[Federal Register Volume 65, Number 212 (Wednesday, November 1, 2000)]
[Notices]
[Pages 65356-65361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27976]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-24697; 812-11786]


PMC Capital, Inc., et al.; Notice of Application

October 25, 2000.
AGENCY: Securities and Exchange Commission (``Commission'' or ``SEC'').

ACTION: Notice of application for an order under sections 6(c) and 
57(c) of the Investment Company Act of 1940 (the ``Act'') for an 
exemption from sections 57(a)(1) and 57(a)(2) of the Act, and under 
section 57(i) of the Act and rule 17d-1 under the Act authorizing 
certain joint transactions otherwise prohibited by section 57(a)(4) of 
the Act.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
(1) a business development company (``BDC'') to engage in a loan 
origination agreement with an affiliated real estate investment trust, 
(2) investment management agreements between subsidiaries of the BDC 
and the real estate investment trust, and (3) the establishment of 
special purpose entities owned by the BDC and the real estate 
investment trust to engage in joint loan securitizations. The requested 
order would supersede an existing order.

APPLICANTS: PMC Capital, Inc. (``PMC''), PMC Commercial Trust (the 
``REIT''), PMC Advisers, Ltd. (``Advisers''), and PMC Asset Management, 
Inc. (``Managers'').

FILING DATES: The application was filed on September 9, 1999 and 
amended on March 29, 2000 and October 24, 2000.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on November 20, 
2000, and should be accompanied by proof of service on applicants, in 
the form of an affidavit, or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reason for the request, and the issues contested. Persons may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicants, 18111 Preston Road, Suite 600, Dallas, Texas 75252.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
942-0582, or Mary Kay Frech, Branch Chief, at (202) 942-0564 (Division 
of Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch, 450 5th Street, N.W., Washington 
D.C. 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. PMC, a Florida corporation, is a closed-end diversified 
management investment company. On June 7, 1994, PMC filed notification 
of its election to operate as a BDC. PMC provides early stage financing 
and makes available significant managerial assistance to small 
businesses and receives interest income, loan servicing and other fees

[[Page 65357]]

generated by loans that it originates. PMC makes loans to small 
businesses either directly or through three subsidiaries, each of which 
is licensed and regulated by the Small Business Administration 
(``SBA'') and each of which is registered under the Act as a closed-
end, diversified management investment company (the ``SBA 
Subsidiaries''). PMC currently has a seven-member board of directors, 
four of whom are not interested persons of PMC (``Independent 
Directors''). The four Independent Directors of PMC have no financial 
interest in the REIT. PMC and its SBA Subsidiaries do not have external 
investment advisers.
    2. The REIT, formed in June 1993, is a Texas real estate investment 
trust whose common shares of beneficial interest are traded on the 
American Stock Exchange. The REIT was formed to take advantage of 
certain loan origination opportunities that PMC was unable to pursue 
because, among other things, many of its customers grew to exceed the 
limitations applicable to the SBA program or potential new borrowers 
were interested in loans of a size or type that did not meet the SBA 
criteria, and leverage restrictions applicable to PMC precluded it from 
borrowing enough additional capital to satisfy loan demand.
    3. To mitigate against potential conflicts of interest between PMC 
and the REIT, PMC and the REIT entered into a loan origination 
agreement to set forth specific objective criteria to be used to 
allocate loan origination opportunities between them. The agreement 
provides that PMC will continue to make loans through its investment 
company subsidiaries in accordance with the eligibility requirements of 
the SBA programs used by the subsidiaries. Pursuant to the loan 
origination agreement, the REIT makes loans primarily (a) to borrowers 
that exceed the eligibility requirements of the SBA programs used by 
PMC, (b) in excess of $1,100,000, or (c) that do not conform to PMC's 
fundamental policies. In 1993, PMC obtained an order under the Act (the 
``1993 Order'')\1\ that permitted (a) PMC to own PMC Advisers, Inc., an 
investment adviser registered under the Investment Advisers Act of 1940 
(the ``Advisers Act''); (b) PMC Advisers, Inc. to enter into an 
investment management agreement with the REIT; and (c) PMC and the REIT 
to enter into the loan origination agreement.
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    \1\ PMC Capital, Inc., Investment Company Act Release Nos. 19823 
(Oct. 29, 1993) (notice) and 19895 (Nov. 23, 1993) (order). The 
other parties to the order were PMC Advisers, Inc., the REIT, Andrew 
S. Rosemore and Lance B. Rosemore. Lance B. Rosemore and Andrew S. 
Rosemore were applicants because at the time the 1993 Order was 
issued, they owned all of the issued and outstanding beneficial 
interests in the REIT. The REIT is now a publicly traded company.
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    4. Advisers is the successor-in-interest by merger to PMC Advisers, 
Inc. Advisers is an indirect, wholly owned subsidiary of PMC, and 
Managers is a direct, wholly owned subsidiary of Advisers. Advisers 
presently provides services to the REIT with respect to the REIT's 
ownership of commercial real estate properties. Managers presently 
provides services to the REIT with respect to the REIT's loan 
origination activities. Advisers and Managers pay all of their net 
income to PMC in the form of dividends or partnership distributions. 
The executive management teams of the REIT, PMC, Advisers and Managers 
are comprised of the same individuals.
    5. PMC and the REIT propose to enter into arrangements to generate 
working capital from time to time by jointly selling through 
securitization transactions portions of their respective loan 
portfolios. At such time as PMC and the REIT have originated a 
sufficient amount of loans to securitize on a cost-effective basis, PMC 
and the REIT propose to form a jointly owned special purpose entity 
(``SPE''). PMC and the REIT will each transfer ownership of the loans 
to the SPE in exchange for cash and an equity interest in the SPE based 
upon the relative outstanding principal balance of the loans that each 
contributes to the SPE. As the equity owners of the SPE, each of PMC 
and the REIT will retain the residual interest in the specific loans it 
transfers to the SPE to the extent any loans remain following repayment 
in full of the securities issued by the SPE.
    6. Each SPE will be a limited partnership, limited liability 
company, trust or some other type of entity the form of which will be 
determined at the time of each transaction. Each SPE will be a passive, 
special purpose bankruptcy-remote entity and its organizational 
documents will expressly limit its activities to owning and holding the 
loans, issuing debt securities and other activities that are reasonably 
related thereto. Each SPE will rely on rule 3a-7 under the Act for an 
exemption from regulation under the Act. Each of PMC and the REIT will 
continue to service the loans that it transfers to the SPE pursuant to 
a servicing agreement that will govern the servicing of the loans and 
any other loan related property owned by the SPE. The SPE will pay PMC 
and the REIT a servicing fee for servicing the loans transferred to the 
SPE, which will be equal to the servicing fee that each would receive 
in a transaction in which the other was not a participant.
    7. PMC and the REIT do not anticipate that they will necessarily 
transfer the same amount of loans to the SPE in connection with any 
particular transaction. However, the rights and obligations (other than 
any rights or obligations based solely on each entity's percentage 
ownership interest in the SPE) of each of PMC and the REIT under the 
transaction documents will be identical. To ensure that neither PMC nor 
the REIT is disadvantaged relative to the other with respect to the 
purchase price it receives upon the transfer of the loans to the SPE, 
the relative ownership interests of PMC and the REIT in the SPE and the 
amount of net proceeds each receives for the loans it transfers to the 
SPE will be based on the aggregate outstanding principal balance of the 
loans each such party transfers to the SPE without regard to the 
interest rates on such loans. Thereafter, to ensure that PMC and the 
REIT each benefit from the value of the loans it transfers to the SPE, 
all subsequent distributions to be made to PMC and the REIT under the 
securitization documents will be allocated proportionately based upon 
the relationship that the amount of the funds available for 
distribution to PMC and the REIT that is attributable to the loans 
(including the interest earned thereon) that were transferred to the 
SPE by such party bears to the total amount of funds then available for 
distribution to PMC and the REIT. Accordingly, the distributions each 
of PMC and the REIT receives will be based upon the performance of the 
loans that it transfers to the SPE.
    8. PMC and the REIT will be required to pay certain expenses 
(including accounting, legal, investment banking, rating agency, 
printing, filing, recording and other expenses) incurred in connection 
with the issuance of securities by the SPE. They will each pay their 
portion of such expenses in accordance with their respective ownership 
interests in the SPE.
    9. The SPEs will issue debt securities (the ``SPE Debt 
Securities'') to investors in private placement transactions exempt 
from registration under section 4(2) of the Securities Act of 1933 (the 
``Securities Act''). The senior class of the SPE Debt Securities will 
be rated by a nationally recognized rating agency in one of its two 
highest rating categories. The indebtedness evidenced by the SPE Debt 
Securities will be secured by a security interest in the loans and will 
be over-collateralized as the aggregate outstanding principal balance 
of the loans securing the SPE Debt Securities will exceed the principal 
amount of the

[[Page 65358]]

SPE Debt Securities that will be issued by the SPE. The indebtedness 
evidenced by the SPE Debt Securities will also be secured by certain 
amounts that the SPE will be required to deposit in a reserve account 
maintained with the trustee under the indenture pursuant to which the 
SPE Debt Securities will be issued. The SPE will issue the SPE Debt 
Securities on a non-recourse basis and accordingly, neither PMC nor the 
REIT will have any liability or obligation for repayment of the SPE 
Debt Securities. The SPE will make payments of principal and interest 
on the SPE Debt Securities issued by the SPE from the payments of 
principal and interest received by the SPE on the loans securing the 
SPE Debt Securities. In the event that on any payment date the payments 
of principal and interest received by the SPE are insufficient to make 
the payments required to be paid to the holders of SPE Debt Securities 
on such date, amounts on deposit in the reserve account will be 
utilized to make the payments to the holders of SPE Debt Securities. To 
the extent amounts on deposit in the reserve account are insufficient 
to make the payments required to be paid to the holders of SPE Debt 
Securities on such date, the loans comprising the over-
collateralization amount will provide excess collateral that will be 
available to the holders of SPE Debt Securities.
    10. Applicants state that, historically, PMC's primary sources of 
capital and liquidity have been debentures issued through programs of 
the SBA, private and public issuances of common stock, the private 
issuance of senior unsecured medium term notes and the utilization of 
its short-term, unsecured revolving credit facility. Due to changes in 
certain SBA programs during the past three years that have increased 
the cost of SBA debentures, PMC has utilized other more cost-effective 
sources of funds to finance and expand its loan portfolio. PMC has been 
able to generate cost-effective growth in its investment portfolio 
through the sale from time to time of a portion of its loan portfolio 
through securitization transactions. These loan sales accomplished 
through securitization transactions have enabled PMC to generate 
working capital at rates generally better than available through the 
issuance of SBA debentures under the terms recently in existence. From 
time to time during the past four years the REIT has also raised 
working capital through the sale of portions of its loan portfolio 
through securitization transactions. Applicants contend that PMC and 
the REIT could each utilize the securitization process more effectively 
on a combined basis.
    11. Applicants state that the proposed transactions would enable 
PMC and the REIT to accumulate larger, more diversified loan portfolios 
and thereby achieve larger asset-backed securities offerings. 
Geographic and borrower diversity in the loan portfolio reduces the 
risk associated with the securities to be issued by the SPE and is 
therefore fundamental to and may benefit the rating process. Applicants 
state that more widely diversified loan portfolios will improve their 
ability to obtain a rating in one of the two highest ratings categories 
from a nationally recognized rating agency, which will result in a 
lower interest rate on the SPE Debt Securities. Applicants state that 
increasing the size of the securitization transaction should not 
increase substantially the associated transaction costs and should 
therefore significantly reduce the transaction costs that would 
otherwise be paid by each of PMC and the REIT in connection with a 
securitization transaction conducted on an individual basis.

Applicants' Legal Analysis

    1. Applicants request an order under sections 6(c) and 57(c) of the 
Act granting an exemption from sections 57(a)(1) and 57(a)(2) of the 
Act, and under section 57(i) of the Act and rule 17d-1 under the Act 
authorizing certain joint transactions otherwise prohibited by section 
57(a)(4) of the Act. The requested order will supercede the 1993 Order.

Section 57(a)(1) and 57(a)(2)

    2. Section 57(a)(1) of the Act provides that it shall be unlawful 
for any person related to a BDC in the manner specified in section 
57(b) of the Act, acting as principal, knowingly to sell any security 
or other property to the BDC or to any company controlled by the BDC, 
unless the sale involves solely (a) securities of which the buyer is 
the issuer, or (b) securities of which the seller is the issuer and 
which are part of a general offering to the holders of a class of its 
securities. Section 57(a)(2) provides that it shall be unlawful for any 
person related to a BDC in the manner specified in section 57(b), 
acting as principal, knowingly to purchase from the BDC or from any 
company controlled by the BDC, any security or other property (except 
securities of which the seller is the issuer).
    3. Section 57(b) provides, among other things, that section 57(a) 
shall apply to any person directly or indirectly controlling, 
controlled by, or under common control with, a BDC. Under section 
2(a)(9) of the Act, a control relationship is presumed to exist if a 
person, either directly or through one or more controlled companies, is 
the beneficial owner of more than 25% of a company's outstanding voting 
securities. Section 57(c) of the Act provides that a person may file 
with the Commission an application for an order exempting a proposed 
transaction from sections 57(a)(1) or 57(a)(2). The Commission shall 
grant the application if (a) the terms of the proposed transaction, 
including the consideration to be paid or received, are reasonable and 
fair and do not involve overreaching of the BDC or its shareholders on 
the part of any person concerned, (b) the proposed transaction is 
consistent with the policy of the BDC as recited in the filings made by 
the company under the Securities Act, its registration statement and 
reports filed under the Securities Exchange Act of 1934 (the ``Exchange 
Act''), and its reports to shareholders, and (c) the proposed 
transaction is consistent with the general purposes of the Act.
    4. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction, or any class of persons, 
securities, or transactions, if and to the extent that such exemption 
is necessary or appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act.
    5. PMC will own more than 25% of the outstanding voting securities 
of an SPE and thus will be deemed to control the SPE. Section 57(a) 
thus applies to transactions between PMC and an SPE. The proposed 
securitization transactions contemplate that PMC and the REIT will each 
transfer loans to the SPE in exchange for cash and an equity interest 
in the SPE. The transfer of the equity interests by the SPE to PMC 
constitutes the sale of a security to a BDC and is therefore prohibited 
by section 57(a)(1). In addition, the acquisition of loans by an SPE 
from PMC will constitute the purchase of property from a BDC and is 
therefore prohibited by section 57(a)(2).
    6. Applicants believe that the proposed transactions satisfy the 
standards for relief set forth in sections 57(c) and 6(c). Applicants 
state that conditions 8 and 9 to the requested relief would assure that 
the consideration to be paid or received is reasonable and fair and 
would not involved overreaching of the BDC or its shareholders on the 
part of any person concerned.

[[Page 65359]]

    7. Applicants state that the proposed transactions are consistent 
with the policies of PMC as set forth in its public filings and reports 
to shareholders. Applicants therefore believe that the requested relief 
is appropriate in the public interest and consistent with the 
protection of investors and the policies and provisions of the Act.

Section 57(a)(4)

    8. Section 57(a)(4) provides that it shall be unlawful for any 
person related to a BDC in the manner specified in section 57(b) of the 
Act, acting as principal, knowingly to effect any transaction in which 
the BDC or a company controlled by the BDC is a joint or a joint and 
several participant with such person in contravention of Commission 
rules adopted for the purpose of limiting or preventing participation 
by the BDC or controlled company on a basis less advantageous than that 
of such person.
    9. Section 57(i) of the Act provides that, until the Commission 
prescribes rules under sections 57(a) and 57(d), the Commission's rules 
under sections 17(a) and 17(d) of the Act applicable to registered 
closed-end investment companies shall be deemed to apply to sections 
57(a) and 57(d) of the Act. Because the Commission has not adopted any 
rules under section 57(a)(4), rule 17d-1 applies.
    10. Rule 17d-1 under the Act generally prohibits affiliated persons 
of an investment company from entering into joint transactions with the 
company without prior Commission authorization. In passing upon 
applications under rule 17d-1, the Commission considers whether the 
participation by the BDC in the joint transaction is consistent with 
the provisions, policies, and purposes of the Act and the extent to 
which such participation is on a basis different from or less 
advantageous than that of other participants.
    11. The REIT is advised by Advisers and Managers and thus could be 
deemed to be controlled by Advisers and Managers. Advisers and Managers 
are wholly owned subsidiaries of PMC and thus are persons controlled by 
PMC. The REIT is thus indirectly controlled by PMC. The REIT is 
prohibited from entering into joint transactions with PMC absent an 
exemptive order.
    12. The proposed joint securitizations will be joint transactions 
involving PMC and the REIT. Applicants believe that the proposed 
transactions are consistent with the provisions, policies and purposes 
of the Act and that participation of PMC in the proposed transactions 
will not be on a basis less advantageous than that on the REIT. The 
directors of PMC, including a ``required majority'' of the directors as 
defined in section 57(o), will determine that the terms of the 
transactions, including the consideration to be paid, are reasonable 
and fair. The terms of each joint securitization will be the same for 
PMC and the REIT. Applicants contend that sufficient safeguards are in 
place through the underwriting and ratings processes to prevent the 
REIT or PMC from transferring disproportionately inferior credit 
quality loans to an SPE. In addition, the REIT will make certain 
representations relating to the credit quality of the loans it 
transfers as described in condition B.3.
    13. A ``required majority,'' as defined in section 57(o) of the 
Act, of the directors of PMC will be required to make a determination 
in connection with any proposed securitization transaction that the 
loans transferred to the SPE by PMC could not have obtained a higher 
credit rating in a transaction not involving the participation of the 
REIT. To assist the directors of PMC in making this determinations, the 
directors will be provided with the same extensive an detailed loan and 
credit information that is provided to a rating agency, including 
information about the loan origination operations of PMC and REIT, the 
credit underwriting criteria utilized in originating the loans, 
historical delinquency and collection information, and loan loss and 
recovery histories. This information will provide a detailed analysis 
of the loan portfolio characteristics, including loan concentration by 
state, franchisor, and other pertinent characteristics of the loan 
portfolio. The board of directors will also be provided sample 
marketing information, delinquency and problem loan reports and such 
other due diligence reports and information as the rating agencies 
utilize in rating any such transaction. Information provided to PMC's 
board of directors will also include an analysis comparing the PMC loan 
pool to the loan pool to be transferred to the SPE by the REIT. 
Finally, PMC will provide its board of directors with an executive 
summary of each loan included in the PMC pool and each loan included in 
the REIT pool on an individual pool basis, which will contain detailed 
information about each loan, including the property type, date of loan 
origination, original loan principal amount, outstanding principal 
balance, current interest rate, maturity date, delinquency history, 
amortization period, original and current loan-to-value ratios, debt-
service-coverage ratio and property location.
    14. Applicants state that, in the unlikely event that the credit 
quality of the loans conveyed by the REIT or PMC is significantly 
disproportionately lower than the credit quality of the loans conveyed 
by the other party, the residual interest of the party contributing the 
higher quality loans could be disproportionately impacted. To protect 
the party transferring a higher quality loan portfolio against this 
possibility, each transaction will be structured so that all 
distributions to PMC and the REIT under the documents will be based on 
the performance of the loans transferred by PMC or the REIT, as the 
case may be. Either the organizational documents of the SPE and/or a 
separate agreement between PMC and the REIT will provide that any and 
all amounts distributable to PMC and the REIT in respect of each 
party's residual interest in its loans will be determined pursuant to a 
percentage allocation, the numerator of which is the amount of funds 
available for distribution that is attributable to the loans 
transferred by such party to the SPE and the denominator of which is 
the total funds then available for distribution to PMC and/or the REIT. 
Each party will also agree to reimburse the other in the unlikely event 
such other party's residual interest in the loans it transferred to the 
SPE is disproportionately impacted as a result of the non-performance 
of the loans transferred to the SPE by such party.
    15. Applicants state that a particular securitization transaction 
could also potentially be less advantageous to PMC or the REIT if one 
of the parties commits an act or omission that subjects that other to 
liability. PMC and the REIT will each execute a cross-indemnity 
agreement to protect the other party against the risk.
    16. Applicants also seek an order under section 57(i) and rule 17d-
1 superseding the 1993 Order which permits the loan origination 
agreement between PMC and the REIT and investment management agreements 
between Advisers and the REIT and Managers and the REIT.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:

A. Investment Advisory and Management Arrangements

    1. PMC's board of directors, including a ``required majority'' or 
the directors as defined in section 57(o) of the Act, will review at 
least annually the relationship

[[Page 65360]]

among (a) Advisers, the REIT and their affiliated persons and (b) 
Managers, the REIT and their affiliated persons, to determine whether 
the benefits derived by PMC and its shareholders warrant the 
continuation of the advisory relationships, including, but not limited 
to, the advisory agreement between Managers and the REIT and the 
management agreement between Advisers and the REIT and, if appropriate, 
will approve (by a vote of a majority of the directors of PMC, 
including the ``required majority'') at least annually such 
continuation.
    2. A loan origination agreement has been entered into between PMC 
and the REIT to set forth specific objective criteria, as described in 
the application, which is utilized by Managers to allocate loan 
origination opportunities. Any amendments or modifications to the loan 
origination agreement will be approved by PMC's board of directors, 
including the ``required majority.''
    3. The minutes of the meetings of PMC's board regarding the 
relationships among Managers, the REIT and their affiliated persons, 
including consideration of the advisory agreement between Managers and 
the REIT, and among Advisers, the REIT and their affiliated persons, 
including consideration of the management agreement between Advisers 
and the REIT, and the loan origination agreement or any amendments or 
modifications thereto, will reflect in detail a description of the 
board's deliberations, its findings, the information or materials upon 
which its findings were based, and the reasons for the directors' 
determination (a) that the relationships among Managers, the REIT and 
their affiliated persons, including the investment advisory agreement 
between Managers and the REIT, (b) that the relationship among 
Advisers, the REIT and their affiliated persons, including the 
management agreement between Advisers and the REIT, or (c) the loan 
origination agreement and any amendments or modifications thereto, as 
the case may be, is in the best interests of both PMC and its 
shareholders.
    4. PMC will, without prejudice to the rights of its board of 
directors to dispose of PMC's interests in Advisers or Managers in 
their respective entireties, at all times own directly or indirectly 
beneficially and of record all of the issued and outstanding shares of 
capital stock or partnership interests of Advisers and Managers, as the 
case may be, and will cause Advisers and Managers not to issue any 
authorized but unissued shares of its capital stock or partnership 
interests to any person other than PMC or a wholly-owned subsidiary of 
PMC.
    5. A majority of the directors of PMC, Advisers and Managers will 
not have any financial interest in or be ``interested persons'' of the 
REIT, as if the REIT were an investment company under section 
2(a)(19)(A).

B. Joint Securitization Transactions

    1. (a) The directors of PMC will receive written information 
concerning all joint securitization opportunities. The directors may 
request such additional information as they deem necessary to the 
exercise of their reasonable business judgment, and they will also 
employ such experts, including lawyers and accountants, as they deem 
appropriate to the reasonable exercise of this oversight function. PMC 
will engage in a joint securitization with the REIT only if a 
``required majority'' of the directors of PMC conclude, prior to the 
transaction, that:
    (i) The terms of the transaction, including the consideration to be 
paid, are reasonable and fair to the shareholders of PMC and do not 
involve overreaching of PMC on the part of any person concerned;
    (ii) The transaction is consistent with the interests of the 
shareholders of PMC and is consistent with PMC's investment objectives 
and policies as recited in filings made by PMC under the Securities 
Act, as amended, its registration statement and reports filed under the 
Exchange Act and its reports to shareholders; and
    (iii) Participation in the transaction by the REIT would not 
disadvantage PMC, and that participation by PMC would not be on a basis 
different from or less advantageous than that of the REIT.
    (b) PMC has the right to decline to participate in any joint 
securitization opportunity.
    2. The directors of PMC will be provided with a detailed credit 
rating analysis of each pool of loans to be contributed by PMC and the 
REIT in connection with any proposed joint securitization transaction 
and the investment bankers of PMC will provide a detailed presentation 
to PMC's directors analyzing each pool of loans on an individual pool 
basis. If the ``required majority'' of directors of PMC determine that 
the loans contributed by the REIT are of an inferior credit quality and 
would cause the transaction to receive a credit rating lower than the 
credit rating PMC's loans could otherwise obtain in a transaction not 
involving the REIT, PMC will not participate in the joint transaction.
    3. The loans transferred by the REIT to the SPE will satisfy the 
following conditions: (a) Such loans will have a weighted average loan-
to-value ratio at the time of loan origination that is less than the 
weighted average loan-to-value ratio at the time of loan origination of 
the loans that PMC transfers to the SPE; (b) such loans will have a 
weighted average loan-to-value ratio at the time of transfer that is 
less than the weighted average loan-to-value ratio of the loans that 
PMC transfers to the SPE; (c) no loan transferred by the REIT will be 
30 days delinquent at the time of transfer; and (d) an environmental 
site assessment shall have been performed in connection with the 
origination of each such loan and to the REIT's knowledge, at the time 
of origination, the property securing each such loan was in material 
compliance with all applicable federal, state and local environmental 
laws and regulations.
    4. Records required by section 57(f)(3) of the Act will be 
maintained as if each of the transactions permitted under these 
conditions were approved by the ``required majority'' of PMC's 
directors under section 57(f).
    5. The senior class of each asset-backed securities offering issued 
by an SPE jointly owned by PMC and the REIT will be rated in one of the 
two highest ratings categories by a NRSRO, as defined in rule 2a-7 
under the Act.
    6. Loans originated by the REIT will not be eligible to participate 
in any joint transaction unless they were underwritten by the REIT 
utilizing the same credit quality and underwriting criteria as that 
utilized by PMC with respect to any loans it originates and transfers 
to an SPE.
    7. Neither PMC nor the REIT will utilize any selection criteria 
with respect to the loans it selects to transfer to any SPE that would 
result in such loans being of a quality generally inferior to that of 
all of its loans taken as a whole.
    8. On the date of the transfer, each of PMC and the REIT will 
receive net proceeds in respect of the loans it transfers to the SPE in 
an amount equal to the aggregate outstanding principal balance of the 
loans it transferred to the SPE less its pro rata portion (based on the 
ratio of the aggregate principal balance of the loans its transfers to 
the total aggregate principal balance of all loans transferred by PMC 
and the REIT to the SPE) of any trustee fees, rating agency fees, other 
transaction costs and any initial reserve account deposits and required 
over-collateralization amounts.
    9. Following the initial distribution of net proceeds to PMC and 
the REIT, all subsequent distributions to PMC and/or the REIT made in 
respect of their respective residual interests in the loans

[[Page 65361]]

will be made pro rata to PMC and/or the REIT based on the percentage of 
the total amount available for distribution to PMC and/or the REIT that 
is attributable to the loans each such party transferred to the SPE.
    10. PMC and the REIT will agree pursuant to the organizational 
documents of the SPE or a separate agreement to reimburse the other 
party to the extent that such other party's residual interest in the 
loans it transferred to the SPE is disproportionately impacted as a 
result of the non-performance of the loans transferred to the SPE by 
PMC or the REIT, as the case may be.
    11. Each of PMC and the REIT will continue to service the loans it 
transfers to the SPE and shall receive the servicing fee payable in 
respect thereof for so long as PMC and the REIT service the loans in 
accordance with the terms of the securitization documents.
    12. PMC and the REIT will provide quarterly servicing reports to 
the board of directors of PMC and the trust managers of the REIT. Such 
reports shall show in reasonable detail all collections received from 
the loans transferred by each of PMC and the REIT as well as all 
deposits, payments and distributions made from the collection amounts 
and the reserve account. Such servicing reports shall also provide 
information on the status of any delinquent loans and any loan that 
becomes a charged-off loan.
    13. PMC and the REIT will provide to the board of directors of PMC 
and the trust managers of the REIT notice of the occurrence of any 
event, non-payment or loan loss with respect to any loan transferred to 
the SPE by one party that reduces the reserve account or increases the 
minimum amount required to be on deposit in the reserve account or 
causes the other party not to receive the distribution amount that it 
would have otherwise been entitled to receive if such event or loss had 
not occurred (each a ``Reimbursement Trigger Event'').
    14. PMC and the REIT will provide the board of directors of PMC and 
the trust managers of the REIT with notice when all amounts owing to 
PMC or the REIT, as the case may be, in respect of a Reimbursement 
Trigger Event have been paid in full by the other party.
    15. The expenses associated with each joint securitization 
transaction will be shared by PMC and the REIT in proportion to their 
ownership interests in the SPE.
    16. The terms and conditions of each joint securitization will be 
the same for PMC and the REIT.
    17. The Independent Directors will review quarterly all relevant 
information concerning joint securitization transactions created during 
the preceding quarter to determine whether the conditions set forth in 
the application were compiled with.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-27976 Filed 10-31-00; 8:45 am]
BILLING CODE 8010-01-M