with investment discretion for the 
assets of the Plans that were invested in the Securities and the 
entities that sold the Securities to the Plans were not acting as 
fiduciaries for such Plans.5
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    \5\ The Department is not providing any views in this proposed 
exemption as to fiduciary status and related decisions involved in 
the investment of the Plans in the subject transactions.
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    7. With respect to the CMOs, at the time of the purchase of these 
Securities by the Plans, the Banks anticipated that most of the CMOs 
would be retired within two to five years of the date of purchase due 
to prepayments of the underlying mortgages in each pool as obligors 
refinanced their mortgages at lower interest rates. The Banks thought 
that the CMOs would yield the Plans a high rate of return which would 
be superior to the yields available on other fixed income securities of 
comparable duration at the time of the transactions.6 The Banks 
note that the ideal time to buy CMOs that are ``inverse floaters'' 
would be when interest rates, as measured by indices such as LIBOR or 
COFI, are high and are expected to go down during the time the investor 
is holding the CMOs. However, when interest rates rise, the rate of 
return on these CMOs goes down and the securities become less valuable.
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    \6\ For example, the Banks state that a five-year U.S. Treasury 
Note yielded 8.7 percent on March 31, 1990, but yielded only 4.7 
percent on September 28, 1993. The Banks note that this interest 
rate ``environment'' led to the development of new structured 
products, such as ``inverse floaters'', which many investors 
believed would produce superior returns based on interest rate 
projections at the time.
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    The Banks note that initially the Plans were receiving monthly 
interest payments on the CMOs at rates that were significantly above 
the market rate for comparable securities, as measured by interest rate 
indexes at the time. However, increases in such interest rates during 
1994 changed the investment outlook for the Securities. As a result, 
the Banks anticipated that the CMOs would not be retired for many years 
because of the projected decrease in the prepayments of mortgages held 
in each pool. Furthermore, the increases in interest rates caused both 
the rate of return on the CMOs (as measured by the monthly interest 
payments) and the market value of the CMOs to decrease significantly.
    In addition, the Banks state that similar decreases in market value 
were occurring with respect to the other Securities that were not CMOs. 
This was particularly true for the FHLB Structured Note because it had 
a coupon rate formula, based on LIBOR, that was similar to the CMOs 
that were ``inverse

[[Page 57465]]

floaters''.7 The FNMA Medium Term Notes, which paid fixed coupon 
rates, were also declining in market value vis a vis other fixed income 
securities of comparable duration (e.g. US Treasury Notes) although to 
a lesser extent than the ``inverse floaters''.
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    \7\ The coupon formula for the FHLB Structured Note was 14.375 
percent--(2  x  six-month LIBOR). This Security's coupon had a cap 
of 14.375 percent and a floor of 0 percent. The coupon rate was 
reset annually on April 6 and October 6. The coupons ranged from 8 
percent as of April 6, 1993 to 2.6875 percent as of October 6, 1994.
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    Therefore, by the end of 1994, the Banks state that the Plans were 
faced with the prospect of incurring significant losses on their 
investments in the Securities, particularly the ``inverse floaters'' 
and ``Z tranche'' CMOs.8
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    \8\ The Department is expressing no opinion in this proposed 
exemption regarding whether the acquisition and holding of the CMOs 
by the Plans violated any of the fiduciary responsibility provisions 
of Part 4 of Title I of the Act.
    The Department notes that section 404(a) of the Act requires, 
among other things, that a fiduciary of a plan act prudently, solely 
in the interest of the plan's participants and beneficiaries, and 
for the exclusive purpose of providing benefits to participants and 
beneficiaries when making investment decisions on behalf of a plan. 
Section 404(a) of the Act also states that a plan fiduciary should 
diversify the investments of a plan so as to minimize the risk of 
large losses, unless under the circumstances it is clearly prudent 
not to do so.
    In this regard, the Department is not providing any opinion as 
to whether a particular category of investments or investment 
strategy would be considered prudent or in the best interests of a 
plan as required by section 404 of the Act. The determination of the 
prudence of a particular investment or investment course of action 
must be made by a plan fiduciary after appropriate consideration to 
those facts and circumstances that, given the scope of such 
fiduciary's investment duties, the fiduciary knows or should know 
are relevant to the particular investment or investment course of 
action involved, including the plan's potential exposure to losses 
and the role the investment or investment course of action plays in 
that portion of the plan's investment portfolio with respect to 
which the fiduciary has investment duties (see 29 CFR 2550.404a-1). 
The Department also notes that in order to act prudently in making 
investment decisions, a plan fiduciary must consider, among other 
factors, the availability, risks and potential return of alternative 
investments for the plan. Thus, a particular investment by a plan, 
which is selected in preference to other alternative investments, 
would generally not be prudent if such investment involves a greater 
risk to the security of a plan's assets than comparable investments 
offering a similar return or result.
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    8. In November and December 1994, the Banks obtained bids from 
various broker-dealers and pricing services in order to establish the 
fair market value of the CMOs and other Securities. The Banks received 
market price information on the Securities from Bloomberg Financial 
Markets (i.e. a well-known pricing service for CMOs), as well as bid 
quotations from Bear Stearns, Smith Barney, Alex Brown & Sons, Morgan 
Keegan, DLJ (i.e. Donaldson, Lufkin & Jenrette), and Prudential 
Securities (the Broker-Dealers). All of the information received 
confirmed that the fair market value of the Securities was below their 
book value (i.e. either the outstanding principal balance or the 
amortized cost).
    The Banks represent that ten (10) of the twenty-six (26) total 
Securities held by the Plans were sold on the open market on November 
2, 1994, for $1,156,028.46.9 This transaction included six (6) of 
the CMOs and all four (4) of the Securities that were not CMOs. The 
Securities were sold after the Banks obtained bids for the Securities, 
on an all or nothing basis, from all of the Broker-Dealers. After 
obtaining bids from the Broker-Dealers, the Banks sold these Securities 
to Prudential Securities (Prudential) because it was the broker with 
the highest average total bid for all of the Securities that were 
involved. The bids obtained by the Banks for all of these Securities 
were as follows:
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    \9\ These Securities were the following: (1) FHLMC REMIC--PAC 
Series 1059, Class F, CUSIP #312905MB5; (2) FHLMC REMIC--PAC Series 
1459, Class P, CUSIP #312914DV3; (3) FHLMC REMIC--PAC Series 1551, 
Class E, CUSIP #312916XX2; (4) FHLB Structured Note, CUSIP 
#313389FC7; (5) FHLMC REMIC--TAC Series 1580, Class H, CUSIP 
#3133TOA7; (6) FNMA Note, CUSIP #31359CAL9; (7) FNMA REMIC--
Scheduled Amortization Class Series 1993-168, Class N, CUSIP 
#31359DQH9; (8) FNMA Medium Term Note, CUSIP #31364AJ37; (9) FNMA 
Medium Term Note, CUSIP #31364AVX7; and (10) GE Capital Mortgage 
Services REMIC--PAC Series 1993-13, Class A6, CUSIP #36157LSB5.
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    (a) Alex Brown--77.944; (b) Bear Stearns--76.996; (c) Morgan 
Keegan--76.996; (d) Smith Barney--77.913; (e) DLJ--77.364; and (f) 
Prudential--78.068.10
---------------------------------------------------------------------------

    \10\ The Broker-Dealers' bids represent a price quoted per $100 
of principal. To determine the price for the Securities received by 
the Banks based on the average bid quoted, the par value of the 
Securities would be multiplied by the particular quote, expressed as 
a percentage of 100. For example, if the par value of the Securities 
was $100,000 and the average bid for the Securities was $78.50 per 
$100 of principal, the quoted price would have been $78,500 since 
$100,000  x  .7850 = $78,500.
---------------------------------------------------------------------------

    After the sale of these Securities to Prudential, the Banks made 
the Plans ``whole'' for their losses on the investments. In this 
regard, the Plans received separate ``makewhole'' payments from PNC, 
the Banks' holding company, on January 20, 1995, of $210,725. These 
``makewhole'' payments equalled the difference between the book value 
(as discussed in Paragraph 12 below) of the Securities at the time of 
sale and the market price received from the sale of the Securities to 
Prudential. The Banks represent that the Plans involved will also 
receive additional payments, as of the date the proposed exemption is 
granted, reflecting a reasonable rate of interest for the period from 
November 2, 1994 (the date of the sale of these Securities on the open 
market) until January 20, 1995 (the date such payments were made to the 
Plans).11
---------------------------------------------------------------------------

    \11\ The Banks state that the interest on this ``makewhole'' 
payment for the 2.5 month period would be approximately $1,720.43.
---------------------------------------------------------------------------

    Since the ``makewhole'' payments made on January 20, 1995 were a 
transaction between the Plans and PNC, a party in interest with respect 
to the Plans, the Banks request that the proposed exemption cover such 
``makewhole'' payments. There will also be additional ``makewhole'' 
payments made to the Plans, as of the date the proposed exemption is 
granted, to reflect the additional amounts owned to the Plans based on 
the difference between the book value (i.e. outstanding principal 
balance) and the amortized cost of some of the Securities, where the 
latter amount would have been greater at the time of the transaction 
(as discussed further below).
    9. On December 28, 1994, the Banks sold fifteen (15) of the 
remaining sixteen (16) Securities from the Plans to PNC for 
$3,069,187.54.12
---------------------------------------------------------------------------

    \ 12\ These Securities were the following: (1) FHLMC REMIC--Z 
Tranche Series 1393, Class J, CUSIP #312912SQ2; (2) FHLMC REMIC--Z 
Tranche Series 1411, Class ZA, CUSIP #312912X45; (3) FHLMC REMIC--
Inverse Floater Series 1438, Class F, CUSIP #312913TJ5; (4) FHLMC 
REMIC--Inverse Floater Series 1625, Class SB, CUSIP #3133T22Q2; (5) 
FHLMC REMIC--Inverse Floater Series 1660, Class S, CUSIP #3133T3QK7; 
(6) FHLMC REMIC--Inverse Floater Series 1665, Class S, CUSIP 
#3133T3RD2; (7) FNMA REMIC--Inverse Floater Series 1993-102, Class 
S, CUSIP #31359AR43; (8) FNMA REMIC--Inverse Floater Series 1993-
115, Class SE, CUSIP #31359BDT1; (9) FNMA REMIC--Inverse Floater 
Series 1993-185, Class SH, CUSIP #31359DU50; (10) FNMA REMIC--
Inverse Floater Series G93-31, Class SD, CUSIP #31359DZW6; (11) 
FHLMC REMIC--Inverse Floater Series 1385, Class S, CUSIP #312912KK3; 
(12) FNMA REMIC--Z Tranche Series 1992-123, Class Z, CUSIP 
#31358N4F6; (13) FNMA REMIC--Inverse Floater Series 1992-129, Class 
S, CUSIP #31358N7D8; (14) FNMA REMIC--Inverse Floater Series G93-14, 
Class S, CUSIP #31358TX87; and (15) FNMA REMIC--Principal Only (PO) 
Series 1993-161, Class GC, CUSIP #31359BXX0.
---------------------------------------------------------------------------

    The Securities were sold for cash at an amount equal to the book 
value of the Securities, as calculated by the Banks, at the time of the 
transaction (as discussed further in Paragraph 12 below).
    10. Prior to the transaction on December 28, 1994, the Banks 
obtained bid quotations for each of the Securities from Bear Stearns, 
Smith Barney, and Alex Brown & Sons, as well as market price 
information from Bloomberg Financial Markets (Bloomberg). All of the 
quotations received from these Broker-Dealers and the information

[[Page 57466]]

obtained from Bloomberg showed that the fair market value of the 
Securities was below their book value as of December 15, 1994. The 
following chart shows the market price information from Bloomberg for 
each of the Securities involved in the sale to PNC on December 28, 
1994.

------------------------------------------------------------------------
                                                               Bloomberg
                      Securities (CMOs)                          market 
                                                                 price  
------------------------------------------------------------------------
FHLMC REMIC--Z Tran. 1393, Class J...........................     89.688
FHLMC REMIC--Z Tran. 1411, Class ZA..........................     57.500
FHLMC REMIC--Inv. Fl. 1438, Class F..........................     82.000
FHLMC REMIC--Inv. Fl. 1625, Class SB.........................     77.313
FHLMC REMIC--Inv. Fl. 1660, Class S..........................     60.094
FHLMC REMIC--Inv. Fl. 1665, Class S..........................     66.469
FNMA REMIC--Inv. Fl. 1993-102, Class S.......................     39.281
FNMA REMIC--Inv. Fl. 1993-115, Class SE......................     33.219
FNMA REMIC--Inv. Fl. 1993-185, Class SH......................     78.063
FNMA REMIC--Inv. Fl. G93-31, Class SD........................     71.188
FHLMC REMIC--Inv. Fl. 1385, Class S..........................     63.656
FNMA REMIC--Z Tran. 1992-123, Class Z........................     79.719
FNMA REMIC--Inv. Fl. 1992-129, Class S.......................     98.813
FNMA REMIC--Inv. Fl. G93-14, Class S.........................     20.500
FNMA REMIC--PO 1993-161, Class GC............................     19.375
------------------------------------------------------------------------

    11. On January 13, 1995, the Banks sold the last remaining Security 
(i.e. the GE Capital Mortgage Services REMIC--Inverse Floater Series 
1993-17, Class A20) from the Plans to PNC for $187,055.19, an amount 
which represented the book value of the Securities at the time of the 
transaction. The Banks represent that no bids were obtained from any of 
the Broker-Dealers for this transaction because information from 
Bloomberg indicated that the market price for the Security would be 
approximately 21.65, an amount far below its book value at the time of 
the transaction.
    12. The total sales proceeds received by the Plans for the 
Securities (including the ``makewhole'' payments of $210,725 paid in 
connection with certain Securities sold on the open market) was 
$4,622,996.19. The Banks state that this amount, which was based on the 
book value of the Securities at the time of the transactions, far 
exceeded the fair market value of the Securities at the time of the 
transactions.13
---------------------------------------------------------------------------

    \13\ The Banks note that the original cost of the Securities for 
the Plans totalled $5,681,892.89. The Plans had been paid 
$427,284.38 in interest and $1,156,914.74 in principal prior to the 
transactions.
---------------------------------------------------------------------------

    In this regard, the ``book value'' of the Securities was determined 
by the Banks to be equal to the outstanding principal balance of the 
Securities at the time of the transaction, plus accrued but unpaid 
interest. However, the Banks subsequently determined that in some cases 
the amortized cost of the Securities,14 as calculated by the 
Banks, was greater than the outstanding principal balance of the 
Securities. The amortized cost of certain Securities slightly exceeded 
their outstanding principal balance in situations where the Securities 
were initially purchased by the Plans at a discount to their face 
value. The Banks state that a total of eleven (11) of the Securities 
were bought by the Plans at a discount. The difference between the 
amount paid by PNC to the Plans, based on the outstanding principal 
balance of the Securities, and the amount that would have been paid if 
the amortized cost method had been used for the Securities bought at a 
discount, resulted in an ``underpayment'' of $21,876.89.
---------------------------------------------------------------------------

    \14\ The Banks state that the formula used to determine the 
amortized cost of these Securities was as follows: [[Purchase 
Price--100/WAL x 12] x [WAL x 12--months held]]+100. For example, 
assume that a particular CMO investment has been held by a Plan for 
6 months. If the WAL was 2.02 years and the purchase price was 90 
based on the par value being 100, the formula would be:
    [[(90-100)/(2.02 x 12)] x [(2.02 x 12)-6)]]+100
    =[(-10/24.24) x (24.24-6)]+100
    =(-.4125413 x 18.24)+100
    +-7.5247533+100
    =92.475247
    As the formula indicates, the amortized cost using the average 
life at purchase would be $92.475247 as compared to the purchase 
price of $90.00. This amortized cost formula allows the ``book 
value'' to reflect the yield to the Plan based on the purchase of 
the security at a discount from the face value and accretes this 
discount over the WAL for the security.
---------------------------------------------------------------------------

    The Banks represent that PNC is prepared to pay this additional 
amount (plus a reasonable rate of interest on such amount) 15 to 
the affected Plans as of the date this proposed exemption is granted.
---------------------------------------------------------------------------

    \15\ The Banks state that as of September 1996, the interest on 
the additional amount owed would be equal to approximately 
$2,297.07, using an annual rate of 6 percent for the 21-month period 
since the transaction.
---------------------------------------------------------------------------

    In addition, the Banks state that there is accrued but unpaid 
interest of approximately $12,194.62, which is still owed to the Plans 
on the Securities involved in the transaction with PNC that occurred on 
December 28, 1994. The Banks represent that PNC will pay this remaining 
accrued interest due on the Securities (plus a reasonable rate of 
interest on such amount) 16 to the affected Plans as of the date 
this proposed exemption is granted.
---------------------------------------------------------------------------

    \16\ The Banks state that as of September 1996, the interest on 
this remaining interest amount would be equal to approximately 
$1,280.44, using an annual rate of 6 percent for the 21-month period 
since the transaction.
---------------------------------------------------------------------------

    Therefore, the Plans will receive a total amount that is equal to 
the greater of: (i) the outstanding principal balance for each Security 
owned by the Plan, plus accrued but unpaid interest, at the time of the 
sale; (ii) the amortized cost for each Security owned by the Plan on 
the date of the sale, plus accrued but unpaid interest, as determined 
by the Banks; or (iii) the fair market value of each Security owned by 
the Plan as determined by the Banks from broker-dealers or pricing 
services independent of the Banks at the time of the sale. In addition, 
the Plans will receive a reasonable rate of interest on any additional 
amounts owed to the Plans.
    13. The Banks represent that the Plans received a reasonable rate 
of return on the Securities during the period of time that such 
Securities were held by the Plans. The annualized rate of return for 
each Security during this time varied from between 24.63 percent to 
0.53 percent. The weighted average annual rate of return on the 
Securities was approximately 8.32 percent. The Banks state that the 
expected yield on the Securities at the time of purchase exceeded the 
yield for other similar fixed income securities of comparable duration. 
With respect to the actual yields to the Plans on the Securities, the 
Banks state that an analysis of each of the Securities held by the 
Plans reveals that the Securities outperformed the rate of return of 
leading investment indices for similar fixed-income securities during 
the period of time that they were held by the Plans. Therefore, the 
Banks represent that each of the Plans that held these Securities 
outperformed the rate of return of an appropriate index of fixed-income 
securities during this period.
    14. The Banks, as trustee of the Plans, represent that the sale of 
the Securities was in the best interests of the Plans and their 
participants and beneficiaries at the time of the transactions. The 
Banks state that the sale transactions insulated the Plans from further 
decreases in the fair market value of the Securities. Specifically, the 
Banks state that the sale of the Securities by the Plans to Prudential 
on November 2, 1994, at their fair market value, plus the ``makewhole'' 
payments made to the Plans by PNC on January 20, 1995, made the Plans 
involved ``whole'' for the

[[Page 57467]]

actual losses they would have otherwise incurred. In addition, the Bank 
states that the sale of the other Securities (CMOs) by the Plans to PNC 
on December 28, 1994 and January 13, 1995 provided the Plans with an 
amount which exceeded the fair market value of the Securities at the 
time of the transactions. Finally, the Banks state that the additional 
``makewhole'' payments for the book value adjustments based on the 
amortized cost of some of the Securities, and the additional payments 
for accrued but unpaid interest on some of the Securities (plus a 
reasonable rate of interest on such amounts), will be paid to the Plans 
as of the date that the exemption is granted.
    15. The Banks represent that they took all appropriate actions 
necessary to safeguard the interests of the Plans and their 
participants and beneficiaries in connection with the sale 
transactions. The Banks ensured that each Plan received the appropriate 
amount of cash from PNC in exchange for such Plan's Securities. The 
Banks also ensured that the Plans did not pay any commissions or other 
expenses in connection with the sale of the Securities.
    16. In summary, the Bank represents that the sale satisfied the 
statutory criteria of section 408(a) of the Act and section 4975 of the 
Code because: (a) each sale was a one-time transaction for cash; (b) 
each Plan has received or will receive a total amount for its 
Securities, including the sale proceeds and ``makewhole'' payments for 
transactions that occurred either on the open market or with PNC, which 
is equal to the greater of: (i) the outstanding principal balance for 
each Security owned by the Plan, plus accrued but unpaid interest, at 
the time of the sale, (ii) the amortized cost for each Security owned 
by the Plan on the date of the sale, plus accrued but unpaid interest, 
as determined by the Banks; or (iii) the fair market value of each 
Security owned by the Plan as determined by the Banks based on 
information obtained from independent third party sources at the time 
of the transactions; (c) the Plans will receive a reasonable rate of 
interest on any additional amounts owed to the Plans as of the date 
this proposed exemption is granted; (d) the Plans did not pay any 
commissions or other expenses with respect to the sales; (e) the Banks, 
as trustee of the Plans, determined that the sale of the Securities 
would be in the best interests of the Plans; (f) the Banks took all 
appropriate actions necessary to safeguard the interests of the Plans 
and their participants and beneficiaries in connection with the 
transactions; and (g) the Plans received a reasonable rate of return on 
the Securities during the period of time that they were held by the 
Plans.

Notice to Interested Persons

    The applicant states that notice of the proposed exemption shall be 
made by first class mail to the appropriate Plan fiduciaries within 
fifteen 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 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.)

Univar Corporation Uni$aver Tax Savings Investment Plan (the Plan), 
Located in Kirkland, Washington

[Application No. D-10143]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a) and 406(b)(1) and 
(b)(2) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(E) of the Code, shall not apply to the proposed extension of credit in 
the form of guarantees and loans of funds (the Loans), not to exceed 
$1,466,785.38, to the Plan by Univar Corporation (the Employer), the 
sponsor of the Plan, or its successors, with respect to Guaranteed 
Investment Contract No. 62127 (the GIC) issued by Confederation Life 
Insurance Company of Canada (Confederation), and the repayment of the 
Loans by the Plan to the Employer, or its successors, provided the 
following conditions are satisfied: (a) All terms and conditions of the 
transactions are no less favorable to the Plan than those the Plan 
could receive in arm's-length transactions with unrelated parties; (b) 
No interest payments or other expenses will be incurred by the Plan 
with respect to the transactions; (c) Repayment of the loans will be 
made from proceeds realized from the GIC (the GIC Proceeds) as paid to 
the Plan by Confederation, its successors, or any other third-party, 
and made only if the repayments do not interfere with the liquidity 
needs of the Plan for payment of benefits, transfer of investments, 
hardship withdrawals or loans as determined by BZW Barclays Global 
Investors, N.A., the Plan trustee; (d) Repayment of the Loans will be 
waived by the Employer and its successors to the extent the Loans 
exceed the GIC Proceeds, and (e) All unpaid principal and interest that 
was due under the GIC on August 12, 1994, minus any Loans from the 
Employer and/or payments received under the GIC after August 12, 1994, 
will be completely paid by January 1, 2000, by a Loan to the Plan from 
the Employer or its successors.

Summary of Facts and Representations

    1. The Employer, a Washington corporation, is an international 
distributor of industrial, agricultural, and pest control chemicals and 
related products and services. The Employer purchases chemicals from 
manufacturers in truck, railcar, or tank car quantities and sells the 
chemicals in smaller quantities to its customers. The Employer operates 
through three wholly-owned subsidiaries: Van Waters & Rogers, Inc.; Van 
Waters & Rogers, Ltd.; and Univar Europe, N.V.
    On September 30, 1996, all of the Employer's outstanding shares of 
common stock were acquired by Royal Pakhoed, N.V. (Pakhoed), a 
Netherlands company, through a friendly tender offer and merged with 
Pakhoed USA, Inc. a United States subsidiary of Pakhoed. The applicant 
represents that the surviving corporation is subject to all the 
obligations and liabilities of the Employer and is expected to continue 
the business and operations of the Employer substantially as they have 
been conducted.
    2. The Plan is a defined contribution plan that is intended to 
satisfy the provisions of sections 401(a) and 401(k) of the Code, with 
employer matching contributions. As of June 30, 1996, the Plan had 
2,218 participants and beneficiaries and total assets of 
$60,687,828.85.
    The fiduciaries of the Plan are the Finance Committee of the Board 
of Directors of the Employer (the Finance Committee), the Pension 
Management Committee (Pension Committee), and the trustee, BZW Barclays 
Global Investors, N.A. (Barclays). The Finance Committee establishes 
the funding policy for the Plan and appoints and monitors the Pension 
Committee. The

[[Page 57468]]

Pension Committee consists of executives of the Employer, who inter 
alia, supervise the daily administration of the Plan. Barclays, a 
national bank of the United States, represents that it is a fiduciary 
with respect to the Plan and performs as trustee, investment manager, 
and outside recordkeeper for the Plan.
    The Pension Committee selects various funds that are offered by the 
Plan to its participants as investment vehicles for their individual 
accounts. Participants of the Plan can daily direct investments of the 
assets in their individual accounts among the various funds offered by 
the Plan.
    One of the funds offered by the Plan to participants is the Fixed 
Income Fund (the Fixed Fund), which invests in various guaranteed 
investment contracts issued by insurance companies. There are currently 
969 individual participant accounts of the Plan invested in the Fixed 
Fund.
    3. Among the assets of the Fixed Fund is the GIC, which represents 
approximately 2.4 percent of the total assets of the Plan. The GIC has 
an effective date of April 2, 1990, and an expiration date of April 5, 
1995, and was issued for the principal amount of $1,000,000 with a 
guaranteed interest rate of 9.18 percent compounded annually. The 
applicant represents that the GIC had a Book Value of $1,466,758.38 
(the Book Value), as of August 12, 1994, which represents the principal 
deposit plus accrued interest, and minus any withdrawals to that date.
    The applicant represents that the insurance regulators of Canada 
seized the assets of Confederation on August 11, 1994. The following 
day the Ingham County Circuit Court, Mason, Michigan placed the assets 
of Confederation located in the United States in conservatorship and 
rehabilitation proceedings under the administration of state insurance 
regulators, and all withdrawals and interest payments with respect to 
the GIC were suspended.17
---------------------------------------------------------------------------

      17 The Department notes that the decision to acquire and hold 
the GIC is governed by the fiduciary responsibility provisions of 
Part 4, Subtitle B of Title I of the Act. In this regard, the 
Department is not herein proposing relief for any violation of Part 
4 which may have arisen as a result of the acquisition and holding 
of the GIC by the Plan.
---------------------------------------------------------------------------

    After August 12, 1994. The trustee of the Plan has continued to 
value the GIC at its Book Value of $1,466,758.38, and has not placed 
restrictions with respect to contributions, loan withdrawals, 
transfers, and distributions into or out of the Fixed Fund.
    4. In order to maintain the Book Value of the GIC and the liquidity 
of the Fixed Fund and to avoid having to segregate the GIC from the 
Fixed Fund or suspend transfers from the Fixed Fund because of the GIC, 
the Employer proposes to guarantee and loan funds (the Loans) for a 
total amount not to exceed the Book Value of the GIC, as determined on 
August 12, 1994.18
---------------------------------------------------------------------------

    \ 18\ The Department notes that the exemption, if granted will 
not affect the ability of a participant or beneficiary to bring a 
civil action against plan fiduciaries for any breaches of section 
404 of the Act which may have occurred in connection with any aspect 
of the GIC transaction.
---------------------------------------------------------------------------

    The Loans will be unsecured and interest-free and made, as needed, 
to provide for withdrawals from the Fixed Fund of the Plan for benefit 
distributions, investment transfers, or hardship withdrawals and loans.
    The Employer also represents that it will make a final Loan to the 
Plan by January 1, 2000, that totals $1,466,785.38, minus any other 
Loans made to the Plan after August 12, 1994, and/or minus any payments 
received by the Plan from the GIC Proceeds after August 12, 1994.
    In addition, the applicant represents that the Plan will not incur 
any interest payments or other expenses from the Loans, and repayment 
of the Loans will be restricted to proceeds from the GIC as paid to the 
Plan by Confederation, its successors, or any other third-party. Also, 
the applicant represents that repayment of the Loans will be waived by 
the Employer, or its successors, to the extent the loans exceed the 
proceeds realized from the GIC by the Plan.
    Barclays in an agreement dated July 10, 1996, agrees to monitor and 
enforce the Employer's fulfillment of its obligations to the Plan to 
make the Loans to the Plan. In addition, if the Employer fails in its 
obligation of the Loans, Barclays will take prudent and appropriate 
action required to protect the interests of the Plan and its 
participants and beneficiaries. Barclays pledges to perform its duties 
in accordance with the fiduciary requirements of the Act.
    Barclays further represents that the undertakings by the Employer 
with respect to its promise to make the Loans as described in the 
exemption application, and the acceptance by the Plan of such 
undertakings are in the best interests of the Plan and its participants 
and beneficiaries.
    5. In summary, the applicant represents that the proposed 
transactions will satisfy the criteria for an exemption under section 
408(a) of the Act because (a) the Loans will enable the Plan to fund 
benefit payments and make loans, withdrawals, transfers, and 
distributions from the Fixed Fund of the Plan; (b) repayments of the 
Loans will be restricted to the proceeds realized from the GIC; (c) 
repayments will be restricted by liquidity needs of the Plan and waived 
by the Employer, or its successors, to the extent the Loans exceed the 
proceeds realized from the GIC by the Plan; and (d) no interest 
payments or other expenses will be incurred by the Plan with respect to 
the transactions.
    For Further Information Contact: Mr. C.E. Beaver of the Department, 
telephone (202) 523-8881. (This is not a toll-free number.)

BA Securities, Inc. (BA) Located in San Francisco, California

[Application No. D-10335]

Proposed Exemption

I. Transactions

    A. Effective August 29, 1996, 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.19
---------------------------------------------------------------------------

    \19\ 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).
---------------------------------------------------------------------------

    B. Effective August 29, 1996, 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

[[Page 57469]]

4975(c)(1)(E) of the Code shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) the plan is not an Excluded Plan;
    (ii) solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) a plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.20 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;
---------------------------------------------------------------------------

    \20\ 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.
---------------------------------------------------------------------------

    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certifi- cates, 
provided that the conditions set forth in paragraphs B.(1)(i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B. (1) or (2).
    C. Effective August 29, 1996, 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.21
---------------------------------------------------------------------------

    \21\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions.
---------------------------------------------------------------------------

    Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act or from 
the taxes imposed by reason of section 4975(c) of the Code for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. Effective August 29, 1996, 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 any transactions to which those restrictions 
or taxes would otherwise apply merely because a person is deemed to be 
a party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider described in 
section 3(14) (F), (G), (H) or (I) of the Act or section 4975(e)(2) 
(F), (G), (H) or (I) of the Code), solely because of the plan's 
ownership of certificates.

II. General Conditions

    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is in one of the three highest 
generic rating categories from either Standard & Poor's Corporation 
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc. 
(D & P) or Fitch Investors Service, Inc. (Fitch);
    (4) The trustee is not an affiliate of any member of the Restricted 
Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith; and
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance

[[Page 57470]]

with the Securities Act of 1933, any such transferees will be required 
to make a written representation regarding compliance with the 
condition set forth in subsection II.A.(6) above.

III. Definitions

    For purposes of this exemption:
    A. Certificate means:
    (1) a certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; and
    (b) that entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) a certificate denominated as a debt instrument--
    (a) that represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) within the meaning of section 860D(a) of the 
Internal Revenue Code of 1986; and
    (b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which BA 
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); \22\
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    \22\ It is the Department's view that the definition of 
``trust'' contained in III.B. includes a two-tier structure under 
which certificates issued by the first trust, which contains a pool 
of receivables described above, are transferred to a second trust 
which issues securities that are sold to plans. However, the 
Department is of the further view that, since the exemption provides 
relief for the direct or indirect acquisition or disposition of 
certificates that are not subordinated, no relief would be available 
if the certificates held by the second trust were subordinated to 
the rights and interests evidenced by other certificates issued by 
the first trust.
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    (2) property which had secured any of the obligations described in 
subsection B.(1);
    (3) undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to made 
to certificateholders; and
    (4) rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship and other credit support 
arrangements with respect to any obligations described in subsection 
B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) the investment pool consists only of 
assets of the type which have been included in other investment pools, 
(ii) certificates evidencing interests in such other investment pools 
have been rated in one of the three highest generic rating categories 
by S&P's, Moody's, D & P, or Fitch for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. Underwriter means:
    (1) BA;
    (2) any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
BA; or
    (3) any member of an underwriting syndicate or selling group of 
which BA or a person described in (2) is a manager or co-manager with 
respect to the certificates.
    D. Sponsor means the entity that organizes a trust by depositing 
obligations therein in exchange for certificates.
    E. Master Servicer means the entity that is a party to the pooling 
and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. Subservicer means an entity which, under the supervision of and 
on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. Servicer means any entity which services loans contained in the 
trust, including the master servicer and any subservicer.
    H. Trustee means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. Insurer means the insurer or guarantor of, or provider of other 
credit support for, a trust. Notwithstanding the foregoing, a person is 
not an insurer solely because it holds securities representing an 
interest in a trust which are of a class subordinated to certificates 
representing an interest in the same trust.
    J. Obligor means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. Excluded Plan means any plan with respect to which any member of 
the Restricted Group is a ``plan sponsor'' within the meaning of 
section 3(16)(B) of the Act.
    L. Restricted Group with respect to a class of certificates means:
    (1) each underwriter;
    (2) each insurer;
    (3) the sponsor;
    (4) the trustee;
    (5) each servicer;
    (6) any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) any affiliate of a person described in (1)-(6) above.
    M. Affiliate of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section

[[Page 57471]]

3(15) of the Act), a brother, a sister, or a spouse of a brother or 
sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. Control means the power to exercise a controlling influence over 
the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. Sale includes the entrance into a forward delivery commitment 
(as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's-length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. Forward delivery commitment means a contract for the purchase or 
sale of one or more certificates to be delivered at an agreed future 
settlement date. The term includes both mandatory contracts (which 
contemplate obligatory delivery and acceptance of the certificates) and 
optional contracts (which give one party the right but not the 
obligation to deliver certificates to, or demand delivery of 
certificates from, the other party).
    R. Reasonable compensation has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. Qualified Administrative Fee means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. Qualified Equipment Note Secured By A Lease means an equipment 
note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as would 
be the case if the equipment note were secured only by the equipment 
and not the lease.
    U. Qualified Motor Vehicle Lease means a lease of a motor vehicle 
where:
    (1) The trust holds a security interest in the lease;
    (2) The trust holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as would be the case if the 
trust consisted of motor vehicle installment loan contracts.
    V. Pooling and Servicing Agreement means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    W. BA means BA Securities, Inc. and its affiliates.
    The Department notes that this proposed exemption is included 
within the meaning of the term ``Underwriter Exemption'' as it is 
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60 
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions 
Involving Insurance Company General Accounts at 35932.

Summary of Facts and Representations

    1. BA is the wholly-owned, separately capitalized investment 
banking subsidiary of BankAmerica Corporation (the Bank), a multi-bank 
holding company which was incorporated in Delaware in 1968. On March 
31, 1996 the Bank's consolidated assets were approximately $234.2 
billion. The Bank is headquartered in San Francisco and, through its 
various subsidiaries, provides a diversified range of financial 
services to its customers. The Bank's depository subsidiaries provide 
consumer banking and other retail banking services. The Bank, through 
its banking and other subsidiaries, also provides wholesale banking and 
financial products and services throughout the United States and in 
overseas markets to business customers. These products and services 
encompass corporate lending, business finance, leasing, cash 
management, trade finance and investment banking services.
    BA was incorporated in 1986. It maintains its principal place of 
business in San Francisco, California, and has branch operations in 
Chicago, Los Angeles, New York, Atlanta and Portland.
    BA is a member of the National Association of Securities Dealers 
and a primary dealer in U.S. Treasury securities. BA also underwrites 
and deals in corporate debt securities, commercial paper, municipal 
securities, high-yield securities and asset-backed securities, provides 
private placement and corporate finance advisory services, including 
merger and acquisition advisory services, publishes research on a wide 
range of securities and issuers, and engages in syndication, arranging 
and trading of bank loans.
    BA and its predecessors, including Security Pacific Corporation and 
Continental Bank Corporation, have extensive experience in asset 
securitizations. BA has participated in securitization transactions as 
lead or co-manager of underwritten public offerings, and as private 
placement agent or commercial paper conduit agent/dealer for 
transactions backed by retail auto receivables, bank and retail credit 
cards, equipment loans and leases, manufactured housing loans, auto 
leases, unsecured consumer loans, dealer floor plan accounts, trade 
receivables and student loans.
    BA represents that it received Federal Reserve Board authorization 
to underwrite and deal in commercial paper, municipal revenue bonds, 
residential mortgage-related securities and consumer receivable-related 
securities. In October 1994, BA received Federal Reserve Board approval 
to underwrite and deal in corporate debt and equity securities. These 
orders are subject to the condition that BA does not derive more than 
10% of its total gross revenues from such activities. In addition, BA's 
affiliates have the power to sell interests in their own assets in the 
form of asset-backed securities.

Trust Assets

    2. BA seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following 
categories of trusts: (1) single and multi-family residential or 
commercial mortgage investment trusts; 23 (2) motor vehicle

[[Page 57472]]

receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.24
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    \ 23\ The Department notes that PTE 83-1 [48 FR 895, January 7, 
1983], a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. BA requests relief for single-family residential mortgages in 
this exemption because it would prefer one exemption for all trusts 
of similar structure. However, BA has stated that it may still avail 
itself of the exemptive relief provided by PTE 83-1.
    \24\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of plan assets 
(29 CFR 2510.3-101(i)) provides that where a plan acquires a 
guaranteed governmental mortgage pool certificate, the plan's assets 
include the certificate and all of its rights with respect to such 
certificate under applicable law, but do not, solely by reason of 
the plan's holding of such certificate, include any of the mortgages 
underlying such certificate. The applicant is requesting exemptive 
relief for trusts containing guaranteed governmental mortgage pool 
certificates because the certificates in the trusts may be plan 
assets.
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    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.25
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      25 Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
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Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee. The sponsor or 
servicer of a trust selects assets to be included in the trust. These 
assets are receivables which may have been originated by a sponsor or 
servicer of the trust, an affiliate of the sponsor or servicer, or by 
an unrelated lender and subsequently acquired by the trust sponsor or 
servicer.26
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    \26\ It is the view of the Department that section III.B.(4) 
includes within the definition of the term ``trust'' rights under 
any yield supplement or similar arrangement which obligates the 
sponsor or master servicer, or another party specified in the 
relevant pooling and servicing agreement, to supplement the interest 
rates otherwise payable on the obligations described in section 
III.B.(1), in accordance with the terms of a yield supplement 
arrangement described in the pooling and servicing agreement, 
provided that such arrangements do not involve swap agreement or 
other notional principal contracts.
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    On or prior to the closing date, the sponsor acquires legal title 
to all assets selected for the trust, establishes the trust and 
designates an independent entity as trustee. On the closing date, the 
sponsor conveys to the trust legal title to the assets, and the trustee 
issues certificates representing fractional undivided interests in the 
trust assets. BA, alone or together with other broker-dealers, acts as 
underwriter or placement agent with respect to the sale of the 
certificates. All of the public offerings of certificates presently 
contemplated are to be underwritten by BA on a firm commitment basis.
    In addition, BA anticipates that it may privately place 
certificates on both a firm commitment and an agency basis. BA may also 
act as the lead underwriter for a syndicate of securities underwriters.
    Certificateholders will be entitled to receive monthly, quarterly 
or semi-annual installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificateholders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from obligors by the servicer may be commingled with the 
servicer's assets during the month prior to deposit. Usually, the 
period of time between receipt of funds by the servicer and deposit of 
these funds in a segregated account does not exceed one month. 
Furthermore, in those cases where distributions are made semi-annually, 
the servicer will furnish a report on the operation of the trust to the 
trustee on a monthly basis. At or about the time this report is 
delivered to the trustee, it will be made available to 
certificateholders and delivered to or made available to each rating 
agency that has rated the certificates.
    5. Some of the certificates will be multi-class certificates. BA 
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.27
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    \27\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(1)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this 
exemption.
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    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. Interest and/or principal 
payments received on the underlying receivables are distributed first 
to the class of certificates having the earliest stated maturity of 
principal, and/or earlier payment schedule, and only when that class of 
certificates has been paid in full (or has received a specified amount) 
will distributions be made with respect to the second class of 
certificates. Distributions on certificates having later stated 
maturities will proceed in like manner until all the certificateholders 
have been paid in full. The only difference between this multi-class 
pass-through arrangement and a single-class pass-through arrangement is 
the order in which distributions are made to certificateholders. In 
each case, certificateholders will have a beneficial ownership interest 
in the underlying assets. In neither case will the rights of a plan 
purchasing a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.28
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    \28\ If a trust issues subordinated certificates, holders of 
such subordinated certificates may not share in the amount 
distributed on a pro rata basis with the senior certificateholders. 
The Department notes that the exemption does not provide relief for 
plan investment in such subordinated certificates.

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[[Page 57473]]

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

Parties to Transactions

    7. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a homeowner or automobile 
purchaser, or leases property to a lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their business, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    8. The sponsor will be one of three entities: (i) a special-purpose 
or other corporation unaffiliated with the servicer, (ii) a special-
purpose or other corporation affiliated with the servicer, or (iii) the 
servicer itself. Where the sponsor is not also the servicer, the 
sponsor's role will generally be limited to acquiring the receivables 
to be included in the trust, establishing the trust, designating the 
trustee, and assigning the receivables to the trust.
    9. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and as such is 
responsible for enforcing all the rights created thereby in favor of 
certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to BA, the trust sponsor or the servicer. BA represents that 
the trustee will be a substantial financial institution or trust 
company experienced in trust activities. The trustee receives a fee for 
its services, which will be paid by the servicer or sponsor. The method 
of compensating the trustee which is specified in the pooling and 
servicing agreement will be disclosed in the prospectus or private 
placement memorandum relating to the offering of the certificates.
    10. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a trust, the receivables may be 
``subserviced'' by their respective originators and a single entity may 
``master service'' the pool of receivables on behalf of the owners of 
the related series of certificates. Where this arrangement is adopted, 
a receivable continues to be serviced from the perspective of the 
borrower by the local subservicer, while the investor's perspective is 
that the entire pool of receivables is serviced by a single, central 
master servicer who collects payments from the local subservicers and 
passes them through to certificateholders.
    Receivables of the type suitable for inclusion in a trust 
invariably are serviced with the assistance of a computer. After the 
sale, the servicer keeps the sold receivables on the computer system in 
order to continue monitoring the accounts. Although the records 
relating to sold receivables are kept in the same master file as 
receivables retained by the originator, the sold receivables are 
flagged as having been sold. To protect the investor's interest, the 
servicer ordinarily covenants that this ``sold flag'' will be included 
in all records relating to the sold receivables, including the master 
file, archives, tape extracts and printouts.
    The sold flags are invisible to the obligor and do not affect the 
manner in which the servicer performs the billing, posting and 
collection procedures related to the sold receivables. However, the 
servicer uses the sold flag to identify the receivables for the purpose 
of reporting all activity on those receivables after their sale to 
investors.
    Depending on the type of receivable and the details of the 
servicer's computer system, in some cases the servicer's internal 
reports can be adapted for investor reporting with little or no 
modification. In other cases, the servicer may have to perform special 
calculations to fulfill the investor reporting responsibilities. These 
calculations can be performed on the servicer's main computer, or on a 
small computer with data supplied by the main system. In all cases, the 
numbers produced for the investors are reconciled to the servicer's 
books and reviewed by public accountants.
    The underwriter will be a registered broker-dealer that acts as 
underwriter or placement agent with respect to the sale of the 
certificates. Public offerings of certificates are generally made on a 
firm commitment basis. Private placement of certificates may be made on 
a firm commitment or agency basis. It is anticipated that the lead and 
co-managing underwriters will make a market in certificates offered to 
the public.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (although they may 
themselves be related) will be unrelated to BA. In other cases, 
however, affiliates of BA may originate or service receivables included 
in a trust or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    11. In some cases, the sponsor will obtain the receivables from 
various originators pursuant to existing contracts with such 
originators under which the sponsor continually buys receivables. In 
other cases, the sponsor will purchase the receivables at fair market 
value from the originator or a third party pursuant to a purchase and 
sale agreement related to the specific offering of certificates. In 
other cases, the sponsor will originate the receivables itself.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters.

[[Page 57474]]

    12. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and expectations as to the 
likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.\29\ 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.
---------------------------------------------------------------------------

    \29\ The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
---------------------------------------------------------------------------

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

Purchase of Receivables by the Servicer

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

Certificate Ratings

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

Provision of Credit Support

    19. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) from the credit support provider (which 
may be the master servicer or an affiliate thereof) or, (c) in the case 
of a trust that issues subordinated certificates, from amounts 
otherwise distributable to holders of subordinated certificates, and 
the master servicer will advance such funds in a timely manner. When 
the servicer is the provider of the credit support and provides its own 
funds to cover defaulted payments, it will do so either on the 
initiative of the trustee, or

[[Page 57475]]

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

Disclosure

    20. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, and any material risk factors with 
respect to the certificates;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets and the trustee's remedy for any breach thereof; 
a description of the procedures for collection of payments on 
receivables and for making distributions to investors, and a 
description of the accounts into which such payments are deposited and 
from which such distributions are made; identification of the servicing 
compensation and any fees for credit enhancement that are deducted from 
payments on receivables before distributions are made to investors; a 
description of periodic statements provided to the trustee, and 
provided to or made available to investors by the trustee; and a 
description of the events that constitute events of default under the 
pooling and servicing contract and a description of the trustee's and 
the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors; and
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates.
    21. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    22. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and

[[Page 57476]]

Annual Reports on Form 10-K, many trusts obtain, by application to the 
Securities and Exchange Commission, a complete exemption from the 
requirement to file quarterly reports on Form 10-Q and a modification 
of the disclosure requirements for annual reports on Form 10-K. If such 
an exemption is obtained, these trusts normally would continue to have 
the obligation to file current reports on Form 8-K to report material 
developments concerning the trust and the certificates. While the 
Securities and Exchange Commission's interpretation of the periodic 
reporting requirements is subject to change, periodic reports 
concerning a trust will be filed to the extent required under the 
Securities Exchange Act of 1934.
    23. At or about the time distributions are made to 
certificateholders, a report will be delivered to the trustee as to the 
status of the trust and its assets, including underlying obligations. 
Such report will typically contain information regarding the trust's 
assets, payments received or collected by the servicer, the amount of 
prepayments, delinquencies, servicer advances, defaults and 
foreclosures, the amount of any payments made pursuant to any credit 
support, and the amount of compensation payable to the servicer. Such 
report also will be delivered to or made available to the rating agency 
or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the servicer, 
paying agent or trustee summarizing information regarding the trust and 
its assets. Such statement will include information regarding the trust 
and its assets, including underlying receivables. Such statement will 
typically contain information regarding payments and prepayments, 
delinquencies, the remaining amount of the guaranty or other credit 
support and a breakdown of payments between principal and interest.

Forward Delivery Commitments

    24. To date, no forward delivery commitments have been entered into 
by BA in connection with the offering of any certificates, but BA may 
contemplate entering into such commitments. The utility of forward 
delivery commitments has been recognized with respect to offering 
similar certificates backed by pools of residential mortgages, and BA 
may find it desirable in the future to enter into such commitments for 
the purchase of certificates.

Secondary Market Transactions

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

Retroactive Relief

    26. BA represents that it has not engaged in transactions related 
to mortgage-backed and asset-backed securities based on the assumption 
that retroactive relief would be granted prior to the date of their 
application. However, BA requests the exemptive relief granted to be 
retroactive to August 29, 1996, the date of their application, and 
would like to rely on such retroactive relief for transactions entered 
into prior to the date exemptive relief may be granted.

Summary

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

Discussion of Proposed Exemption

I. Differences Between Proposed Exemption and Class Exemption PTE 83-1

    The exemptive relief proposed herein is similar to that provided in 
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain 
Transactions Involving Mortgage Pool Investment Trusts, amended and 
restated as PTE 83-1 [48 FR 895, January 7, 1983].
    PTE 83-1 applies to mortgage pool investment trusts consisting of 
interest-bearing obligations secured by first or second mortgages or 
deeds of trust on single-family residential property. The exemption 
provides relief from sections 406(a) and 407 for the sale, exchange or 
transfer in the initial issuance of mortgage pool certificates between 
the trust sponsor and a plan, when the sponsor, trustee or insurer of 
the trust is a party-in-interest with respect to the plan, and the 
continued holding of such certificates, provided that the conditions 
set forth in the exemption are met. PTE 83-1 also provides exemptive 
relief from section 406(b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the 
trust is a fiduciary with respect to the plan assets invested in such 
certificates, provided that additional conditions set forth in the 
exemption are met. In particular, section 406(b) relief is conditioned 
upon the approval of the transaction by an independent fiduciary. 
Moreover, the total value of certificates purchased by a plan must not 
exceed 25 percent of the amount of the issue, and at least 50 percent 
of the aggregate amount of the issue must be acquired by persons 
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1 
provides conditional exemptive relief from section 406(a) and (b) of 
the Act for transactions in connection with the servicing and operation 
of the mortgage trust.
    Under PTE 83-1, exemptive relief for the above transactions is 
conditioned upon the sponsor and the trustee of the mortgage trust 
maintaining a system for insuring or otherwise protecting the pooled 
mortgage loans and the property securing such loans, and for 
indemnifying certificateholders against reductions in pass-through 
payments due to defaults in loan payments or property damage. This 
system must provide such protection and indemnification up to an amount 
not less than the greater of one percent of the aggregate principal 
balance of all trust mortgages or the principal balance of the largest 
mortgage.
    The exemptive relief proposed herein differs from that provided by 
PTE 83-1 in the following major respects: (1) The proposed exemption 
provides individual exemptive relief rather than class relief; (2) The 
proposed exemption covers transactions involving trusts containing a 
broader range of assets than single-family residential mortgages; (3) 
Instead of requiring a system for insuring the pooled receivables, the 
proposed exemption conditions relief upon the certificates having 
received one of the three highest ratings available from S&P's, 
Moody's, D&P or Fitch (insurance or other credit support would be 
obtained only to the extent necessary for the certificates to attain 
the desired rating); and (4) The proposed exemption provides more

[[Page 57477]]

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.30
---------------------------------------------------------------------------

    \30\ In referring to different ``types'' of asset-backed 
securities, the Department means certificates representing interests 
in trusts containing different ``types'' of receivables, such as 
single family residential mortgages, multi-family residential 
mortgages, commercial mortgages, home equity loans, auto loan 
receivables, installment obligations for consumer durables secured 
by purchase money security interests, etc. The Department intends 
this condition to require that certificates in which a plan invests 
are of the type that have been rated (in one of the three highest 
generic rating categories by S&P's, D&P, Fitch or Moody's) and 
purchased by investors other than plans for at least one year prior 
to the plan's investment pursuant to the proposed exemption. In this 
regard, the Department does not intend to require that the 
particular assets contained in a trust must have been ``seasoned'' 
(e.g., originated at least one year prior to the plan's investment 
in the trust).
---------------------------------------------------------------------------

III. Limited Section 406(b) and Section 407(a) Relief for Sales

    BA represents that in some cases a trust sponsor, trustee, 
servicer, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates may be a pre-existing party 
in interest with respect to an investing plan.31 In these cases, a 
direct or indirect sale of certificates by that party in interest to 
the plan would be a prohibited sale or exchange of property under 
section 406(a)(1)(A) of the Act.32 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.
---------------------------------------------------------------------------

    \31\ In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which BA or any of 
its affiliates is either (a) the sole underwriter or manager or co-
manager of the underwriting syndicate, or (b) a selling or placement 
agent.
    \32\ The applicant represents that where a trust sponsor is an 
affiliate of BA, 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 BA is not a fiduciary with 
respect to plan assets to be invested in certificates.
---------------------------------------------------------------------------

    Additionally, BA represents that a trust sponsor, servicer, 
trustee, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates representing an interest in 
a trust may be a fiduciary with respect to an investing plan. BA 
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, BA represents that to the extent there is a plan asset 
``look through'' to the underlying assets of a trust, the investment in 
certificates by a plan covering employees of an obligor under 
receivables contained in a trust may be prohibited by sections 406(a) 
and 407(a) of the Act.
    After consideration of the issues involved, the Department has 
determined to provide the limited sections 406(b) and 407(a) relief as 
specified in the proposed exemption.
    Notice to Interested Persons: The applicant represents that because 
those potentially interested participants and beneficiaries cannot all 
be identified, the only practical means of notifying such participants 
and beneficiaries of this proposed exemption is by the publication of 
this notice in the Federal Register. Comments and requests for a 
hearing must be received by the Department not later than 30 days from 
the date of publication of this notice of proposed exemption in the 
Federal Register.
    For Further Information Contact: Gary Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Zions Bancorporation and Affiliated Companies (Zions) Located in Salt 
Lake City, Utah

[Application No. L-10338]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of sections 406(a) and (b) of the Act shall not apply to the 
reinsurance of risks and the receipt of premiums therefrom by Zions 
Life Insurance Company (ZLIC) in connection with an insurance contract 
sold by American Bankers Life Insurance Company (AB) to provide group 
life and accidental death and dismemberment insurance to employees of 
Zions (the Plan), provided the following conditions are met:
    (a) ZLIC--
    (1) Is a party in interest with respect to the Plan by reason of a 
stock or partnership affiliation with Zions that is described in 
section 3(14) (E) or (G) of the Act,
    (2) Is licensed to sell insurance or conduct reinsurance operations 
in at least one State as defined in section 3(10) of the Act,
    (3) Has obtained a Certificate of Authority from the Insurance 
Commissioner of its domiciliary state which has neither been revoked 
nor suspended, and
    (4)(A) Has undergone an examination by an independent certified 
public accountant for its last completed taxable year immediately prior 
to the taxable year of the reinsurance transaction; or
    (B) Has undergone a financial examination (within the meaning of 
the law of its domiciliary State, Arizona) by the Insurance 
Commissioner of the State of Arizona within 5 years prior to the end of 
the year preceding the year in which the reinsurance transaction 
occurred.
    (b) The Plan pays no more than adequate consideration for the 
insurance contracts;
    (c) No commissions are paid with respect to the direct sale of such 
contracts or the reinsurance thereof; and
    (d) For each taxable year of ZLIC, the gross premiums and annuity 
considerations received in that taxable year by ZLIC for life and 
health insurance or annuity contracts for all employee benefit plans 
(and their employers) with respect to which ZLIC is a party in interest 
by reason of a relationship to such employer described in section 3(14) 
(E) or (G) of the Act does not exceed 50% of the gross premiums and 
annuity considerations received for all lines of insurance (whether 
direct insurance or reinsurance) in that taxable year by ZLIC. For 
purposes of this condition (d):
    (1) the term ``gross premiums and annuity considerations received'' 
means as to the numerator the total of premiums and annuity 
considerations received, both for the subject reinsurance transactions 
as well as for any direct sale or other reinsurance of life insurance, 
health insurance or

[[Page 57478]]

annuity contracts to such plans (and their employers) by ZLIC. This 
total is to be reduced (in both the numerator and the denominator of 
the fraction) by experience refunds paid or credited in that taxable 
year by ZLIC.
    (2) all premium and annuity considerations written by ZLIC for 
plans which it alone maintains are to be excluded from both the 
numerator and the denominator of the fraction.

Preamble

    On August 7, 1979, the Department published a class exemption 
[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44FR 46365] which 
permits insurance companies that have substantial stock or partnership 
affiliations with employers establishing or maintaining employee 
benefit plans to make direct sales of life insurance, health insurance 
or annuity contracts which fund such plans if certain conditions are 
satisfied.
    In PTE 79-41, the Department stated its views that if a plan 
purchases an insurance contract from a company that is unrelated to the 
employer pursuant to an arrangement or understanding, written or oral, 
under which it is expected that the unrelated company will subsequently 
reinsure all or part of the risk related to such insurance with an 
insurance company which is a party in interest with respect to the 
plan, the purchase of the insurance contract would be a prohibited 
transaction.
    The Department further stated that as of the date of publication of 
PTE 79-41, it had received several applications for exemption under 
which a plan or its employer would contract with an unrelated company 
for insurance, and the unrelated company would, pursuant to an 
arrangement or understanding, reinsure part or all of the risk with 
(and cede part or all of the premiums to) an insurance company 
affiliated with the employer maintaining the plan. The Department felt 
that it would not be appropriate to cover the various types of 
reinsurance transactions for which it had received applications within 
the scope of the class exemption, but would instead consider such 
applications on the merits of each individual case.

Summary of Facts and Representations

    1. Zions is a publicly traded bank holding company organized under 
the laws of the State of Utah in 1955. Zions provides a full range of 
banking and related services through its subsidiaries located in Utah, 
Nevada and Arizona. Zions has several subsidiaries, including a 
mortgage company, a life insurance company (ZLIC), an insurance agency 
company, and a securities brokerage company.
    2. ZLIC is a corporation organized under the laws of Arizona, its 
domiciliary state. ZLIC is a wholly owned subsidiary of Zions. ZLIC is 
principally in the business of reinsurance, primarily with respect to 
mortgage life and other credit life products. The applicant represents 
that $765,000 in premiums was written by ZLIC in 1995.
    3. Zions provides to its employees certain welfare benefits through 
the Plan. The Plan includes group life, dependent life, supplemental 
life and accidental death and dismemberment insurance issued by AB with 
respect to the employees of Zions. The Plan is a fully insured welfare 
plan within the meaning of section 3(1) of the Act. The Plan currently 
has approximately 2,400 participants and beneficiaries.
    4. The insurance is currently underwritten by AB, an unaffiliated 
insurance carrier. Zions has entered into a policy with AB for 100% of 
this coverage. Zions proposes to use its subsidiary, ZLIC, to reinsure 
50% of the risk through a reinsurance contract between ZLIC and AB in 
which AB would pay 50% of the premiums to ZLIC. From the participants' 
perspective, the participants have a binding contract with AB, which is 
legally responsible for the risk associated under the Plan. AB is 
liable to provide the promised coverage regardless of the proposed 
reinsurance arrangement.
    5. The applicant represents that the proposed transaction will not 
in any way affect the cost to the insureds of the group life insurance 
contracts, and the Plan will pay no more than adequate consideration 
for the insurance. Also, Plan participants are afforded insurance 
protection from AB at competitive rates arrived at through arm's-length 
negotiations. AB is rated ``A'' by the A. W. Best Company, whose 
insurance ratings are widely used in financial and regulatory circles. 
AB has assets in excess of $600 million. AB will continue to have the 
ultimate responsibility in the event of loss to pay insurance benefits 
to the employee's beneficiary. The applicant represents that ZLIC is a 
sound, viable company which is dependent upon insurance customers that 
are unrelated to itself and its affiliates for premium revenue.
    6. The applicant represents that the proposed reinsurance 
transaction will meet all of the conditions of PTE 79-41 covering 
direct insurance transactions:
    (a) ZLIC is a party in interest with respect to the Plan (within 
the meaning of section 3(14)(G) of the Act) by reason of stock 
affiliation with Zions, which maintains the Plan.
    (b) ZLIC is licensed to do business in Arizona.
    (c) ZLIC has undergone an examination by an independent certified 
public accountant for 1995.
    (d) ZLIC has received a Certificate of Authority from its 
domiciliary state, Arizona, which has neither been revoked nor 
suspended.
    (e) The Plan will pay no more than adequate consideration for the 
insurance. The proposed transaction will not in any way affect the cost 
to the insureds of the group life insurance transaction.
    (f) No commissions will be paid with respect to the acquisition of 
insurance by Zions from AB or the acquisition of reinsurance by AB from 
ZLIC.
    (g) For each taxable year of ZLIC, the ``gross premiums and annuity 
considerations received'' in that taxable year for group life and 
health insurance (both direct insurance and reinsurance) for all 
employee benefit plans (and their employers) with respect to which ZLIC 
is a party in interest by reason of a relationship to such employer 
described in section 3(14)(E) or (G) of the Act will not exceed 50% of 
the ``gross premiums and annuity considerations received'' by ZLIC from 
all lines of insurance in that taxable year. All of the premium income 
of ZLIC comes from reinsurance. ZLIC has received no premiums for the 
Plan insurance in the past. ZLIC wrote $765,000 in premiums in 1995, 
and the applicant estimates that the 1996 premiums should be 15-25% 
higher. In 1995, the premium income for ZLIC all came from AB, and 
represented reinsurance premiums relating to policies sold by AB to 
entities unrelated to Zions and its affiliates. Thus, 100% of ZLIC's 
premiums for 1995 were derived from insurance (or reinsurance thereon) 
sold to entities other than Zions and its affiliated group.
    7. In summary, the applicant represents that the proposed 
transaction will meet the criteria of section 408(a) of the Act 
because: a) Plan participants and beneficiaries are afforded insurance 
protection by AB, an ``A'' rated group insurer, at competitive market 
rates arrived at through arm's-length negotiations; b) ZLIC is a sound, 
viable insurance company which does a substantial amount of public 
business outside its affiliated group of companies; and c) each of the 
protections provided to the Plan and its participants and beneficiaries 
by PTE 79-41 will be met under the proposed reinsurance transaction.

    For Further Information Contact: Gary H. Lefkowitz of the 
Department,

[[Page 57479]]

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 1st day of November, 1996.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 96-28504 Filed 11-5-96; 8:45 am]
BILLING CODE 4510-29-P