[Federal Register Volume 64, Number 13 (Thursday, January 21, 1999)]
[Notices]
[Pages 3342-3358]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1271]
[[Page 3341]]
_______________________________________________________________________
Part II
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
Proposed Exemptions; Genito Urinary Surgeons, Inc., et al.; Notice
Federal Register / Vol. 64, No. 13 / Thursday, January 21, 1999 /
Notices
[[Page 3342]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10630 thru D-10632, et al.]
Proposed Exemptions; Genito Urinary Surgeons, Inc. Profit Sharing
Plan (GUS Plan); Michael J. Rosenberg Money Purchase Pension Plan
(Rosenberg Plan); Robert Savage Qualified Retirement Plan (Savage Plan)
(Collectively, the Plans)
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 restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests 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.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Genito-Urinary Surgeons, Inc. Profit Sharing Plan (GUS Plan); Michael
J. Rosenberg Money Purchase Pension Plan (Rosenberg Plan); Robert
Savage Qualified Retirement Plan (Savage Plan) (collectively, the
Plans) Located in Toledo, Ohio
[Application Nos. D-10630, D-10631 and D-10632, respectively]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 C.F.R. Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) the cash sale of certain shares of
preferred stock (the Preferred Stock) issued by TTC Holdings Inc. (TTC)
to TTC, by the individually-directed account of Dr. Gregor Emmert in
the GUS Plan (the Emmert Account), by the individually-directed account
of Mr. Michael J. Rosenberg in the Rosenberg Plan (the Rosenberg
Account), and by the individually-directed account of Mr. Robert Savage
in the Savage Plan (the Savage Account) (collectively, the Accounts);
and (2) the subsequent purchase of certain shares of common stock (the
Common Stock) issued by TTC by Messrs. Emmert, Rosenberg and Savage
(collectively; the Participants), in their own name, from TTC pursuant
to an agreement with TTC that the purchase of the Common Stock was to
occur immediately after the sale of the Preferred Stock by the Plans;
provided that the following conditions were met:
(a) The sale of the Preferred Stock to TTC by the Accounts and the
purchase of the Common Stock from TTC by the Participants, acting in
their individual capacity, were one-time transactions for cash;
(b) The transactions described in (a) above took place on the same
business day;
(c) The amount paid to the Accounts by TTC was the fair market
value of the Preferred Stock, as determined by a qualified independent
appraiser at the time of the sale;
(d) The Participants, in their individual capacity, purchased from
TTC shares of the Common Stock which were equal in number and value to
the shares of Preferred Stock sold by the Accounts to TTC;
(e) A qualified independent fiduciary (the Independent Fiduciary)
determined that the transactions described herein were in the best
interests and protective of the Accounts at the time of the
transactions; and
(f) The Independent Fiduciary supervised the transactions; assured
that the conditions of this proposed exemption were met; and took
whatever actions necessary to protect the interests of the Accounts,
including reviewing amounts paid by TTC for the Preferred Stock.
EFFECTIVE DATE: This exemption, if granted, will be effective as of
December 1, 1998.
Summary of Facts and Representations
1. The applicants describe the Plans and the Accounts as follows:
a. The GUS Plan is an individual account, defined contribution plan
sponsored by Genito-Urinary Surgeons, Inc., a medical practice located
in Toledo, Ohio. The trustee of the GUS Plan is the Fifth-Third Bank.
Currently, the GUS Plan has 45 participants and holds assets valued at
approximately $19,900,000. As of August 12, 1998 the Emmert Account
held assets valued at $1,480,734.07.
[[Page 3343]]
b. The Rosenberg Plan is an individual account, defined
contribution plan sponsored and trusteed by Michael J. Rosenberg.
Currently, the Rosenberg Plan has two participants and holds assets
valued at approximately $266,000. As of December 31, 1997, the
Rosenberg Account held assets valued at $231,380.
c. The Savage Plan is an individual account, defined contribution
plan sponsored and trusteed by Robert Savage. Currently, the Savage
Plan has 45 participants and holds assets valued at $2,200,000. As of
December 31, 1997, the Savage Account held assets valued at
$1,174,488.15.
2. TTC, the issuer of the Preferred Stock, is an Ohio corporation
that was incorporated in April 1990. The Trust Company of Toledo
(TTCOT) is a wholly-owned subsidiary of TTC. The applicant represents
that TTCOT is a ``Bank'' as that term is defined in Section 202(a)(2)
of the Investment Advisers Act of 1940.1
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\1\ The applicant represents that under Section 202(a)(2) of the
Investment Advisers Act of 1940, a ``Bank'' means (A) banking
institution organized under the laws of the United States, (B) a
member bank of the Federal Reserve System, (C) any other institution
or trust company, whether incorporated or not, doing business under
the laws of any State of the United States, a substantial portion of
the business of which consists of receiving deposits or exercising
fiduciary powers similar to those permitted to national banks under
the authority of the U.S. Comptroller of the Currency, and which is
supervised and examined by State or Federal authority having
supervision over banks, and which is not operated for the purpose of
evading the provisions of this subchapter, and (D) a receiver,
conservator, or other liquidating agent of any institution or firm
included in clauses (A), (B), or (C) of this paragraph.
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3. TTC was capitalized with one class of common stock (the Common
Stock), one class of Preferred Stock and $1,000,000 of 9% debentures
(the Debentures). Originally, 3,531 shares of Common Stock were
outstanding prior to the subject transactions. These shares were owned
in equal amounts by Theodore T. Hahn, Julie B. Higgins and David A.
Snavely. These individuals are the three founders, principals and
partners of TTC.
Prior to the subject transactions, there were 20,000 shares of the
Preferred Stock outstanding that were held by 65 different
shareholders. The Preferred Stock was issued by TTC through a private
offering that took place in 1990. The offering provided investors with
the opportunity to acquire units comprised of 200 shares of Preferred
Stock and one $10,000 Debenture, which had a maturity date of December
31, 2000.2 The price for each unit was $30,000. Of this
amount, $20,000 was allocated to the Preferred Stock and $10,000 was
allocated to the Debenture.3
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\2\ The outstanding principal amount of the Debentures held by
the Accounts and other investors was prepaid by TTC in December
1998, prior to the subject transactions, in accordance with terms of
the Debentures.
\3\ Pursuant to the Memorandum, dividends were not expected to
be paid on the Preferred Stock, and no dividends were paid on such
shares.
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The following table outlines the percentage of each Participant's
Account assets invested in the units of Preferred Stock and Debentures
at the time of acquisition and at the time of the subject trans
action:4
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\4\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions in regard to the exclusive benefit rule under
section 401(a) of the Code. See, e.g. Rev. Rul. 73-5332, 1973-2 C.B.
128. However, it is not within the purview of the Department's
jurisdiction to express an opinion in this proposed exemption
regarding whether violations of the Code have taken place with
respect to the purchase and subsequent retention of the Stock by Mr.
Rosenberg.
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Shares of
Plan preferred Cost Debenture % Assets % Assets
stock then now
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Emmert......................................... 200 $20,000 $10,000 7.5 5.3
Rosenberg...................................... 200 20,000 10,000 48 23.4
Savage......................................... 200 20,000 10,000 16.5 6.5
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4. While owning shares of the Preferred Stock, each Account had
been a minority shareholder of TTC. However, the applicants represent
that the Participants did not, in their individual capacity, own shares
of the Preferred Stock prior to the subject transactions. As such, the
applicants state that the purchase of shares of the Common Stock by the
Participants pursuant to the subject transaction did not cause any of
the Participants to become majority shareholders of TTC. The applicants
further represent that none of the Participants was, or currently is,
an officer, director, principal or employee of TTC or TTCOT. Finally,
the applicants represent that, at the time of original acquisition of
the Preferred Stock by the Accounts, neither TTC nor TTCOT was a party
in interest with respect to the Plans.
5. TTC recently obtained authority from its shareholders to amend,
by total restatement, its Amended and Restated Articles of
Incorporation. Due to business and income tax considerations, TTC
adopted the Second Amended and Restated Articles of Incorporation to
change its corporate tax status, in accordance with section 1362 of the
Code,5 from a Subchapter C corporation to a Subchapter S
corporation for the taxable years commencing January 1, 1999. As part
of the change, the amendment called for the full conversion of the
Preferred Stock into Common Stock.
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\5\ Section 1362 of the Code contains provisions which allow a
small business corporation to elect and terminate Subchapter-S
corporate status.
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6. On May 1, 1998, TTC sent certain documents to its shareholders,
including the Participants. These documents stated that TTC planned to
redeem, via cancellation, all of the shares of the Preferred Stock held
by those shareholders who would have adverse tax consequences from
continued ownership of shares in a Subchapter S corporation or who were
ineligible to hold shares in a Subchapter S corporation pursuant to the
Code.
TTC provided a mechanism whereby eligible shareholders, including
employee benefit plans, could designate a related party to purchase
shares of TTC Common Stock equal to the number of shares sold by the
Accounts. Such purchase was to be for a cash amount equal to the price
paid per share by TTC for redemption of the Preferred Stock.
7. The applicants request exemptive relief for the sale of the
Preferred Stock by each Account to its respective Participant. The
applicants represent that the Accounts benefitted from significant
appreciation since purchasing the Preferred Stock as demonstrated by
the fact that the value of the Preferred Stock increased from $100 per
share in 1990 to $291.70 as of December 31, 1997.6 The
applicants believe that at the time of the subject transactions, price
levels were such that an excellent opportunity for the sale of the
Preferred Stock existed. Accordingly, they wished to sell the
[[Page 3344]]
Preferred Stock from their respective Accounts to ensure that each
Account realized a substantial profit.
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\6\ As for the Debentures, which were redeemed in annual
installments of $200,000, the outstanding principal amount was
$400,000 as of March 31, 1998.
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In addition, the applicants represented that the continued holding
of the newly issued Common Stock would have caused the Accounts to
incur unrelated business income tax pursuant to section 512 of the
Code.
Due to the aforementioned reasons, the applicants seek relief for
the following transactions: (1) the cash sale of shares of the
Preferred Stock to TTC by the Emmert Account, the Rosenberg Account,
and the Savage Account; and (2) the subsequent purchase under the above
described agreement with TTC of an equal number and value of shares of
the Common Stock by Messrs. Emmert, Rosenberg and Savage, in their own
name, from TTC immediately after the sale by the Accounts.
8. The sales price for the Preferred Stock was obtained through a
written valuation of the shares dated May 6, 1998 prepared by Austin
Financial Services, Inc. (Austin), a qualified, independent consulting
firm with substantial experience in the financial services industry.
Austin was retained by the TTC Board of Directors for the purpose of
valuing TTC and its shares of Preferred Stock and Common Stock. In
determining fair market value of the Preferred and Common Stock, Austin
relied on the discounted cash flow method and the capitalization of
earnings method. After weighing the two methods, Austin determined that
the fair market value of all the outstanding shares of the Preferred
and Common Stock was approximately $7,263,035, or $308.66 per share for
each outstanding share of Preferred and Common Stock. Austin updated
this valuation at the time of the transaction, and reached the same
conclusion regarding the fair market value. Accordingly, each Account
received a total of $61,732 for its shares of Preferred Stock, as of
the date of Conversion.
9. TTC also engaged the law firm of Callister Nebeker & McCullough
of Salt Lake City, Utah (CNM) to serve as the Independent Fiduciary for
the Plans. CNM, which represented that it had experience serving as
independent fiduciary for employee benefit plans, was hired to review
the offer of redemption of the Preferred Stock, to render an opinion as
to the prudence of the investment decisions relating thereto, and to
direct the sale of shares as appropriate. In a report dated April 29,
1998 (the Report), CNM acknowledged its appointment as the Independent
Fiduciary for the Accounts regarding the subject transactions.
As the Independent Fiduciary, CNM determined whether the subject
transactions, and the actions taken by the Accounts in connection
therewith, were in the best interests of such Accounts and in
accordance with the requirements of the Act. Before doing so, each
Participant made a separate determination that the proposed
transactions would be in the best interests of their Accounts.
Subsequent to arriving at this conclusion, a determination was made to
retain CNM as Independent Fiduciary for the Accounts to ensure that the
terms of such transactions, including the appraisal made of the fair
market value of the Preferred Stock, would be protective of the
Accounts.
In a letter dated August 25, 1998 that was submitted to the
Department, CNM acknowledged that, as an independent fiduciary, it
understood the duties and responsibilities imposed by the Act. Further,
CNM concluded that the subject transactions would be prudent and in the
best interest of each of the Accounts. Finally, CNM stated that it
would ensure, among other things, that the fair market value of the
Preferred Stock would be updated on the date of the transactions, and
that each Account would receive the correct amount of cash for the
Preferred Stock.
10. The Independent Fiduciary appointed Houlihan Valuation Advisors
(HVA), an independent appraisal firm maintaining offices in Salt Lake
City, Utah, to provide an opinion as to the fairness (the Fairness
Opinion) of the proposed sale transaction from a financial standpoint.
In the Fairness Opinion, HVA stated that the Preferred Stock was
essentially equivalent to the Common Stock because the Preferred Stock:
(a) was convertible at the option of the holder into Common Stock; (b)
had voting privileges identical to the Common Stock; and (c) paid no
preferred dividends. The Preferred Stock did have a $100 per share
liquidation presence; however, according to HVA, the fair market value
of TTC is significantly higher than its liquidation value, rendering
this liquidation preference virtually meaningless.
Based on the foregoing, HVA concluded that the sale of the
Preferred Stock by the Accounts to TTC would be fair to the Accounts
because the Accounts would receive adequate consideration for their
shares.
11. In summary, the applicant represents that the subject
transactions satisfied the statutory criteria of section 408(a) of the
Act and section 4975(c)(2) of the Code because:
(a) The sale of the Preferred Stock to TTC by the Accounts and the
purchase of the Common Stock from TTC by the Participants, in their
individual capacity, were one-time transactions for cash;
(b) The transactions described in (a) above took place on the same
business day;
(c) The amount paid to the Accounts by TTC was the fair market
value of the Preferred Stock, as determined by a qualified independent
appraiser at the time of the sale;
(d) The Participants, in their individual capacity, purchased from
TTC shares of the Common Stock which were equal in number and value to
the shares of Preferred Stock sold by the Accounts to TTC;
(e) The Independent Fiduciary determined that the transactions
described herein were in the best interests and protective of the
Accounts at the time of the transactions; and
(f) The Independent Fiduciary supervised the transactions; assured
that the conditions of this proposed exemption were met; and took
whatever actions necessary to protect the interests of the Accounts,
including reviewing amounts paid by TTC for the Preferred Stock.
Notice to Interested Persons: Because the only assets of the Plans
involved in the subject transactions are those held in the Accounts,
and no other participants in the Plans are affected by the
transactions, it has been determined that there is no need to
distribute this notice of proposed exemption to any interested persons
other than the Participants. Comments and requests for a hearing on the
proposed exemption are due 30 days after the date of publication of
this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: James Scott Frazier of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Mellon Financial Markets, Inc. (Mellon) Located in Pittsburgh,
Pennsylvania
[Application No. D-10695]
Proposed Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between
[[Page 3345]]
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.7
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\7\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act,
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code, shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or 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.8 For purposes of
this paragraph B.(1)(iv) only, an entity will not be considered to
service assets contained in a trust if it is merely a subservicer of
that trust;
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\8\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B. (1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975(a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust,
provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) The pooling and servicing agreement is provided to, or
described in all material respects in, the prospectus or private
placement memorandum provided to investing plans before they purchase
certificates issued by the trust.9
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\9\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
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Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act, or from
the taxes imposed by reason of section 4975(c) of the Code, for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. The restrictions of sections 406(a) and 407(a) of the Act, and
the taxes imposed by sections 4975 (a) and (b) of the Code by reason of
sections 4975(c)(1) (A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14) (F),
(G), (H) or (I) of the Act or section 4975(e)(2) (F), (G), (H) or (I)
of the Code), solely because of the plan's ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating
from a rating agency (as defined in section III.W.) at the time of such
acquisition that is in one of the three highest generic rating
categories;
(4) The trustee is not an affiliate of any other 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;
(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
[[Page 3346]]
Exchange Commission under the Securities Act of 1933; and
(7) In the event that the obligations used to fund a trust have not
all been transferred to the trust on the closing date, additional
obligations as specified in subsection III.B.(1) may be transferred to
the trust during the pre-funding period (as defined in section III.BB.)
in exchange for amounts credited to the pre-funding account (as defined
in section III.Z.), provided that:
(a) The pre-funding limit (as defined in section III.AA.) is not
exceeded;
(b) All such additional obligations meet the same terms and
conditions for eligibility as those of the original obligations used to
create the trust corpus (as described in the prospectus or private
placement memorandum and/or pooling and servicing agreement for such
certificates), which terms and conditions have been approved by a
rating agency. Notwithstanding the foregoing, the terms and conditions
for determining the eligibility of an obligation may be changed if such
changes receive prior approval either by a majority of the outstanding
certificateholders or by a rating agency;
(c) The transfer of such additional obligations to the trust during
the pre-funding period does not result in the certificates receiving a
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(d) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the trust at the
end of the pre-funding period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the trust on the closing date;
(e) In order to ensure that the characteristics of the receivables
actually acquired during the pre-funding period are substantially
similar to those which were acquired as of the closing date, the
characteristics of the additional obligations will either be monitored
by a credit support provider or other insurance provider which is
independent of the sponsor, or an independent accountant retained by
the sponsor will provide the sponsor with a letter (with copies
provided to the rating agency, the underwriter and the trustees)
stating whether or not the characteristics of the additional
obligations conform to the characteristics of such obligations
described in the prospectus, private placement memorandum and/or
pooling and servicing agreement. In preparing such letter, the
independent accountant will use the same type of procedures as were
applicable to the obligations which were transferred as of the closing
date;
(f) The pre-funding period shall be described in the prospectus or
private placement memorandum provided to investing plans; and
(g) The trustee of the trust (or any agent with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to the Act.
B. Neither any underwriter, sponsor, trustee, servicer, insurer,
nor any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this proposed exemption:
A. ``Certificate'' means:
(1) a certificate--
(a) That represents a beneficial ownership interest in the assets
of a trust; and
(b) That entitles the holder to pass-through payments of principal,
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) or a Financial Asset Securitization
Investment Trust (FASIT) within the meaning of section 860D(a) or
section 860L, respectively, 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 Mellon
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 proposed exemption, references to ``certificates
representing an interest in a trust'' include certificates denominated
as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) (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); and/or
(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); and/or
(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); and/or
(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); and/or
(e) ``Guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2); and/or
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) Property which had secured any of the obligations described in
subsection B.(1);
(3) (a) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders; and/or
(b) Cash or investments made therewith which are credited to an
account to provide payments to certificateholders pursuant to any yield
supplement agreement or similar yield maintenance arrangement to
supplement the interest rates otherwise payable on obligations
described in
[[Page 3347]]
subsection III.B.(1) held in the trust, provided that such arrangements
do not involve swap agreements or other notional principal contracts;
and/or
(c) Cash transferred to the trust on the closing date and permitted
investments made therewith which:
(i) Are credited to a pre-funding account established to purchase
additional obligations with respect to which the conditions set forth
in clauses (a)-(g) of subsection II.A.(7) are met and/or;
(ii) Are credited to a capitalized interest account (as defined in
section III.X.); and
(iii) Are held in the trust for a period ending no later than the
first distribution date to certificateholders occurring after the end
of the pre-funding period.
For purposes of this clause (c) of subsection III.B.(3), the term
``permitted investments'' means investments which are either: (i)
Direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by the United States, or any agency
or instrumentality thereof, provided that such obligations are backed
by the full faith and credit of the United States or (ii) have been
rated (or the obligor has been rated) in one of the three highest
generic rating categories by a rating agency; are described in the
pooling and servicing agreement; and are permitted by the rating
agency; and
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship, yield supplement agreements
described in clause (b) of subsection III.B.(3) and other credit
support arrangements with respect to any obligations described in
subsection III.B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include
any investment pool unless: (i) the investment pool consists only of
assets of the type described in clauses (a) through (f) of subsection
III.B.(1) 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 a
rating agency for at least one year prior to the plan's acquisition of
certificates pursuant to this proposed 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
proposed exemption.
C. ``Underwriter'' means:
(1) Mellon;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
Mellon; or
(3) Any member of an underwriting syndicate or selling group of
which Mellon or a person described in (2) is a manager or co-manager
with respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services loans contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) Any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) Such person is not an affiliate of that other person; and
(2) The other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this proposed
exemption (if granted) 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.
[[Page 3348]]
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 owns or 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. ``Rating Agency'' means Standard & Poor's Structured Rating
Group (S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps
Credit Rating Co. (D & P) or Fitch IBCA, Inc. (Fitch), or their
successors.
X. ``Capitalized Interest Account'' means a trust account: (i)
which is established to compensate certificateholders for shortfalls,
if any, between investment earnings on the pre-funding account and the
pass-through rate payable under the certificates; and (ii) which meets
the requirements of clause (c) of subsection III.B.(3).
Y. ``Closing Date'' means the date the trust is formed, the
certificates are first issued and the trust's assets (other than those
additional obligations which are to be funded from the pre-funding
account pursuant to subsection II.A.(7)) are transferred to the trust.
Z. ``Pre-Funding Account'' means a trust account: (i) which is
established to purchase additional obligations, which obligations meet
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and
(ii) which meets the requirements of clause (c) of subsection
III.B.(3).
AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount
allocated to the pre-funding account, as compared to the total
principal amount of the certificates being offered which is less than
or equal to 25 percent.
BB. ``Pre-Funding Period'' means the period commencing on the
closing date and ending no later than the earliest to occur of: (i) the
date the amount on deposit in the pre-funding account is less than the
minimum dollar amount specified in the pooling and servicing agreement;
(ii) the date on which an event of default occurs under the pooling and
servicing agreement; or (iii) the date which is the later of three
months or 90 days after the closing date.
CC. ``Mellon'' means Mellon Financial Markets, 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 (see 60 FR at 35932).
Summary of Facts and Representations
1. Mellon is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. As of December 31, 1997, it had total assets
of $78.8 million.
Mellon is a wholly-owned subsidiary of Mellon Bank Corporation
(MBC), a bank holding with its principal offices located in Pittsburgh,
Pennsylvania. Mellon was established as a broker-dealer subsidiary of
MBC pursuant to an order of the U.S. Federal Reserve Board effective
April 17, 1995, as modified by a release adopted December 20, 1996 (as
modified, the Order). The Federal Reserve Board regulates MBC as a bank
holding company and restricts non-banking activities of MBC and its
affiliates under the Glass-Steagall Act.
Under the Order, Mellon is authorized to engage, to a limited
extent, in underwriting and dealing in certain mortgage-related
securities, municipal revenue bonds, commercial paper and consumer
receivables-related securities. In addition, Mellon is authorized to
act as agent in the private placement of all types of securities,
including providing related advisory services, and to buy and sell
securities on the order of investors. The Order is subject to the
condition that Mellon does not derive more than a limited percentage of
its total gross revenues over any two-year period from underwriting and
dealing in certain categories of securities, including asset-backed
securities of the type described herein.
Several other broker-dealer subsidiaries of bank holding companies
have been authorized by the Federal Reserve Board to engage in so-
called ``Tier 2'' activities (in addition to the ``Tier 1'' activities
described in the Order), including the ability to underwrite and deal
in all types of debt and equity securities. Mellon intends to apply for
the additional authorization and hopes to obtain an approving order
from the Federal Reserve Board in the near future.
Mellon has been involved in the structuring and placement of asset-
backed securities transactions since November 1995. Mellon has served
as co-lead underwriter in public offerings of certificates backed by
insurance premium finance loans, home equity revolving line of credit
loans, residential mortgage loans and credit card receivables,
involving amounts ranging from $200 million up to $869 million. In
March, 1997, Mellon instituted a program to securitize mortgage-related
assets.
MBC, the parent of Mellon, is one of the largest commercial banking
organizations in the United States, with total assets of approximately
$45 billion as of the end of 1997 (and approximately $1.5 trillion in
assets under management and administration). MBC's subsidiaries include
Mellon Bank, N.A., a leading national bank that provides a full range
of corporate and consumer banking, trust, custody and investment
management services, and The Dreyfus Corporation, a sponsor of
investment companies (i.e., mutual funds) registered under the
Investment Company Act of 1940.
Trust Assets
2. Mellon 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
[[Page 3349]]
residential or commercial mortgage investment trusts; 10 (2)
motor vehicle receivable investment trusts; (3) consumer or commercial
receivables investment trusts; and (4) guaranteed governmental mortgage
pool certificate investment trusts.11
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\10\ 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. Mellon requests relief for single-family residential mortgages
in this exemption because it would prefer one exemption for all
trusts of similar structure. However, Mellon has stated that it may
still avail itself of the exemptive relief provided by PTE 83-1.
\11\ 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.12
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\12\ 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.13 The
sponsor or servicer of a trust selects assets to be included in the
trust.14 These assets are receivables which may have been
originated by a sponsor or servicer of the trust, an affiliate of the
sponsor or servicer, or by an unrelated lender and subsequently
acquired by the trust sponsor or servicer.15
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\13\ The Department is of the view that the term ``trust''
includes a trust: (a) the assets of which, although all specifically
identified by the sponsor or the originator as of the closing date,
are not all transferred to the trust on the closing date for
administrative or other reasons but will be transferred to the trust
shortly after the closing date, or (b) with respect to which
certificates are not purchased by plans until after the end of the
pre-funding period at which time all receivables are contained in
the trust.
\14\ It is the Department's view that the definition of
``trust'' contained in section 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.
\15\ It is the view of the Department that section III.B.(4)
includes within the definition of the term ``trust'' rights under
any yield supplement or similar arrangement which obligates the
sponsor or master servicer, or another party specified in the
relevant pooling and servicing agreement, to supplement the interest
rates otherwise payable on the obligations described in section
III.B.(1), in accordance with the terms of a yield supplement
arrangement described in the pooling and servicing agreement,
provided that such arrangements do not involve swap agreements or
other notional principal contracts.
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Typically, 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. Typically, all receivables to be held in the trust
are transferred as of the closing date, but in some transactions, as
described more fully below, a limited percentage of the receivables to
be held in the trust may be transferred during a limited period of time
following the closing date, through the use of a pre-funding account.
Mellon, 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 Mellon on a firm commitment
basis. In addition, Mellon anticipates that it may privately place
certificates on both a firm commitment and an agency basis. Mellon may
also act as the lead underwriter for a syndicate of securities
underwriters.
Certificateholders will be entitled to receive distributions 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. These distributions
will be made monthly, quarterly, semi-annually, or at such other
intervals and dates as specified in the related prospectus or private
placement memorandum.
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.
Mellon requests exemptive relief for two types of multi-class
certificates: ``strip'' certificates and ``fast-pay/slow-pay''
certificates. Strip certificates are a type of security in which the
stream of interest payments on receivables is split from the flow of
principal payments and separate classes of certificates are
established, each representing rights to disproportionate payments of
principal and interest.16
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\16\ It is the Department's understanding that where a plan
invests in REMIC ``residual'' interest certificates to which this
exemption applies, some of the income received by the plan as a
result of such investment may be considered unrelated business
taxable income to the plan, which is subject to income tax under the
Code. The Department emphasizes that the prudence requirement of
section 404(a)(l)(B) of the Act would require plan fiduciaries to
carefully consider this and other tax consequences prior to causing
plan assets to be invested in certificates pursuant to this proposed
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
[[Page 3350]]
different payment schedules. Interest and/or principal payments
received on the underlying receivables are distributed first to the
class of certificates having the earliest stated maturity of principal,
and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class pass-through arrangement is
the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying assets. In neither case will the rights of a plan
purchasing a certificate be subordinated to the rights of another
certificateholder in the event of default on any of the underlying
obligations. In particular, if the amount available for distribution to
certificateholders is less than the amount required to be so
distributed, all senior certificateholders then entitled to receive
distributions will share in the amount distributed on a pro rata
basis.17
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\17\ If a trust issues subordinated certificates, holders of
such subordinated certificates may not share in the amount
distributed on a pro rata basis with the senior certificateholders.
The Department notes that the proposed exemption does not provide
relief for plan investment in such subordinated certificates.
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6. The trust will be maintained as an essentially passive entity.
Therefore, both the sponsor's discretion and the servicer's discretion
with respect to assets included in a trust are severely limited.
Pooling and servicing agreements provide for the substitution of
receivables by the sponsor only in the event of defects in
documentation discovered within a short time after the issuance of
trust certificates (within 120 days, except in the case of obligations
having an original term of 30 years, in which case the period will not
exceed two years). Any receivable so substituted is required to have
characteristics substantially similar to the replaced receivable and
will be at least as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed through to certificateholders.
In some cases the trust will be maintained as a Financial Asset
Securitization Investment Trust (``FASIT''), a statutory entity created
by the Small Business Job Protection Act of 1996, adding sections 860H,
860J, 860K and 860L to the Code. In general, a FASIT is designed to
facilitate the securitization of debt obligations, such as credit card
receivables, home equity loans, and auto loans, and thus, allows
certain features such as revolving pools of assets, trusts containing
unsecured receivables and certain hedging types of investments. A FASIT
is not a taxable entity and debt instruments issued by such trusts,
which might otherwise be recharacterized as equity, will be treated as
debt in the hands of the holder for tax purposes. However, a trust
which is the subject of the proposed exemption will be maintained as a
FASIT only where the assets held by the FASIT will be comprised of
secured debt; revolving pools of assets or hedging investments will not
be allowed unless specifically authorized by the exemption, if granted,
so that a trust maintained as a FASIT will be maintained as an
essentially passive entity.
Trust Structure With Pre-Funding Account
Pre-Funding Accounts
7. As described briefly above, some transactions may be structured
using a pre-funding account or a capitalized interest account. If pre-
funding is used, cash sufficient to purchase the receivables to be
transferred after the closing date will be transferred to the trust by
the sponsor or originator on the closing date. During the pre-funding
period, such cash and temporary investments, if any, made therewith
will be held in a pre-funding account and used to purchase the
additional receivables, the characteristics of which will be
substantially similar to the characteristics of the receivables
transferred to the trust on the closing date. The pre-funding period
for any trust will be defined as the period beginning on the closing
date and ending on the earliest to occur of (i) the date on which the
amount on deposit in the pre-funding account is less than a specified
dollar amount, (ii) the date on which an event of default occurs under
the related pooling and servicing agreement or (iii) the date which is
the later of three months or ninety (90) days after the closing date.
Certain specificity and monitoring requirements described below will be
met and will be disclosed in the pooling and servicing agreement and/or
the prospectus or private placement memorandum.
For transactions involving a trust using pre-funding, on the
closing date, a portion of the offering proceeds will be allocated to
the pre-funding account generally in an amount equal to the excess of
(i) the principal amount of certificates being issued over (ii) the
principal balance of the receivables being transferred to the trust on
such closing date. In certain transactions, the aggregate principal
balance of the receivables intended to be transferred to the trust may
be larger than the total principal balance of the certificates being
issued. In these cases, the cash deposited in the pre-funding account
will equal the excess of the principal balance of the total receivables
intended to be transferred to the trust over the principal balance of
the receivables being transferred on the closing date.
On the closing date, the sponsor transfers the assets to the trust
in exchange for the certificates. The certificates are then sold to an
underwriter for cash or to the certificateholders directly if the
certificates are sold through a placement agent. The cash received by
the sponsor from the certificateholders (or the underwriter) from the
sale of the certificates issued by the trust in excess of the purchase
price for the receivables and certain other trust expenses, such as
underwriting or placement agent fees and legal and accounting fees,
constitutes the cash to be deposited in the pre-funding account. Such
funds are either held in the trust and accounted for separately, or are
held in a sub-trust. In either event, these funds are not part of
assets of the sponsor.
Generally, the receivables are transferred at par value, unless the
interest rate payable on the receivables is not sufficient to service
both the interest rates to be paid on the certificates and the
transaction fees (i.e., servicing fees, trustee fees and fees to credit
support providers). In such cases, the receivables are sold to the
trust at a discount, based on an objective, written, mechanical formula
which is set forth in the pooling and servicing agreement and agreed
upon in advance between the sponsor, the rating agency and any credit
support provider or other insurer. The proceeds payable to the sponsor
from the sale of the receivables transferred to the trust may also be
reduced to the extent they are used to pay transaction costs (which
typically include underwriting or placement agent fees and legal and
accounting fees). In addition, in certain cases, the sponsor may be
required by the rating agencies or credit support providers to set up
trust reserve accounts to protect the certificateholders against credit
losses.
The pre-funding account of any trust will be limited so that the
percentage or
[[Page 3351]]
ratio of the amount allocated to the pre-funding account, as compared
to the total principal amount of the certificates being offered (the
pre-funding limit) will not exceed 25%. The pre-funding limit (which
may be expressed as a ratio or as a stated percentage or a combination
thereof) will be specified in the prospectus or the private placement
memorandum.
Any amounts paid out of the pre-funding account are used solely to
purchase receivables and to support the certificate pass-through rate
(as explained below). Amounts used to support the pass-through rate are
payable only from investment earnings and are not payable from
principal. However, in the event that, after all of the requisite
receivables have been transferred into the trust, any funds remain in
the pre-funding account, such funds will be paid to the
certificateholders as principal prepayments. Upon termination of the
trust, if no receivables remain in the trust and all amounts payable to
certificateholders have been distributed, any amounts remaining in the
trust would be returned to the sponsor.
A dramatic change in interest rates on the receivables held in a
trust using a pre-funding account would be handled as follows. If the
receivables (other than those with adjustable or variable rates) had
already been originated prior to the closing date, no action would be
required as the fluctuations in the market interest rates would not
affect the receivables transferred to the trust after the closing date.
In contrast, if interest rates fall after the closing date, loans
originated after the closing date will tend to be originated at lower
rates, with the possible result that the receivables will not support
the certificate pass-through rate. In such situations, the sponsor
could sell the receivables into the trust at a discount, and more
receivables would be used to fund the trust in order to support the
pass-through rate. In a situation where interest rates drop
dramatically and the sponsor is unable to provide sufficient
receivables at the requisite interest rates, the pool of receivables
would be closed. In this latter event, under the terms of the pooling
and servicing agreement, the certificateholders would receive a
repayment of principal from the unused cash held in the pre-funding
account. In transactions where the certificate pass-through rates are
variable or adjustable, the effects of market interest rate
fluctuations are mitigated. In no event will fluctuations in interest
rates payable on the receivable affect the pass-through rate for fixed
rate certificates.
The cash deposited into the trust and allocated to the pre-funding
account is invested in certain permitted investments (see below), which
may be commingled with other accounts of the trust. The allocation of
investment earnings to each trust account is made periodically as
earned in proportion to each account's allocable share of the
investment returns. As pre-funding account investment earnings are
required to be used to support (to the extent authorized in the
particular transaction) the pass-through amounts payable to the
certificateholders with respect to a periodic distribution date, the
trustee is necessarily required to make periodic, separate allocations
of the trust's earning to each trust account, thus ensuring that all
allocable commingled investment earnings are properly credited to the
pre-funding account on a timely basis.
The Capitalized Interest Account
8. In certain transactions where a pre-funding account is used, the
sponsor and/or originator may also transfer to the trust additional
cash on the closing date, which is deposited in a capitalized interest
account and used during the pre-funding period to compensate the
certificateholders for any shortfall between the investment earnings on
the pre-funding account and the pass-through interest rate payable
under the certificates.
The capitalized interest account is needed in certain transactions
since the certificates are supported by the receivables and the
earnings on the pre-funding account, and it is unlikely that the
investment earnings on the pre-funding account will equal the interest
rates on the certificates (although such investment earnings will be
available to pay interest on the certificates). The capitalized
interest account funds are paid out periodically to the
certificateholders as needed on distribution dates to support the pass-
through rate. In addition, a portion of such funds may be returned to
the sponsor from time to time as the receivables are transferred into
the trust and the need for the capitalized interest account diminishes.
Any amounts held in the capitalized interest account generally will be
returned to the sponsor and/or originator either at the end of the pre-
funding period or periodically as receivables are transferred and the
proportionate amount of funds in the capitalized interest account can
be reduced. Generally, the capitalized interest account terminates no
later than the end of the pre-funding period. However, there may be
some cases where the capitalized interest account remains open until
the first date distributions are made to certificateholders following
the end of the pre-funding period.
In other transactions, a capitalized interest account is not
necessary because the interest paid on the receivables exceeds the
interest payable on the certificates at the applicable pass-through
rate and the fees of the trust. Such excess is sufficient to make up
any shortfall resulting from the pre-funding account earning less than
the certificate pass-through rate. In certain of these transactions,
this occurs because the aggregate principal amount of receivables
exceeds the aggregate principal amount of certificates.
Pre-Funding Account and Capitalized Interest Account Payments and
Investments
9. Pending the acquisition of additional receivables during the
pre-funding period, it is expected that amounts in the pre-funding
account and the capitalized interest account will be invested in
certain permitted investments or will be held uninvested. Pursuant to
the pooling and servicing agreement, all permitted investments must
mature prior to the date the actual funds are needed. The permitted
types of investments in the pre-funding account and capitalized
interest account are investments which are either: (i) direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that such obligations are backed by
the full faith and credit of the United States or (ii) have been rated
(or the obligor has been rated) in one of the three highest generic
rating categories by a rating agency, as set forth in the pooling and
servicing agreement and as required by the rating agencies. The credit
grade quality of the permitted investments is generally no lower than
that of the certificates. The types of permitted investments will be
described in the pooling and servicing agreement.
The ordering of interest payments to be made from the pre-funding
and capitalized interest accounts is pre-established and set forth in
the pooling and servicing agreement. The only principal payments which
will be made from the pre-funding account are those made to acquire the
receivables during the pre-funding period and those distributed to the
certificateholders in the event that the entire amount in the pre-
funding account is not used to acquire receivables. The only principal
payments which will be made from the capitalized interest account are
those made to certificateholders if necessary
[[Page 3352]]
to support the certificate pass-through rate or those made to the
sponsor either periodically as they are no longer needed or at the end
of the pre-funding period when the capitalized interest account is no
longer necessary.
The Characteristics of the Receivables Transferred During the Pre-
Funding Period
10. In order to ensure that there is sufficient specificity as to
the representations and warranties of the sponsor regarding the
characteristics of the receivables to be transferred after the closing
date:
(i) All such receivables will meet the same terms and conditions
for eligibility as those of the original receivables used to create the
trust corpus (as described in the prospectus or private placement
memorandum and/or pooling and servicing agreement for such
certificates), which terms and conditions have been approved by a
rating agency. However, the terms and conditions for determining the
eligibility of a receivable may be changed if such changes receive
prior approval either by a majority vote of the outstanding
certificateholders or by a rating agency;
(ii) The transfer to the trust of the receivables acquired during
the pre-funding period will not result in the certificates receiving a
lower credit rating from the rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(iii) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the trust at the
end of the pre-funding period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the trust on the closing date;
(iv) The trustee of the trust (or any agency with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to the Act.
In order to ensure that the characteristics of the receivables
actually acquired during the pre-funding period are substantially
similar to receivables that were acquired as of the closing date, the
characteristics of the additional obligations subsequently acquired
will either be: (i) monitored by a credit support provider or other
insurance provider which is independent of the sponsor; or (ii) an
independent accountant retained by the sponsor will provide the sponsor
with a letter (with copies provided to the rating agency, Mellon and
the trustee) stating whether or not the characteristics of the
additional obligations acquired after the closing date conform to the
characteristics of such obligations described in the prospectus,
private placement memorandum and/or pooling and servicing agreement. In
preparing such letter, the independent accountant will use the same
type of procedures as were applicable to the obligations which were
transferred as of the closing date.
Each prospectus, private placement memorandum and/or pooling and
servicing agreement will set forth the terms and conditions for
eligibility of the receivables to be included in the trust as of the
related closing date, as well as those to be acquired during the pre-
funding period, which terms and conditions will have been agreed to by
the rating agencies which are rating the applicable certificates as of
the closing date. Also included among these conditions is the
requirement that the trustee be given prior notice of the receivables
to be transferred, along with such information concerning those
receivables as may be requested. Each prospectus or private placement
memorandum will describe the amount to be deposited in, and the
mechanics of, the pre-funding account and will describe the pre-funding
period for the trust.
Parties to Transactions
11. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a home-owner or automobile
purchaser, or leases property to a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor.
Originators of receivables included in the trusts will be entities
that originate receivables in the ordinary course of their businesses,
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.
12. 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.
13. 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 Mellon, the trust sponsor, the servicer or any other
member of the Restricted Group (as defined in section III.L.). Mellon
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
or out of the trust assets. 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.
14. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, the receivables may be
``subserviced'' by their respective originators and a single entity may
``master service'' the pool of receivables on behalf of the owners of
the related series of certificates. Where this arrangement is adopted,
a receivable continues to be serviced from the perspective of the
borrower by the local subservicer, while the investor's perspective is
that the entire pool of receivables is serviced by a single, central
master servicer who collects payments from the local subservicers and
passes them through to certificateholders.
Receivables of the type suitable for inclusion in a trust
invariably are serviced with the assistance of a computer. After the
sale, the servicer
[[Page 3353]]
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 (i.e., Mellon, its affiliate, or a member of an
underwriting syndicate or selling group of which Mellon or its
affiliate is a manager or co-manager) 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 Mellon. In other cases,
however, affiliates of Mellon may originate or service receivables
included in a trust or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
15. 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.
16. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the pass-through interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The pass-through rate for certificates is equal to the interest
rate on receivables included in the trust minus a specified servicing
fee.18 This rate is generally determined by the same market
forces that determine the price of a certificate. The price of a
certificate and its pass-through, or coupon, rate together determine
the yield to investors. If an investor purchases a certificate at less
than par, that discount augments the stated pass-through rate;
conversely, a certificate purchased at a premium yields less than the
stated coupon.
---------------------------------------------------------------------------
\18\ The pass-through rate on certificates representing
interests in trusts holding leases is determined by breaking down
lease payments into ``principal'' and ``interest'' components based
on an implicit interest rate.
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17. 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.
18. 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.
19. 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.
20. 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
[[Page 3354]]
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
21. 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
22. The certificates will have received one of the three highest
ratings available from a rating agency. 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
23. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust (i.e. act as
an insurer). In these cases, the master servicer, in its capacity as
servicer, will first advance funds to the full extent that it
determines that such advances will be recoverable (a) out of late
payments by the obligors, (b) from the credit support provider (which
may be the master servicer or an affiliate thereof) or, (c) in the case
of a trust that issues subordinated certificates, from amounts
otherwise distributable to holders of subordinated certificates, and
the master servicer will advance such funds in a timely manner. When
the servicer is the provider of the credit support and provides its own
funds to cover defaulted payments, it will do so either on the
initiative of the trustee, or on its own initiative on behalf of the
trustee, but in either event it will provide such funds to cover
payments to the full extent of its obligations under the credit support
mechanism. In some cases, however, the master servicer may not be
obligated to advance funds but instead would be called upon to provide
funds to cover defaulted payments to the full extent of its obligations
as insurer. Moreover, a master servicer typically can recover advances
either from the provider of credit support or from future payments on
the affected assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the trust as payments on
receivables are passed through to investors. These safeguards include:
(a) There is often a disincentive to postponing credit losses
because the sooner repossession or foreclosure activities are
commenced, the more value that can be realized on the security for the
obligation;
(b) The master servicer has servicing guidelines which include a
general policy as to the allowable delinquency period after which an
obligation ordinarily will be deemed uncollectible. The pooling and
servicing agreement will require the master servicer to follow its
normal servicing guidelines and will set forth the master servicer's
general policy as to the period of time after which delinquent
obligations ordinarily will be considered uncollectible;
(c) As frequently as payments are due on the receivables included
in the trust (monthly, quarterly or semi-annually, as set forth in the
pooling and servicing agreement), the master servicer is required to
report to the independent trustee the amount of all past-due payments
and the amount of all servicer advances, along with other current
information as to collections on the receivables and draws upon the
credit support. Further, the master servicer is required to deliver to
the trustee annually a certificate of an executive officer of the
master servicer stating that a review of the servicing activities has
been made under such officer's supervision, and either stating that the
master servicer has fulfilled all of its obligations under the pooling
and servicing agreement or, if the master servicer has defaulted under
any of its obligations, specifying any such default. The master
servicer's reports are reviewed at least annually by independent
accountants to ensure that the master servicer is following its normal
servicing standards and that the master servicer's reports conform to
the master servicer's internal accounting records. The results of the
independent accountants' review are delivered to the trustee; and
(d) The credit support has a ``floor'' dollar amount that protects
investors against the possibility that a large number of credit losses
might occur towards the end of the life of the trust, whether due to
servicer advances or any other cause. Once the floor amount has been
reached, the servicer lacks an incentive to postpone the recognition of
credit losses because the credit support amount thereafter is subject
to reduction only for actual draws. From the time that the floor amount
is effective until the end of the life of the trust, there are no
proportionate reductions in the credit support amount caused by
reductions in the pool principal
[[Page 3355]]
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
24. 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, including the terms and conditions for
eligibility of any receivables transferred during the pre-funding
period 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; a description of permitted investments for any
pre-funding account or capitalized interest account; 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;
(j) Information about the scope and nature of the secondary market,
if any, for the certificates; and
(k) A statement as to the duration of any pre-funding period and
the pre-funding limit for the trust.
25. 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.
26. In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file such periodic reports as may be required to be filed under
the Securities Exchange Act of 1934. Although some trusts that offer
certificates in a public offering will file quarterly reports on Form
10-Q and Annual Reports on Form 10-K, many trusts obtain, by
application to the Securities and Exchange Commission (SEC), a complete
exemption from the requirement to file quarterly reports on Form 10-Q
and a modification of the disclosure requirements for annual reports on
Form 10-K. If such an exemption is obtained, these trusts normally
would continue to have the obligation to file current reports on Form
8-K to report material developments concerning the trust and the
certificates and copies of the statements sent to certificateholders.
While the SEC's interpretation of the periodic reporting requirements
is subject to change, periodic reports concerning a trust will be filed
to the extent required under the Securities Exchange Act of 1934.
27. 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 (including those purchased by the trust from any pre-funding
account), 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 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
28. Mellon may contemplate entering into forward delivery
commitments in connection with the offering of pass-through
certificates. The utility of forward delivery commitments has been
recognized with respect to offering similar certificates backed by
pools of residential mortgages, and Mellon may find it desirable in the
future to enter into such commitments for the purchase of certificates.
Secondary Market Transactions
29. Mellon's normal policy would be to attempt to make a market for
securities for which it is lead or co-managing underwriter, and it is
Mellon's intention to make a market for any certificates for which it
is lead or co-managing underwriter, although it is under no obligation
to do so. At times, Mellon will facilitate sales by investors who
purchase certificates if Mellon has acted as agent or principal in the
original private placement of the certificates and if such investors
request Mellon's assistance.
Summary
30. 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) In the case where a pre-funding account is used, the
characteristics of the receivables to be transferred to the trust
during the pre-funding period will be substantially similar to the
characteristics of those transferred to the trust on the closing date,
thereby giving the sponsor and/or originator little discretion over the
selection process,
[[Page 3356]]
and compliance with this requirement will be assured by the specificity
of the characteristics and the monitoring mechanisms contemplated under
the proposed exemption. In addition, certain cash accounts will be
established to support the certificate pass-through rate and such cash
accounts will be invested in short-term, conservative investments; the
pre-funding period will be of a reasonably short duration; a pre-
funding period limit will be imposed; and any Internal Revenue Service
requirements with respect to pre-funding intended to preserve the
passive income character of the trust will be met. The fiduciary of the
plans making the decision to invest in certificates is thus fully
apprised of the nature of the receivables which will be held in the
trust and has sufficient information to make a prudent investment
decision.
(c) Certificates in which plans invest will have been rated in one
of the three highest rating categories by a rating agency. Credit
support will be obtained to the extent necessary to attain the desired
rating;
(d) All transactions for which Mellon 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;
(e) Exemptive relief from sections 406(b) and 407 for sales to
plans is substantially limited; and
(f) Mellon anticipates that it will make a secondary market in
certificates (although it is under no obligation to do so).
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.)
Operating Engineers Local 324 Journeyman and Apprentice Training
Fund (the Plan), located in Howell, Michigan (Application No. L-
10645).
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 32826, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b) (1) and (2) of
the Act shall not apply to: (1) The proposed loan of $1,500,000 (the
Loan) to the Plan by the International Union of Operating Engineers
Local 324, AFL-CIO (the Union), a party in interest with respect to the
Plan, for the repayment of certain outstanding loans (the Original
Loans) made to the Plan by the Michigan National Bank (the Bank), an
unrelated party; and (2) as of March 12, 1998, the pledging of
certificates of deposit by the Union as security for the Original
Loans; provided that the following conditions are met:
(a) The terms and conditions of the Loan are at least as favorable
to the Plan as those which the Plan could have obtained in an arm's-
length transaction with an unrelated party;
(b) The Plan's trustees determine that the Loan is appropriate for
the Plan and in the best interests of the Plan's participants and
beneficiaries;
(c) An independent fiduciary acting on behalf of the Plan (the
Independent Fiduciary) reviews the terms of the Loan and determines
that the Loan is protective of and in the best interests of the Plan;
(d) The Independent Fiduciary monitors the Loan, as well as the
conditions of this proposed exemption (if granted), and takes whatever
actions are necessary to safeguard the interests of the Plan under the
Loan;
(e) The Loan is repaid by the Plan solely with funds the Plan
retains after paying all of its operational expenses; and
(f) The terms and conditions relating to the pledging of the
certificates of deposit by the Union as security for the Original Loans
were in the best interest of the Plan and its participants and
beneficiaries.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of March 12, 1998.
Summary of Facts and Representations
1. The Union is located in Livonia, Michigan and represents workers
who are engaged primarily in heavy construction projects throughout the
state of Michigan. The Plan was established by the Union in 1964 as a
training program for individuals who are members of the Union and are
employed by contributing employers with regard to the Plan. The purpose
of the Plan is to provide eligible participants (the Participants) with
the skills necessary to operate and repair construction equipment. The
Plan had approximately 11,500 participants and $12,664,604 in total
assets, as of August 31, 1998.
2. Among the Plan's assets is an indoor training facility (the
Facility) located in Howell, Michigan. The Facility is comprised mainly
of classrooms and an indoor work area, and is used by the Participants
to acquire additional construction training. The Facility is situated
on 365 acres of real property (the Property) which is also owned by the
Plan. The Property is used by the Participants as an outdoor
construction training area.
3. The trustees of the Plan (the Trustees) represent that, in the
spring of 1997, they anticipated a significant increase in the amount
of training hours the Participants would be spending in the Facility
during the upcoming years. The Trustees state that this potential
increase was due to a growing demand for construction workers
throughout Michigan, stricter training requirements for workers who
handle hazardous waste, and increasingly sophisticated construction
equipment. In this regard, the Participants trained a total of
approximately 32,000 hours in the Facility in 1997, and will train a
total of approximately 43,200 hours in the Facility in 1998. The
Trustees believe that there will be additional increases in Participant
usage of the Facility in future years.
4. The Trustees determined that the Facility was inadequate to
handle the anticipated increase in use by the Participants. As a
result, in March 1998, the Trustees decided to expand the Facility (the
Expansion) at a projected cost of $1,500,000. The Expansion consisted
of the addition of three classrooms to the Facility and an enlargement
of the Facility's indoor repair area. The Expansion also included
maintenance repairs on the Facility. The Expansion was completed on
September 26, 1998.
5. To finance the Expansion, the Trustees caused the Plan to
receive two loans (i.e. the Original Loans) from the Bank. The first
loan (the First Loan) was entered into on May 12, 1998 for $1,000,000
and was secured with a certificate of deposit (CD) pledged by the Union
in the amount of $1,000,000. The second loan (the Second Loan) was
entered into on July 28, 1998 for $500,000 and was secured with a CD
pledged by the Union in the amount of $500,000.
6. The Original Loans each had a term of 12 months and required
that the Plan pay a fixed rate of interest. At the time the First Loan
and the Second Loan
[[Page 3357]]
were made, the interest rates for each were set at two percentage
points above the interest rate the Bank currently paid on its 12 month
CDs. At the time the First Loan was made, the Bank was paying 5.25% on
its 12 month CDs. As a result, the interest rate the Plan pays on the
First Loan is 7.25%. At the time the Second Loan was made, the Bank was
paying 5.17% on its 12 month CDs. As a result, the interest rate the
Plan pays on the Second Loan is 7.17%.
7. The Union proposes to lend the Plan, under the terms of the
Loan, an amount equal to the entire principal amount of the Original
Loans (i.e. $1,500,000). The Union represents that the Loan will be
used by the Plan to repay the Original Loans. The Union also represents
that the Plan will not pay any fees associated with the Loan. The Loan
will have a term of seven years and will be unsecured. Additionally,
the Loan will have a seven year amortization schedule (the Schedule)
and monthly payments of principal and interest until maturity.
The Trustees of the Plan represent that the Schedule is beneficial
to the Plan since it allows the Plan to gradually pay down the
principal amount of the Loan. The Trustees represent that the terms of
the Original Loans do not provide for amortization of the Original
Loans' principal amounts. Thus, absent any renewals of the Original
Loans by the Bank, the Plan must repay the entire principal amount of
the Original Loans at maturity. In this regard, the Trustees represent
that the terms of the Original Loans cause a liquidity problem for the
Plan in that the Plan is required to reserve funds for the repayment of
the principal amounts of the Original Loans. The Trustees represent
that the Schedule allows for a more efficient allocation of Plan
resources.
8. The Union represents that the terms of the Loan are more
favorable to the Plan than the terms of the Original Loans. The Union
represents that the Plan will repay the Loan solely with funds retained
by the Plan after paying for all of its operational expenses (the
Excess Funds).19 In the event that the Plan has no Excess
Funds at the time a payment by the Plan is due, the Union represents
that the Loan will be suspended (the Suspension Period).20
The Union represents that during any Suspension Period, the Plan will
not be required to make any principal or interest payments on the
Loan.21 In addition, the Union represents that no interest
on the Loan will accrue during the Suspension Period.
---------------------------------------------------------------------------
\19 \The Union represents that the Plan's operational expenses
are funded by contributions made to the Plan by contributing
employers. These contributions are based on a portion of each
Participant's hourly wage that is paid by such employers. The Union
represents that the Participants' hourly wage rate is negotiated
between the Union and the contributing employers each year. Thus,
the Union represents that the Particicants' wage deduction amount
for contributions made by the employers to the Plan is determined by
the parties each year.
\20\ The Union represents that computation of the amount of
Excess Funds available for the repayment on the Loan will be done
according to generally accepted accounting principles by a certified
public accountant representing the Plan.
\21\ The Union represents that if the Suspension Period causes
there to be an outstanding principal balance on the Loan at the end
of the seven-year term, the duration of the Loan will be extended
and the Plan will be obligated to continue making monthly payments
of principal and interest until the Loan is paid in full. In this
regard, the Plan will not be required to make any lump-sum payment
for the outstanding principal balance at any time.
---------------------------------------------------------------------------
The Trustees represent that the interest rate paid by the Plan to
the Union on the Loan will be less than the interest rates paid by the
Plan on the Original Loans. The interest rate the Plan will pay on the
Loan (the New Rate) will be a floating rate based on the Wall Street
Journal Jumbo CD Rate (the WSJ CD Rate) for CDs with a duration of 12
months. The New Rate will be initially set at the lesser of (i) 6.02%
(the WSJ CD Rate as of November 9, 1998, plus 1%), or (ii) a rate which
is 1% above the WSJ CD Rate at the time the Loan is consummated. The
New Rate will be reset on the first day of January, April, July, and
October to equal the rate which is 1% above the WSJ CD Rate at that
time. However, in no event will the New Rate exceed 7.25% per annum,
the rate the Plan currently pays the Bank under the First Loan.
In addition, the New Rate will be more favorable to the Plan than
the interest rate the Plan would have paid on a renewal of the Original
Loans from the Bank. The New Rate will only be 1% above the WSJ CD Rate
for 12-month CDs which will be significantly less than a rate which is
2% above the Bank's 12-month CD rate. The Trustees estimate that
setting the interest rate on the Loan at the New Rate will result in a
savings to the Plan in excess of $61,000 during the term of the Loan.
9. The terms of the Loan will be monitored by Richard Czapski (Mr.
Czapski) of Plante and Moran, LLP (Plante and Moran), who will act as
the Plan's Independent Fiduciary. Plante and Moran is a public
accounting firm having offices in Michigan and Ohio. Mr. Czapski is a
partner with Plante and Moran. Mr. Czapski represents that he is
qualified to act as the Independent Fiduciary because he is experienced
in matters concerning pension plans and bank loans. Mr. Czapski states
that he will rely on the advice of an experienced ERISA counsel, if
necessary, to determine what actions are appropriate to safeguard the
interests of the Plan throughout the duration of the Loan.
Mr. Czapski represents that he has evaluated the terms of the Loan
and has determined that the Loan would be in the best interests and
protective of the Plan and its participants and beneficiaries. Mr.
Czapski states that he will monitor the Plan's repayment of the Loan.
Mr. Czapski will represent the Plan, as the Independent Fiduciary, to
enforce the Plan's rights under the terms and conditions of the Loan
and will take whatever actions are necessary to protect the interests
of the Plan.
10. In summary, the applicant represents that the transactions
satisfy the statutory criteria contained in section 408(a) of the Act
for the following reasons:
(a) The terms of the Loan are at least as favorable to the Plan as
those obtainable in an arm's-length transaction with an unrelated
party;
(b) The Trustees have determined that the Loan is appropriate for
the Plan and in the best interests of the Plan's participants and
beneficiaries;
(c) Mr. Czapski, as the Plan's Independent Fiduciary, has reviewed
the terms and conditions of the Loan and determined that the Loan would
be appropriate for, and in the best interests of, the Plan;
(d) Mr. Czapski, as the Plan's Independent Fiduciary, will monitor
the Loan, as well as the conditions of this proposed exemption (if
granted), and will take whatever actions are necessary to safeguard the
interests of the Plan;
(e) The New Rate initially will be the lesser of 6.02% or 1% above
the WSJ CD Rate as of the date of the Loan, an interest rate which will
be significantly less than the rates currently paid by the Plan under
the Original Loans (i.e. 7.25% and 7.17%, respectively); and
(f) The Loan will be repaid by the Plan solely with funds retained
by the Plan after paying for all of its operational expenses.
FOR FURTHER INFORMATION CONTACT: Christopher J. Motta of the
Department, telephone (202) 219-8883 (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
[[Page 3358]]
provisions to which the exemption does not apply and the general
fiduciary responsibility provisions of section 404 of the Act, which
among other things require a fiduciary to discharge his duties
respecting the plan solely in the interest of the participants and
beneficiaries of the plan and in a prudent fashion in accordance with
section 404(a)(1)(b) of the act; nor does it affect the requirement of
section 401(a) of the Code that the plan must operate for the exclusive
benefit of the employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 14th day of January 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 99-1271 Filed 1-20-99; 8:45 am]
BILLING CODE 4510-29-P