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Proposed Amendment to Prohibited Transaction Exemption (PTE) 97-34 Involving Bear, Stearns & Co. Inc., Prudential Securities Incorporated, et al., (D-10829); Notice [Notices] [08/23/2000]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Amendment to Prohibited Transaction Exemption (PTE) 97-34 Involving Bear, Stearns & Co. Inc., Prudential Securities Incorporated, et al., (D-10829); Notice [08/23/2000]

[PDF Version]

Volume 65, Number 164, Page 51453-51494



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Part III





Department of Labor





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Pension and Welfare Benefits Administration



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Proposed Amendment to Prohibited Transaction Exemption (PTE) 97-34 
Involving Bear, Stearns & Co. Inc., Prudential Securities Incorporated, 
et al., (D-10829); Notice


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

 
Proposed Amendment to Prohibited Transaction Exemption (PTE) 97-
34 Involving Bear, Stearns & Co. Inc., Prudential Securities 
Incorporated, et al., (D-10829)

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Notice of a proposed amendment to the Underwriter 
Exemptions.\1\

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    \1\ The term ``Underwriter Exemptions'' refers to the following 
individual Prohibited Transaction Exemptions (PTEs): PTE 89-88, 54 
FR 42582 (October 17, 1989); PTE 89-89, 54 FR 42569 (October 17, 
1989); PTE 89-90, 54 FR 42597 (October 17, 1989); PTE 90-22, 55 FR 
20542 (May 17, 1990); PTE 90-23, 55 FR 20545 (May 17, 1990); PTE 90-
24, 55 FR 20548 (May 17, 1990); PTE 90-28, 55 FR 21456 (May 24, 
1990); PTE 90-29, 55 FR 21459 (May 24, 1990); PTE 90-30, 55 FR 21461 
(May 24, 1990); PTE 90-31, 55 FR 23144 (June 6, 1990); PTE 90-32, 55 
FR 23147 (June 6, 1990); PTE 90-33, 55 FR 23151 (June 6, 1990); PTE 
90-36, 55 FR 25903 (June 25, 1990); PTE 90-39, 55 FR 27713 (July 5, 
1990); PTE 90-59, 55 FR 36724 (September 6, 1990); PTE 90-83, 55 FR 
50250 (December 5, 1990); PTE 90-84, 55 FR 50252 (December 5, 1990); 
PTE 90-88, 55 FR 52899 (December 24, 1990); PTE 91-14, 55 FR 48178 
(February 22, 1991); PTE 91-22, 56 FR 03277 (April 18, 1991); PTE 
91-23, 56 FR 15936 (April 18, 1991); PTE 91-30, 56 FR 22452 (May 15, 
1991); PTE 91-62, 56 FR 51406 (October 11, 1991); PTE 93-31, 58 FR 
28620 (May 5, 1993); PTE 93-32, 58 FR 28623 (May 14, 1993); PTE 94-
29, 59 FR 14675 (March 29, 1994); PTE 94-64, 59 FR 42312 (August 17, 
1994); PTE 94-70, 59 FR 50014 (September 30, 1994); PTE 94-73, 59 FR 
51213 (October 7, 1994); PTE 94-84, 59 FR 65400 (December 19, 1994); 
PTE 95-26, 60 FR 17586 (April 6, 1995); PTE 95-59, 60 FR 35938 (July 
12, 1995); PTE 95-89, 60 FR 49011 (September 21, 1995); PTE 96-22, 
61 FR 14828 (April 3, 1996); PTE 96-84, 61 FR 58234 (November 13, 
1996); PTE 96-92, 61 FR 66334 (December 17, 1996); PTE 96-94, 61 FR 
68787 (December 30, 1996); PTE 97-05, 62 FR 1926 (January 14, 1997); 
PTE 97-28, 62 FR 28515 (May 23, 1997); PTE 97-34, 62 FR 39021 (July 
21, 1997); PTE 98-08, 63 FR 8498 (February 19, 1998); PTE 99-11, 64 
FR 11046 (March 8, 1999); PTE 2000-19, 65 FR 25950 (May 4, 2000); 
PTE 2000-33, 65 FR 37171 (June 13, 2000); and PTE 2000-41, First 
Tennessee National Corporation (August, 2000).
    In addition, the Department notes that it is also proposing 
individual exemptive relief for: Deutsche Bank AG, New York Branch 
and Deutsche Morgan Grenfell/C.J. Lawrence Inc., Final Authorization 
Number (FAN) 97-03E (December 9, 1996); Credit Lyonnais Securities 
(USA) Inc., FAN 97-21E (September 10, 1997); ABN AMRO Inc., FAN 98-
08E (April 27, 1998); and Ironwood Capital Partners Ltd., FAN 99-31E 
(December 20, 1999), which received the approval of the Department 
to engage in transactions substantially similar to the transactions 
described in the Underwriter Exemptions pursuant to PTE 96-62. 
Finally, the Department notes that it is proposing relief for 
Countrywide Securities Corporation (Application No. D-10863).
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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to the 
Underwriter Exemptions. The Underwriter Exemptions are individual 
exemptions that provide relief for the origination and operation of 
certain asset pool investment trusts and the acquisition, holding and 
disposition of certain asset-backed pass-through certificates 
representing undivided interests in those investment trusts. The 
proposed amendment, if granted, would: (1) Permit, for certain 
categories of transactions, the offering of ``investment grade'' 
mortgage-backed securities and asset-backed securities which are either 
senior or subordinated; (2) permit the use of eligible interest rate 
swaps (both ratings dependent and non-ratings dependent) under 
circumstances described in this proposal; (3) permit the use of yield 
supplement agreements which involve notional principal amounts; and (4) 
make certain changes to the Underwriter Exemptions that would reflect 
the Department's current interpretation of the Underwriter Exemptions.
    Finally, the proposed amendment, if granted, would provide 
exemptive relief for transactions involving: (1) an Issuer of mortgage-
backed securities or asset-backed securities which is a trust 
(including a grantor or owner trust), REMIC, FASIT, special purpose 
corporation, limited liability company or partnership and (2) mortgage-
backed securities or asset-backed securities issued which are either 
debt or equity investments.

DATES: Written comments and/or requests for a public hearing should be 
received by October 10, 2000.
    Effective Date: If granted, the proposed amendment to the 
Underwriter Exemptions would be effective for transactions occurring on 
or after the date of publication of this notice in the Federal 
Register, except as otherwise provided in sections I.C., II.A.(4)(b), 
and III.JJ. of the proposed amendment to the Underwriter Exemptions.

ADDRESSES: All written comments and requests for a hearing (preferably 
at least three copies) should be sent to: Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, Department of Labor, 200 Constitution Avenue, N.W., Washington, 
D.C. 20210, Attn: Proposed Amendment to the Underwriter Exemptions. The 
application pertaining to the amendment proposed herein and the 
comments received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Administration, U.S. 
Department of Labor, Room N-5638, 200 Constitution Avenue, N.W., 
Washington, D.C. 20210.

FOR FURTHER INFORMATION CONTACT: Wendy McColough of the Department, 
telephone (202) 219-8971. (This is not a toll-free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed exemption to amend PTE 97-34, 62 FR 
39021 (July 21, 1997) (the 1997 Amendment). PTE 97-34 amended over 
forty individual Underwriter Exemptions. The Underwriter Exemptions 
provide substantially identical relief for the operation of certain 
asset pool investment trusts and the acquisition and holding by plans 
of certain asset-backed pass-through certificates representing 
interests in those trusts. These exemptions provide relief from certain 
of the restrictions of sections 406(a), 406(b) and 407(a) of the Act 
and from the taxes imposed by section 4975(a) and (b) of the Code, by 
reason of certain provisions of section 4975(c)(1) of the Code.

I. Introduction

    The proposed amendment was requested by application dated October 
22, 1999, and as restated in later submissions on behalf of Morgan 
Stanley & Co. Incorporated.\2\ (the Applicant). In preparing the 
application, the Applicant received input from members of The Bond 
Market Association (TBMA).
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    \2\ PTE 90-24, 55 FR 20548 (May 17, 1990). Morgan Stanley & Co. 
Incorporated (Morgan Stanley) is an international securities firm 
providing through its affiliates a wide range of financial and 
securities services on a global basis to a large and diversified 
group of clients and customers, including corporations, governments, 
financial institutions and individuals. The businesses of Morgan 
Stanley and its affiliates include securities underwriting, 
distribution and trading; merger, acquisition, restructuring, real 
estate, project finance and other corporate finance advisory 
activities; asset management; private equity and other principal 
investment activities; brokerage and research services; and the 
trading of foreign exchange and commodities as well as derivatives 
on a broad range of asset categories, rates and indices. Affiliates 
of Morgan Stanley also provide credit and transaction services, 
including the operation of the Discover/Novus (trademark symbol) 
Network, a proprietary network of merchant and cash access 
locations, and the issuance of proprietary general purpose credit 
cards.
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    The Department is proposing the amendment to this individual 
exemption pursuant to section 408(a) of the Act and section 4975(c)(2) 
of the Code, and in accordance with the procedures set forth in 29 CFR 
Part 2570 (Subpart B) 55 FR 32836, 32847(August 10, 1990).\3\ In 
addition, the Department

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is proposing to provide the same relief on its own motion pursuant to 
the authority described above for many of the other Underwriter 
Exemptions which have substantially similar terms and conditions.\4\ 
The Department notes that it is also proposing individual exemptive 
relief for: Deutsche Bank AG, New York Branch and Deutsche Morgan 
Grenfell/C.J. Lawrence Inc., FAN 97-03E (December 9, 1996); Credit 
Lyonnais Securities (USA) Inc., FAN 97-21E (September 10, 1997); ABN 
AMRO Inc., FAN 98-08E (April 27, 1998); and Ironwood Capital Partners 
Ltd., FAN 99-31E (December 20, 1999), which received the approval of 
the Department to engage in transactions substantially similar to the 
transactions described in the Underwriter Exemptions pursuant to PTE 
96-62. Finally, the Department notes that it is proposing relief for 
Countrywide Securities Corporation (Application No. D-10863).
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    \3\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally 
transferred the authority of the Secretary of the Treasury to issue 
exemptions under section 4975(c)(2) of the Code to the Secretary of 
Labor. In the discussion of the exemption, references to sections 
406 and 408 of the Act should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
    \4\ In this regard, the entities who received the other 
Underwriter Exemptions were contacted concerning their participation 
in this amendment process.
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A. The Underwriter Exemptions

    The original Underwriter Exemptions permit plans to invest in pass-
through certificates representing undivided interests in the following 
categories of trusts: \5\ (1) Single and multi-family residential or 
commercial mortgage investment trusts; \6\ (2) motor vehicle 
receivables investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.\7\ Residential and commercial mortgage 
investment trusts may include mortgages on ground leases of real 
property. The terms of the ground leases pledged to secure leasehold 
mortgages will in all cases be at least ten years longer than the terms 
of such mortgages.\8\
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    \5\ The Department stated in the 1997 Proposed Amendment to the 
Underwriter Exemptions, 62 FR 28502 (May 23, 1997), that a given 
trust may include receivables of the type described in one or more 
of the categories under the definition of Trust.
    \6\ The Department noted 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. The Underwriter Exemptions provide relief for single-family 
residential mortgages because the applicants preferred one exemption 
for all trusts of similar structure. However, the applicants have 
stated that they may still avail themselves of the exemptive relief 
provided by PTE 83-1.
    \7\ 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. Exemptive relief for trusts containing 
guaranteed governmental mortgage pool certificates was provided 
previously because the certificates in the trusts may be plan 
assets.
    \8\ The Department previously noted that 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, at 23150 (June 6, 1990).
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    Each trust is established under a pooling and servicing agreement 
or an equivalent agreement among a sponsor, a servicer, and a trustee. 
Prior to the closing date under the pooling and servicing agreement, 
the sponsor and/or the servicer selects receivables from the classes of 
assets described in section III.B.(1)(a)-(f) of the original 
Underwriter Exemptions to be included in a trust, establishes the trust 
and designates an independent entity as trustee for the trust. 
Typically, on or prior to the closing date, the sponsor acquires legal 
title to all assets selected for the trust. In some cases, legal title 
to some or all of such assets continues to be held by the originator of 
the receivables until the closing date. On the closing date, the 
sponsor and/or the originator conveys to the trust legal title to the 
assets, and the trustee issued certificates representing fractional 
undivided interests in the trust assets.
    Since the receivables to be held in the trust were all transferred 
as of the Closing Date, no exemptive relief was requested under the 
Underwriter Exemptions for the trust to hold any cash, or temporary 
investments made therewith, other than cash representing undistributed 
proceeds from payments of principal and interest by obligors under the 
receivables. However, over time, the transactions relating to the 
funding of the trust changed. The 1997 Amendment to the Underwriter 
Exemptions: (1) Modified the definition of ``Trust'' to include a 
``pre-funding account'' (PFA) and a ``capitalized interest account'' 
(CIA) as part of the corpus of the trust; (2) provided retroactive 
relief for transactions involving asset pool investment trusts 
containing PFAs which have occurred on or after January 1, 1992; (3) 
included in the definition of ``Certificate'' a debt instrument that 
represents an interest in a Financial Asset Securitization Investment 
Trust (FASIT); and (4) made certain changes to the Underwriter 
Exemptions that reflected the Department's current interpretation of 
the Underwriter Exemptions.
    Under the Underwriter Exemptions as amended in 1997: (1) The rights 
and interests evidenced by certificates acquired by plans may not be 
subordinated to the rights and interests evidenced by other 
certificates of the same trust; (2) the certificates acquired by the 
plan must have received a rating from a Rating Agency at the time of 
such acquisition that is in one of the three highest generic rating 
categories; (3) the assets held by the trust must consist solely of 
receivables, obligations or credit instruments which are ``secured,'' 
(4) no interest rate swaps and no yield supplement agreements or 
similar yield maintenance agreements involving swap agreements or other 
notional principal contracts may be held by the trust and (5) the 
certificates must represent a beneficial ownership interest in the 
assets of a trust or a debt instrument issued by a REMIC or a FASIT 
which is a trust.

B. Proposed Amendment to the Exemptions

    The proposed amendment to the Underwriter Exemptions (the Proposed 
Amendment) is requested in order to permit plans to invest in 
investment-grade \9\ mortgage-backed securities (MBS) and asset-backed 
securities (ABS) (collectively, Securities) involving categories of 
transactions which are either senior or subordinated, and/or in certain 
cases, permit the entity issuing such Securities (Issuer) to hold 
receivables with loan-to-value property ratios (HLTV ratios) in excess 
of 100%. Specifically, the requested amendment would exempt 
transactions involving senior or subordinated Securities rated ``AAA,'' 
``AA,'' ``A'' or ``BBB'' issued by Issuers whose assets are comprised 
of the following categories of receivables: (1) Automobile and other 
motor vehicle loans, (2) residential and home equity loans which may 
have HLTV ratios in excess of 100%, (3) manufactured housing loans and 
(4) commercial

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mortgages (the Designated Transactions).
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    \9\ The term ``investment grade'' refers to Securities which are 
rated at the time of issuance in one of the four highest generic 
rating categories by at least one Rating Agency. The designations 
``AAA,'' ``AA,'' ``A'' and ``BBB'' are used herein to refer to the 
generic rating categories used by Standard & Poor's Ratings 
Services, a division of The McGraw-Hill Companies Inc., Fitch ICBA, 
Inc., and Duff & Phelps Credit Rating Co. and are deemed to include 
the equivalent generic category rating designations ``Aaa'' ``Aa,'' 
``A'' and ``Baa'' used by Moody's Investors Service, Inc.
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    The Applicant requests that the relief the Department granted to 
MBNA America Bank National Association (MBNA) in Prohibited Transaction 
Exemption 98-13, 63 FR 4038 (April 7, 1998) (PTE 98-13) and to Citibank 
South Dakota, N.A., Citibank (Nevada), N.A. and affiliates (Citibank) 
in Prohibited Transaction Exemption 98-14, 63 FR 4052 (April 7, 1998) 
(PTE 98-14) with respect to the use of Eligible Swaps (both Ratings 
Dependent and Non-Ratings Dependent) be extended to all securitizations 
which otherwise meet the conditions of the Underwriter Exemptions, 
provided that the swap transaction meets the requirements set forth in 
the requested amendment. As a corollary to such request, the Applicant 
also requests that yield supplement agreements which involve notional 
principal amounts be permitted.
    Finally, the Applicant is requesting that exemptive relief also be 
extended to all securitization transactions which otherwise meet the 
conditions of the Underwriter Exemptions notwithstanding that: (1) The 
Issuer of the Securities is a trust (including a grantor or owner 
trust), REMIC, FASIT, special purpose corporation, limited liability 
company or partnership or that (2) the Securities issued are either 
debt or equity investments.\10\
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    \10\ The Department notes that this exemption request will not 
preclude the Applicant (or any other parties which have previously, 
or may in the future, request an Underwriter Exemption) from 
requesting additional exemptive relief from the Department in future 
applications with respect to other issues relating to the 
Underwriter Exemptions.
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    The proposed amendment to the Underwriter Exemptions specifically 
will modify the relief previously provided in the following respects:

    (i) The rights and interests evidenced by securities acquired by 
plans in the Designated Transactions (i.e., motor vehicle, 
residential/home equity, manufactured housing and commercial 
mortgage ABS/MBS transactions) described in this application may be 
subordinated to the rights and interests evidenced by other 
securities of the same Issuer.
    (ii) Securities acquired by a plan in a Designated Transaction 
may receive a rating from a Rating Agency at the time of such 
acquisition that is in one of the four highest generic rating 
categories.
    (iii) The corpus of the Issuer in residential and home equity 
Designated Transactions may include mortgage loans with HLTV ratios 
in excess of 100%.
    (iv) Eligible interest rate swaps (both ratings dependent and 
non-ratings dependent) and yield supplement arrangements with 
notional principal amounts may be included.
    (v) The securitization vehicle can also be an owner trust, 
special purpose corporation, limited partnership or limited 
liability company.
    (vi) The security may be either an equity or debt interest 
issued by any permissible type of Issuer.

    The Applicant represents that the transactions associated with 
subordinated and/or ``BBB'' rated debt and equity ABS/MBS, issued by a 
variety of special purpose vehicles which may be funded with collateral 
with HLTV ratios in excess of 100% and may use interest rate swaps or 
yield supplement agreements with notional principal amounts, have been 
customary in the financial marketplace for many years, and all of these 
features and security types are taken into consideration by the Rating 
Agencies when they rate the securities issued by such entities. If 
these securities can not be sold to plans, investing plans will lose an 
opportunity to achieve a current market return through investment in 
securities that have received a rating from a Rating Agency which is as 
high or higher than that of comparable instruments in which such plans 
are clearly permitted to invest. In addition, thesetransactions are 
backed by diverse varieties of individual assets that a plan would be 
reluctant to purchase on its own, if for no other reason than the 
necessity to perform its own asset-by-asset credit analysis and 
servicing functions.
    The Applicant notes that the requested relief is administratively 
feasible since it substantially incorporates the provisions of the 
Underwriter Exemptions which have already proven in practice to be 
administratively feasible. To the extent that the requested amendment 
permits additional types of securitization vehicles and the use of 
yield supplement arrangements with notional principal balances and 
interest rate swaps, the additional safeguards the Department has 
required can be accommodated by market practices and do not require any 
further action by the Department. The Applicant states that all of the 
features included in the amendment request are also acceptable to the 
Rating Agencies. The Applicant believes that the amendment is in the 
interest of plan participants and beneficiaries because it provides 
greater opportunities for plans to invest in a more diverse range of 
liquid, extremely creditworthy securities. Lastly, the Applicant notes 
that the requested amendment is protective of the rights of 
participants and beneficiaries of affected plans because securities 
with the features proposed in the request for amended relief have 
experienced almost no defaults in their entire market history.

II. Request for Additional Types of Issuers

A. The Applicant's Request

    The Applicant is requesting that the Underwriter Exemptions be 
amended to expand the permissible types of securitization vehicles that 
may be used to offer securities to include special purpose 
corporations, limited partnerships and limited liability companies and 
owner trusts, in addition to grantor trusts, REMICs and FASITs. It is 
also requesting that the securities eligible for relief include those 
issued by all such entities whether they are debt or equity.
    When the original Underwriter Exemptions were granted, relief was 
only requested for ABS/MBS issued by grantor trusts and REMICs since, 
at that time, these were the principal securitization vehicles used for 
asset-backed transactions. FASITs were included under PTE 97-34 in 
response to legislation that had been enacted during the time period 
when the relief requested under PTE 97-34 was being considered by the 
Department. Currently, ABS/MBS securitizations are structured with a 
variety of types of special purpose vehicles which issue both debt and 
equity securities. The permissible types of Issuers used to offer 
Securities include trusts (including grantor and owner trusts), special 
purpose corporations, limited partnerships and limited liability 
companies and may also be REMICs or FASITs. The Applicant asserts that 
each of these different types of securitization entities provides 
virtually the same legal protections to investors. At the request of 
the Department, the Applicant provided the following discussion that 
describes the legal structure, bankruptcy status and taxation of each 
securitization vehicle. It also explains why debt is issued in certain 
transactions instead of equity and the relative rights of both types of 
securities.
    The principal factors in the choice of securitization vehicle and 
whether equity or debt securities are issued by the securitization 
vehicle are not economic but involve a combination of tax, accounting 
and ERISA considerations. In this regard, the Applicant notes that 
where the Issuer is not a Trust, equity will not be sold to plans 
pursuant to this exemption, if granted. In the final analysis, the 
choice of securitization entity or type of security does not 
significantly affect plan investors either from a legal rights,

[[Page 51457]]

credit risk or tax perspective, but it significantly affects ERISA 
eligibility. Accordingly, transactions are restructured solely because 
of ERISA considerations which have no relationship to the safety of the 
securities for plan investors.
    Securitizations transactions are structured with a variety of types 
of Issuers which are special purpose vehicles which issue both debt 
\11\ and equity Securities. Each of the different types of 
securitization entities provides virtually the same legal protections 
to investors.
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    \ 11\ The Department notes that PTE 84-14, 49 FR 9494 (March 13, 
1984) (as corrected at 50 FR 41430 (Oct. 10, 1985), relating to 
transactions determined by independent qualified professional asset 
managers; PTE 90-1, 55 FR 2891 (Jan. 29, 1990), relating to certain 
transactions involving insurance company pooled separate accounts; 
PTE 91-38, 56 FR 31966 (July 12, 1991) (as corrected at 56 FR 59299 
(Nov. 25, 1991), relating to certain transactions involving bank 
collective trust funds; PTE 95-60, 60 FR 35925 (July 12, 1995), 
relating to certain transactions involving insurance company general 
accounts and PTE 96-23, 61 FR 15975 (Apr. 10, 1996), relating to 
transactions determined by in-house asset managers collectively 
(Investor-Based Exemptions), may apply to the acquisition or 
disposition of debt securities by plans. The Applicant requests 
relief for transactions meeting the conditions of the Underwriter 
Exemptions because it would prefer one Exemption for all Issuers of 
similar structures. However, the Applicant has stated that Issuers 
may still issue debt securities pursuant to the Investor-Based 
Exemptions.
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B. Legal Protections and Structure of Issuers

    A goal in every structured finance transaction is to remove the 
assets being securitized from the estate of the Sponsor so that in the 
event of a bankruptcy or insolvency of such Sponsor, its creditors (or 
regulators in the case of entities such as banks that are not eligible 
to be debtors under the Bankruptcy Code (11 U.S.C.)) will be unable to 
claim those assets or delay payments therefrom. This allows potential 
buyers of Securities to base their purchasing decisions solely on the 
creditworthiness of the assets and not the Sponsor. This transfer of 
assets is referred to as a ``true sale.''
    The Applicant asserts that if the transfer of assets by the Sponsor 
is not treated as a ``true sale,'' the transaction would be deemed a 
borrowing by the Sponsor, with the assets serving as collateral for the 
financing. In a typical financing transaction, if the Sponsor were to 
become the subject of a proceeding under the Bankruptcy Code (or 
comparable regulatory provisions for entities that are not eligible to 
be debtors under the Bankruptcy Code), the assets may be deemed 
property of the Sponsor's estate. Although a secured creditor should 
eventually realize the benefits of its pledged collateral, several 
provisions of the Bankruptcy Code or comparable regulatory provisions 
may operate to delay payments, and such creditor may in some cases 
receive less than the full value of the pledged collateral. First, 
immediately upon filing of a bankruptcy petition, Section 362(a) of the 
Bankruptcy Code imposes an automatic stay on the ability of all secured 
creditors to exercise their rights against pledged collateral. Other 
sections of the Bankruptcy Code allow a bankruptcy court to permit the 
use of pledged collateral to aid in the debtor's reorganization 
(Section 363), to provide ``super priority'' liens on such assets 
(Section 364), or to require a secured creditor in possession of the 
collateral to return it to the debtor (Section 542). Thus, in a loan 
financing transaction, the creditworthiness of the Sponsor is a prime 
factor in determining whether to extend credit, as well as the value of 
the collateral.
    Accordingly, the goal in a structured finance transaction is to 
insulate the collateral from the Sponsor. The usual mechanism to 
accomplish this goal is through the creation and use of a bankruptcy 
remote Issuer which issues the Securities. The assets to be securitized 
are transferred to the Issuer in a ``true sale'' transaction. The 
Issuer either issues Securities backed by those assets or transfers the 
Securities (in a second transaction) to a second Issuer, which then 
issues the Securities backed by those assets. These are known as ``one-
tier'' or ``two-tier'' transactions, respectively.
    An Issuer can be formed as a corporation, limited partnership, 
limited liability corporation or trust. Regardless of legal structure, 
many restrictions are placed on the Issuer's operations, including its 
ability to file for bankruptcy protection (either voluntarily or 
involuntarily). Examples of such prohibitions are severe restrictions 
on the Issuer's ability to borrow money or issue debt, as well as 
prohibitions on the Issuer's merging with another entity, reorganizing, 
liquidating or selling assets (outside of the permitted securitization 
transactions). In this regard, the Issuer can only borrow money or 
issue debt in connection with the securitization.
    The documents which create the Issuer (articles/certificates of 
incorporation for corporations, deeds of partnership/partnership 
agreements for limited partnerships, articles of organization for 
limited liability corporations or deeds of trust/trust agreements for 
trusts) contain restrictive clauses significantly limiting the 
activities of the Issuer (usually to just activities relating to the 
securitization transactions). They also provide for the election of one 
or more independent directors/partners/members whose affirmative 
consent is required before a voluntary bankruptcy petition can be filed 
by the Issuer. Independent directors are generally individuals not 
having significant interests in, or other relationships with, the 
related Sponsor or any of its affiliates. The legal documentation 
evidencing the securitization often contains covenants prohibiting all 
parties thereto from filing an involuntary bankruptcy petition against 
the Issuer or initiating any other form of insolvency proceeding. In 
this way, the Issuer, Sponsor, Servicer, trustees and others are 
contractually prohibited from seeking such actions against the Issuer.
    Once the Issuer is formed, the Sponsor will transfer the assets to 
the Issuer, typically in exchange for the cash (and possibly some 
Securities) received from the securitization transaction. This 
transaction will be evidenced by appropriate legal documentation. Also, 
a ``true sale'' opinion from counsel is obtained for Issuers subject to 
the Bankruptcy Code. For those Issuers not subject to the Bankruptcy 
Code, an opinion is obtained from counsel to the effect that in the 
event of insolvency or receivership of the Sponsor, the assets 
transferred to the Issuer will not be part of the estate of the 
Sponsor.
    The Applicant explains that the above procedures are generally 
perceived as effective in removing the assets from the Sponsor's 
bankruptcy estate. However, if the Sponsor were to file for bankruptcy 
protection, a bankruptcy court, under the provisions of Section 105 of 
the Bankruptcy Code, could still gain jurisdiction over the securitized 
assets if the Issuer could be ``substantively consolidated'' with the 
Sponsor. Substantive consolidation permits the bankruptcy court to 
treat separate but related legal entities as one and merge the assets 
and liabilities of two or more entities as if they belonged to one 
debtor. If a court determines that the Issuer has not acted as a 
separate legal entity but merely exists as an ``alter-ego'' of another 
entity, then the court may utilize the principles of ``piercing the 
corporate veil'' or substantive consolidation to gain control of the 
underlying assets even if a ``true sale'' of such assets from the 
Issuer to the Sponsor exists.
    To prevent a court from ordering a substantive consolidation, the 
applicable Rating Agencies require that the organizing documents of the 
Issuer

[[Page 51458]]

contain a variety of ``separateness'' covenants. These include, among 
other things, requirements that the Issuer: Maintain fully separate 
books and records, not commingle assets with any other entity, maintain 
separate accounts, conduct business in its own name, prepare separate 
financial statements, engage only in arm's-length transactions with 
affiliates, pay its liabilities only from its own funds, observe all 
trust, corporate or partnership formalities (as applicable), not 
guarantee the debts or pledge its assets in support of another entity, 
hold itself out to be a separate legal entity and maintain adequate 
capital for its business operations. In certain transactions, legal 
opinions are delivered to the effect that adherence to these covenants 
would be sufficient to prevent a court from ordering the substantive 
consolidation of the Issuer into a debtor-parent or affiliate. The 
Applicant has suggested similar restrictions relating to the activities 
of the Issuer and the parties to an ABS/MBS transaction that would 
serve as conditions of the exemptive relief requested with respect to 
non-Trust Issuers (see section II.A.(8) of the Proposed Amendment).
    The Applicant states that whether an Issuer is structured as a 
corporation, limited partnership, limited liability corporation or 
trust will have little impact on the relevant bankruptcy or insolvency 
protection features. They are merely different legal entities with 
differing structures but will produce, in the aggregate, similar types 
of protections for investors. A corporation will have shareholders (who 
benefit from limited liability protections) and debt holders (who enjoy 
a superior claim on assets to that of shareholders and are taxed 
differently). A limited partnership will have general partners (who 
operate the entity and are ultimately responsible for its debts) and 
limited partners (who will receive investment earnings but are only 
liable to the extent of their actual investment in the event of 
losses). In a limited liability corporation, ``members'' (also the 
holders of equity Securities) are given the limited liability 
protections of a corporation's equity holders (much like limited 
partners but with a greater degree of permitted active management 
abilities). In an owner trust (which is also referred to as a business 
trust), the trust itself is a separately existing entity that is under 
the day-to-day control of its trustee but whose profits are 
distributable to the beneficial owners. According to the Applicant, an 
owner trust is essentially a Delaware business trust or similar entity 
as organized under other local law. An owner trust may also issue debt 
instruments. It can also declare bankruptcy (unlike a common law trust 
which does not exist as a legal entity distinct and separate from its 
creator). As previously indicated, the specific entity chosen for a 
structured finance transaction is often motivated by tax considerations 
and less so by any legal advantage of one structural form over another.

C. Rights of Equity and Debt Holders

    Equity holders have an undivided beneficial ownership interest in 
the issuer's assets. Debt holders do not beneficially own such assets 
but have a security interest in such assets which has preference over 
the rights of the equity holders to such collateral. The Applicant 
believes that, since the Underwriter Exemptions currently allow equity 
investments by plans, it is entirely appropriate for the Department to 
also provide relief for debt instruments which give their holders 
preferential rights to the collateral.
    The equity holders, limited partners or other beneficial owners of 
all types of Issuers are liable on the obligations of the entity only 
to the extent of such holders' investment and are not personally liable 
on any obligations in excess thereof. In general, each type of Issuer 
may issue debt, and while debt holders (or note holders) of any of 
these entities do not own an ownership interest in the assets of the 
Issuer, they are entitled to preferential treatment over equity holders 
(e.g., certificateholders) or limited partners with respect to rights 
to collateral. To protect equity and debt holders further, the pooled 
assets of any specific transaction will be placed under the control of 
a trustee who is independent from the Sponsor and the Servicers. This 
can be accomplished in different ways depending on the type of Issuer. 
If the Issuer is a trust and only equity Securities are issued, then 
the trustee of the trust would have control over the pooled assets. If 
instead, debt Securities are issued by any type of Issuer (trust or 
non-trust), then the Indenture Trustee would have control of the pooled 
assets. Accordingly, any requirements under the Proposed Exemption 
applying to the ``trustee'' will apply to both the trustee of any 
Issuer which is a trust and to any Indenture Trustee (each a 
``Trustee'' and any Issuer which is a trust, a ``Trust''). In any 
transaction where debt Securities are issued, possession of the assets 
by the Trustee or filing a security interest would serve to perfect the 
debt holders' security interest in the pooled assets. In transactions 
involving debt Securities, the Rating Agencies require perfected 
security interest opinions. The Applicant agrees to make perfected 
security interest opinions a condition of exemptive relief for those 
securities issued which are debt instruments.

D. Choice of Issuer and Choice of Debt Versus Equity Securities

    The principal determining factors for the choice of securitization 
vehicle and whether equity or debt Securities are issued are tax and 
accounting considerations which have no affect on plan investors as 
they are tax exempt.\12\
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    \12\ Although plans are subject to tax on their unrelated 
business taxable income under sections 511-514 of the Internal 
Revenue Code of 1986, as amended (UBTI), the kind of income produced 
in securitization transactions does not generally trigger UBTI if 
the plan investor holds a Security which is treated as a debt 
instrument for tax purposes.
---------------------------------------------------------------------------

    Although the decision as to whether debt or equity Securities are 
issued does not significantly affect the interests of the 
securityholders, it does affect the Sponsor of an Issuer. A Sponsor may 
want to be able to recognize the gain from the sale of the receivables 
to the Issuer for accounting purposes but not have the sale trigger 
gain for tax purposes. Under Statement of Financial Accounting 
Standards No. 125 (FASB 125) issued by the Financial Accounting 
Standards Board, generally a transfer of assets to an Issuer which 
results in the Sponsor surrendering control of the transferred assets 
will allow the Sponsor to book the gain for accounting purposes. 
However, the tax treatment to a Sponsor can be greatly affected by 
whether the Issuer issues debt or equity Securities. For example, if an 
Issuer other than a REMIC or a FASIT issues debt, the Sponsor is 
generally not taxed on the sale of the assets into the Trust (which is 
treated instead as a financing) but will be taxed on the same 
percentage of the economic gain on such sale as the proportion of 
equity interest in the Issuer which is sold by the Sponsor. By way of 
illustration, if an Issuer issues $100 of Securities, $6 of which are 
equity and $94 are debt, and the Sponsor keeps 100% of the equity and 
sells all of the debt, it will not be taxed on the gain from selling 
the assets to the Trust. However, if the Sponsor issues $100 of equity 
Securities and sells 94% of them, it will recognize gain of $94 on the 
sale of the Securities. Accordingly, if a transaction does not qualify 
under the REMIC or FASIT rules, the transaction may be structured to 
issue debt instruments.

E. Effect of Tax Rules on Choice of Issuer and Securities

    The Applicant notes that the choice of Issuer and whether the 
Securities

[[Page 51459]]

offered are debt or equity is also greatly affected by the tax rules 
governing each type of Issuer. The tax characterization of Issuers is 
not necessarily the same as their characterization under local law. For 
example, a Trust can be taxed as a trust, a partnership, a corporation 
or be completely ignored for tax purposes. Conversely, any form of 
Issuer can be treated as a REMIC or FASIT for tax purposes if it meets 
the applicable requirements and so elects. However, regardless of the 
tax characterizations, the transaction will be structured to avoid 
double taxation; i.e., taxation at both the Issuer level and the 
investor level (for investors who are tax-paying entities). The tax 
treatment of each type of Issuer with respect to which exemptive relief 
is requested is as follows.
1. Grantor Trust
    Under the Federal tax rules which govern grantor trusts as set 
forth in Treas. Reg. section 301.7701-4(c), a grantor Trust is 
disregarded for tax purposes and the securityholders are generally 
taxed on their ratable share of the income of the Trust. There is no 
specific prohibition on a grantor Trust's ability to issue debt under 
the tax rules. However, this is usually not done because if the debt 
securities were ever recharacterized as equity for tax purposes, the 
trust could be viewed as violating Treas. Reg. section 301.7701-4(c) 
which generally prohibits multiple classes of equity from being issued. 
Although a grantor Trust is not permitted to issue multiple classes of 
equity with disproportionate payments or fast-pay/slow-pay structures, 
it may issue a senior class and a subordinated class, provided that 
they each receive normal distributions pro rata. Because a grantor 
Trust may not issue Securities with different maturity dates, real 
estate related securitization transactions which are intended to have 
these features are often structured as REMICs.
2. REMICs
    REMICs can be formed as any type of Issuer; i.e., Trust, 
corporation, partnership, limited liability company or even a 
segregated pool of assets. A REMIC is permitted to issue both equity 
and debt Securities but usually is set up as a Trust which issues 
equity Securities. The REMIC itself does not pay tax, but the residual 
equity holder instead is taxed on the REMIC's taxable income. REMIC 
``regular'' interests are treated as debt instruments for tax purposes. 
One of the principal advantages to using a REMIC structure is that the 
transaction can use a fast-pay/slow-pay structure.
3. FASITs
    FASITs can also be formed as any type of Issuer and can be a 
segregated pool of assets. FASITs are a type of statutory entity 
created by the Small Business Job Protection Act of 1996 (SBA) through 
amendments to the Code effective on September 1, 1997.\13\ FASITs are 
designed to facilitate the securitization \14\ 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, Issuers 
containing unsecured receivables and certain hedging types of 
investments. A FASIT is permitted to issue both equity and debt 
Securities. A FASIT is not a taxable entity and debt instruments issued 
by such Issuers, which might otherwise be recharacterized as equity, 
will be treated as debt in the hands of the holder for tax purposes. 
The holder of the ownership interest (which may not be a pension plan) 
is taxed on the FASIT income. FASIT ``regular interests'' are treated 
as debt instruments.
---------------------------------------------------------------------------

    \13\ Section 1621 of the SBA added sections 860H, 860I, 860J, 
860K and 860L to the Internal Revenue Code of 1986, as amended.
    \14\ Securitization is the process of converting one type of 
asset into another and generally involves the use of an entity 
separate from the underlying assets. In the case of securitization 
of debt instruments, the instruments created in the securitization 
typically have different maturities and characteristics than the 
debt instruments that are securitized.
---------------------------------------------------------------------------

    Although FASITs are permitted to have revolving pools of permitted 
assets, exemptive relief is only currently available for FASITs that 
are, in fact, passive in nature which would preclude (in the absence of 
other exemptive relief) revolving asset pools. Thus, only FASITs with 
assets which were comprised of secured debt and which did not allow 
revolving pools of assets or hedging investments not otherwise 
specifically authorized by the Underwriter Exemptions would be 
permissible.
4. Owner Trusts
    There are many situations where a securitization transaction wishes 
to use a Trust as the Issuer but cannot qualify as a REMIC or a grantor 
Trust. These include transactions that do not qualify as REMICs because 
they either do not involve real estate assets (e.g., motor vehicle 
transactions) or are real estate transactions where the REMIC rules are 
not satisfied (e.g., the LTV ratios exceed the REMIC limits or the Pre-
Funding Period exceeds three months). If the parties wish to use the 
type of tranching which uses a fast-pay/slow-pay structure, they also 
cannot qualify as a grantor Trust. In such cases, the Issuer will be 
set up as an owner Trust which is a business Trust. State statutory and 
common law governs the formation and operation of owner trusts. An 
owner Trust with more than one equity holder is treated as a 
partnership with the same tax effects as the other types of Issuers 
described above. The ``partnership'' is not taxed; its income is taxed 
to its equity holders and any debt holders are taxed on the interest 
income they receive. If the owner Trust is wholly owned, it is 
disregarded for tax purposes.\15\ Whoever holds the equity in the owner 
Trust is the beneficial owner of the trust assets. Therefore, if the 
equity is sold to more than one entity it could have multiple 
beneficial owners. The debt holder(s) would have a security interest in 
the owner Trust assets.
---------------------------------------------------------------------------

    \15\ Whether an entity is wholly owned or owned by more than one 
equity holder is determined under the tax rules.
---------------------------------------------------------------------------

5. Limited Liability Companies, Partnerships and Special Purpose 
Corporations
    Entities which are limited liability companies with more than one 
equity holder or are partnerships under local law are taxed as 
partnerships. If the limited liability company is wholly owned, it is 
also disregarded for tax purposes.\16\ A special purpose corporation is 
taxed on its income, but it receives a deduction for interest paid to 
debt holders, so the tax result is similar to that of a partnership.
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

    While the permissible types of Issuers under the requested 
exemption include Issuers which are not required under the tax rules to 
be passive entities,\17\ in order for a transaction to qualify for 
exemptive relief, each of the applicable requirements of the 
Underwriter Exemptions as modified must be met. This would mean, for 
example, that only transactions involving Issuers holding assets which 
are comprised of secured debt (unless the assets are residential and 
home equity loans in a Designated Transaction) and which do not allow 
revolving pools of assets or hedging investments (unless specifically 
authorized) are permissible under the requested relief. Specifically, 
the Issuer must be maintained as an essentially passive entity, and, 
therefore, both the Sponsor's discretion and the Servicer's discretion 
with respect to assets included in an Issuer must be severely limited 
both as to those assets transferred on the Closing Date and

[[Page 51460]]

those acquired during any Pre-Funding Period. Pooling and Servicing 
Agreements provide for the substitution of Issuer receivables by the 
Sponsor only in the event of breaches of representations and warranties 
or defects in documentation discovered within a short time after the 
issuance of Securities (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 securityholders.
---------------------------------------------------------------------------

    \17\ Grantor trusts and REMICs are required under the tax rules 
to be passive entities with limited asset substitution rights, but 
other types of Issuers are not so restricted.
---------------------------------------------------------------------------

F. The Applicant's Arguments for Exemptive Relief for Different Types 
of Issuers and Securities

    Although, as previously noted, the choice of Issuer does not 
significantly affect the rights of securityholders or the safety of the 
investments, ERISA's prohibited transaction rules affect whether plan 
investors can purchase these different forms of ABS/MBS. The plan asset 
regulation set forth at 29 CFR Sec. 2510-3.101 (the Plan Asset 
Regulation) was intended to prevent an employee benefit plan subject to 
ERISA from retaining an asset manager indirectly through an equity 
investment by the plan in an investment fund in order to avoid the 
fiduciary responsibility and prohibited transaction provisions of 
ERISA. The Department made a determination that debt instruments should 
not be subject to the Plan Asset Regulations as they were not likely to 
be vehicles for the indirect provision of investment management 
services.\18\ As a consequence of this regulation, the treatment of 
debt and the treatment of equity is very different under ERISA. Equity 
investments in ABS/MBS not only can result in the purchase and sale of 
the securities triggering prohibited transactions, but if the 
underlying assets of the Trust are deemed to include plan assets, the 
operation of the Trust and the servicing of its assets can also trigger 
prohibited transactions.
---------------------------------------------------------------------------

    \18\ See the preamble to the final Plan Asset Regulation, 51 FR 
41280 (Nov. 13, 1986).
---------------------------------------------------------------------------

    In contrast, investments in ABS/MBS which are debt securities avoid 
any plan asset issues with respect to the operation of the Trust. 
However, they can still result in one or more prohibited transactions. 
This is because the acquisition or disposition of the debt security 
itself may be a sale or exchange of property between a plan and a party 
in interest and also an extension of credit between such entities. The 
acquisition or disposition of the debt securities may be covered under 
PTE 75-1. However, in many ABS/MBS transactions, the conditions of PTE 
75-1 may not be met, i.e., where a broker-dealer is not selling the 
securities but is instead acting as the placement agent for securities 
which are being offered pursuant to a private placement exempt from 
registration under the Securities Act of 1933. Similarly, if a plan 
sold the ABS/MBS to a party in interest in the secondary market, Part V 
of PTE 75-1 would not apply since it is limited to extensions of credit 
to a plan in connection with the purchase or sale of securities (e.g., 
extensions of credits during the three-day settlement period).
    When a plan purchases an ABS/MBS which is a debt security, it is 
effectively viewed as an extension of credit to the Issuer for ERISA 
purposes. While the Issuer, as a newly formed, special purpose entity, 
would not be a party in interest with respect to such plan, if the 
Issuer is deemed to be an affiliate of an existing party in interest, 
this could create a prohibited extension of credit. Whenever ABS/MBS 
are issued as debt, some other entity will own the equity of the 
Issuer, either as a residual equity interest held by the Sponsor or all 
or part of the equity could be sold to the public. If any equity holder 
which owns a 50% or more interest in the Issuer is a party in interest 
with respect to a plan holding the debt security, the Issuer will be 
deemed a party in interest under 3(14)(G) of ERISA. This problem is 
compounded by the fact that most publicly-offered securities are held 
by the Depository Trust Company and Clearing Corporation so that the 
identity of the public equity holders may not be known either at the 
initial issuance of the securities or when a security is sold in the 
secondary market. Accordingly, there is a need for the Underwriter 
Exemptions to cover the acquisition, disposition and holding of debt 
securities which is not met by PTE 75-1.
    As debt securities generally are not eligible for relief under the 
Underwriter Exemptions, an ABS/MBS which is a debt security may not be 
purchased by a plan investor from a party in interest unless another 
exemption is available. This is an anomalous result since the rights of 
debt holders in ABS/MBS transactions are senior to those of 
Certificateholders, and the decision to issue debt or equity ABS/MBS is 
not dictated by the relative rights of the investor but is made based 
on tax and accounting considerations which are not relevant to plan 
investors. In fact, purchasers make the decision to invest in ABS/MBS 
based on the projected return on the securities and the quality and 
sufficiency of the underlying obligations in the pool without regard to 
the characterization as debt or equity. According to the Applicant, 
either type of security issued in an ABS/MBS transaction is viewed by 
plan investment managers as a fixed income alternative to corporate 
bonds. The fact that ABS/MBS pass-through Certificates are equity 
interests under local law is completely disregarded by plan investors 
except to the extent that the equity characterization negatively 
impacts ERISA eligibility of those securities in the absence of an 
exemption. Thus, the Applicant asserts that allowing debt securities 
issued in ABS/MBS transactions to be eligible securities under the 
Underwriter Exemptions is beneficial to such investors in their efforts 
to diversify plan assets.
    In this regard, the Applicant has submitted letters from the Rating 
Agencies which state that the legal form of the issuer does not affect 
the ratings given to comparable securities and that the Rating 
Agencies' analysis takes into account the legal and structural risks of 
each type of Issuer. Accordingly, the Applicant believes that, if a 
particular transaction has sufficient substantive safeguards to protect 
the interests of plan investors, the choice of Issuer or whether the 
particular security is debt or equity should not be determinative of 
whether they are eligible investments for ERISA plans.
    Although the Applicant is requesting that the definition of 
securitization vehicle be expanded to include special purpose 
corporations, partnerships and limited liability companies, none of 
which is a Trust, the Applicant believes that any and all requirements 
under the Underwriter Exemptions which currently are applicable to the 
``Trustee'' will continue to be applicable and are appropriate no 
matter what type of Issuer is used. This is because, even in 
transactions where the Issuer is not a Trust, ABS/MBS which are debt 
securities will be issued pursuant to a Trust indenture, and there will 
be an Indenture Trustee representing the interests of debt holders 
which will be independent of the Sponsor and other members of the 
Restricted Group. The Indenture Trustee is the trustee appointed 
pursuant to an indenture which provides for the pledge of collateral to 
secure the debt securities issued by the issuer pursuant to the

[[Page 51461]]

indenture and sets forth the rights of the debt holders. Accordingly, 
the fact that an Issuer which is not a Trust does not have a Trustee 
will not affect the existing requirement under the Underwriter 
Exemptions relating to an independent Trustee that is not an affiliate 
of any other member of the Restricted Group (see section III.M. of the 
Proposed Amendment). Thus, there will always be an Independent Trustee 
in transactions entered into pursuant to the requested exemption. The 
Applicant notes that where the Issuer is not a Trust, equity will not 
be sold to plans.

G. Classes of Securities

    The Applicant notes that some of the Securities will be multi-class 
Securities. The Applicant requests exemptive relief for two types of 
multi-class Securities: ``strip'' Securities and ``fast-pay/slow-pay'' 
Securities. Strip Securities 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 Securities are established, each 
representing rights to disproportionate payments of principal and 
interest.\19\
---------------------------------------------------------------------------

    \ 19\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest Certificates to which this 
Exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(1)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in Certificates pursuant to this Proposed 
Exemption.
---------------------------------------------------------------------------

    ``Fast-pay/slow-pay'' Securities involve the issuance of classes of 
Securities having different stated maturities or the same maturities 
with different payment schedules. Interest and/or principal payments 
received on the underlying Issuer's assets are distributed first to the 
class of Securities having the earliest stated maturity of principal 
and/or earlier payment schedule, and only when that class of Securities 
has been paid in full (or has received a specified amount) will 
distributions be made with respect to the second class of Securities. 
Distributions on Securities having later stated maturities will proceed 
in like manner until all the securityholders have been paid in full. 
The only difference between this multi-class arrangement and a single-
class arrangement is the order in which distributions are made to 
securityholders. In each case, securityholders will have a beneficial 
ownership interest in the underlying Issuer's assets or a security 
interest in the collateral securing such assets. Except as permitted in 
a Designated Transaction, the rights of a plan purchasing Securities 
will not be subordinated to the rights of another securityholder in the 
event of default on any of the underlying obligations. In particular, 
unless the Securities are issued in a Designated Transaction, if the 
amount available for distribution to securityholders is less than the 
amount required to be so distributed, all senior securityholders will 
share in the amount distributed on a pro rata basis.\20\
---------------------------------------------------------------------------

    \ 20\ If an Issuer issues subordinated Securities, holders of 
such subordinated Securities may not share in the amount distributed 
on a pro rata basis. The Department notes that the Proposed 
Exemption does not provide relief for plan investment in such 
subordinated Securities, unless the Securities are issued in a 
Designated Transaction.
---------------------------------------------------------------------------

III. Requested Modifications for Interest Rate Swap Agreements

A. Interest Rate Swaps

    PTE 98-13 and PTE 98-14 provide exemptive relief for 
securitizations featuring revolving pools of secured and unsecured 
credit card receivables held in Trusts sponsored by MBNA and Citibank, 
respectively, which Trusts may also hold simple interest rate swaps as 
an asset. The granting of these exemptions involved extensive 
discussions between the Department and representatives of MBNA and 
Citibank as to the structure and operation of credit card 
securitizations, including the use of interest rate swaps, and the 
approach used by the Rating Agencies in rating these types of 
securities where the rating given by the Rating Agency is dependent 
upon the existence of an interest rate swap agreement.
    Interest rate swaps are used in non-credit card securitization 
transactions in the same manner that they are used in credit card 
transactions; i.e., where the index used to calculate interest payments 
on the receivables is different than the index used to calculate 
interest payments on the securities issued by the Trust. For example, 
many securities bear interest based upon the London Interbank Offered 
Rate for dollar deposits of a specified maturity (LIBOR). However, the 
assets being securitized often bear interest at fixed rates or rates 
based upon U.S. Treasury securities, the prime rate or other indices 
that may not move in tandem with LIBOR. The swap helps assure that the 
Trust will have sufficient funds to make full payments of interest on 
the securities.
    The Applicant states that a class of Securities in a non-credit 
card securitization may have the benefit of an interest rate swap 
agreement entered into between the Issuer and a bank or other financial 
institution acting as a swap counterparty. Pursuant to the swap 
agreement, the swap counterparty would pay a certain rate of interest 
to the Issuer in return for a payment of a rate of interest by the 
Issuer, from collections allocable to the relevant class of Securities, 
to the swap counterparty. The Applicant represents that the credit 
rating provided to a particular class of Securities by the relevant 
Rating Agency may or may not be dependent upon the existence of a swap 
agreement. Thus, in some instances, the terms and conditions of the 
swap agreements will not affect the credit rating of the class of 
Securities to which the swap relates (i.e., a Non-Ratings Dependent 
Swap).
    The Applicant requests that the same exemptive relief which has 
been provided to MBNA and Citibank with respect to interest rate swaps 
be extended to all securitization transactions, otherwise meeting the 
conditions of the requested amendment. Thus, the Applicant is 
requesting relief for both ratings dependent and non-ratings dependent 
swaps as described in PTE 98-13 and PTE 98-14 (the Credit Card 
Exemptions), subject to the same terms and conditions regarding 
interest rate swaps contained in those exemptions. Consistent with the 
conditions of the Credit Card Exemptions, the Applicant has included 
the swap counterparty as a member of the Restricted Group. However, two 
revisions regarding interest rate swaps are necessary in order to make 
the swap provisions compatible with fixed asset pool transactions.
    First, the Credit Card Exemptions require that a ratings dependent 
swap include as an early payout event the withdrawal or reduction by a 
Rating Agency of the swap counterparty's credit rating where the 
Servicer has failed to meet its obligations under the Pooling and 
Servicing Agreement relating to obtaining a replacement swap agreement 
or causing the swap counterparty to post collateral. The early payout 
causes principal to be paid out for the benefit of securityholders 
instead of being used to purchase additional credit card receivables. 
In contrast, all principal and interest payments received by the Issuer 
in non-revolving pool transactions are used to make payments to either 
the securityholders, the swap counterparty or to pay servicing fees or 
other expenses; none are used to purchase additional obligations for 
deposit into the Issuer. Accordingly, the concept of an early payout 
event is not relevant for

[[Page 51462]]

the non-revolving pools of assets which are covered under the 
Underwriter Exemptions. Instead, the Applicant is proposing that if the 
swap counterparty's rating is downgraded, and the Servicer fails to 
obtain an acceptable replacement swap or to cause the swap counterparty 
to post collateral or make other arrangements satisfactory to the 
Rating Agency, the plan certificateholders would be notified in the 
immediately following Trustee's periodic report and would have sixty 
days thereafter to dispose of the Certificates before the exemptive 
relief under section I.C. of the Underwriter Exemptions with respect to 
the servicing, management and operation of the Issuer would 
prospectively cease to be available. The party responsible for such 
notification may be the Sponsor, the Trustee, a third-party 
administrator or any other party designated in the pooling and 
servicing agreement and/or servicing agreement to give periodic reports 
to the securityholders.
    Second, the Credit Card Exemptions use the term ``Excess Finance 
Charge Collections'' which is not relevant to non-credit card ABS/MBS 
transactions. Accordingly, the Applicant has substituted the term 
``Excess Spread'' which is the functionally equivalent term and best 
suited to the types of transactions covered by the Underwriter 
Exemptions. The term ``excess spread'' applies to both ratings 
dependent and non-ratings dependent swaps and is defined as the amount, 
as of any given day funds are distributed from the issuer, by which the 
interest allocated to the securities exceeds the amount necessary to 
pay interest to the securityholders, servicing fees and issuer 
expenses. This term is defined in section III.II. of the Proposed 
Amendment.
    The Applicant believes that allowing the use of interest rate swaps 
is beneficial to plan investors as it helps to protect them from the 
risk of interest rate fluctuations. The conditions the Department has 
imposed in PTE 98-13 and PTE 98-14, which will be met with respect to 
any interest rate swap used in transactions covered by the requested 
exemption, will further protect the interest of plans. Accordingly, the 
Applicant represents that whether or not the credit rating of a 
particular class of Securities is dependent upon the terms and 
conditions of one or more interest rate swap agreements entered into by 
the Issuer (i.e., a ``Ratings Dependent Swap'' or a ``Non-Ratings 
Dependent Swap''), each particular swap transaction will be an 
``Eligible Swap'' as defined in the Proposed Amendment.

B. Conditions

    In this regard, an Eligible Swap will be a swap transaction:
    1. Which is denominated in U.S. Dollars;
    2. Pursuant to which the Issuer pays or receives, on or immediately 
prior to the respective payment or distribution date for the applicable 
class of Securities, a fixed rate of interest or a floating rate of 
interest based on a publicly available index (e.g. LIBOR or the U.S. 
Federal Reserve's Cost of Funds Index (COFI)), with the Issuer 
receiving such payments on at least a quarterly basis and being 
obligated to make separate payments no more frequently than the 
counterparty, with all simultaneous payments being netted;
    3. Which has a notional amount that does not exceed either: (i) The 
principal balance of the class of Securities to which the swap relates, 
or (ii) the portion of the principal balance of such class represented 
solely by those types of corpus or assets of the Issuer referred to in 
subsections III.B. (1), (2) and (3) of the Proposed Amendment;
    4. Which is not leveraged (i.e., payments are based on the 
applicable notional amount, the day count fractions, the fixed or 
floating rates designated in item (b) above and the difference between 
the products thereof, calculated on a one-to-one ratio and not on a 
multiplier of such difference);
    5. Which has a final termination date that is the earlier of the 
date on which the Issuer terminates or the related class of Securities 
is fully repaid; and
    6. Which does not incorporate any provision which could cause a 
unilateral alteration in any provision described in items (1) through 
(5) above without the consent of the Trustee.
    In addition, any Eligible Swap entered into by the Issuer will be 
with an ``Eligible Swap Counterparty,'' which will be a bank or other 
financial institution with a rating at the date of issuance of the 
Securities by the Issuer which is in one of the three highest long-term 
credit rating categories, or one of the two highest short-term credit 
rating categories, utilized by at least one of the Rating Agencies 
rating the Securities; provided that, if a swap counterparty is relying 
on its short-term rating to establish its eligibility, such 
counterparty must either have a long-term rating in one of the three 
highest long-term rating categories or not have a long-term rating from 
the applicable Rating Agency, and provided further that if the class of 
Securities with which the swap is associated has a final maturity date 
of more than one year from the date of issuance of the Securities, and 
such swap is a Ratings Dependent Swap, the swap counterparty is 
required by the terms of the swap agreement to establish any 
collateralization or other arrangement satisfactory to the Rating 
Agencies in the event of a ratings downgrade of the swap counterparty.
    Under any termination of a swap, the Issuer will not be required to 
make any termination payments to the swap counterparty (other than a 
currently scheduled payment under the swap agreement) except from 
Excess Spread or other amounts that would otherwise be payable to the 
Servicer or the Sponsor.
    With respect to a Rating Dependent Swap, the Servicer shall either 
cause the Eligible Counterparty to establish certain collateralization 
or other arrangements satisfactory to the Rating Agencies in the event 
of a rating downgrade of such swap counterparty below a level specified 
by the Rating Agency (which will be no lower than the level which would 
make such counterparty an Eligible Counterparty), or the Servicer shall 
obtain a replacement swap with an Eligible Swap Counterparty acceptable 
to the Rating Agencies with substantially similar terms. If the 
Servicer fails to do so, the plan securityholders will be notified in 
the immediately following Trustee's periodic report to securityholders 
and will have a 60-day period thereafter to dispose of the Securities, 
at the end of which period the exemptive relief provided under section 
I.C. of the Underwriter Exemption (relating to the servicing, 
management and operation of the Issuer) would prospectively cease to be 
available. With respect to Non-Ratings Dependent Swaps, each Rating 
Agency rating the Securities must confirm, as of the date of issuance 
of the Securities by the Issuer, that entering into the swap 
transactions with the Eligible Counterparty will not affect the rating 
of the Securities, even if such counterparty is no longer an Eligible 
Counterparty and the swap is terminated.\21\
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    \21\ In the course of considering applications for exemptive 
relief under PTE 98-13 and PTE 98-14, the Department received 
representations from the Rating Agencies that certain classes of 
Securities issued by an Issuer holding receivables will have 
Securities ratings that are not dependent on the existence of a swap 
transaction entered into by the Issuer. Therefore, a downgrade in 
the swap counterparty's credit rating would not cause a downgrade in 
the rating established by the Rating Agency for the Securities. 
These Rating Agency representations stated that in such instances, 
there will be more credit enhancements (e.g., ``excess spread,'' 
letters of credit, cash collateral accounts) for the class to 
protect the securityholders than there would be in a comparable 
class where the Issuer enters into a so-called Ratings Dependent 
Swap. Non-Ratings Dependent Swaps are generally used as a 
convenience to enable the Issuer to pay certain fixed interest rates 
on a class of Securities. However, the receipt of such fixed rates 
by the Issuer from the counterparty is not a necessity for the 
Issuer to be able to make its fixed rate payments to the 
securityholders.

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[[Page 51463]]

    Any class of Securities to which one or more swap agreements 
entered into by the Issuer applies will be acquired or held only by 
Qualified Plan Investors. Qualified Plan Investors will be plan 
investors represented by an appropriate independent fiduciary that is 
qualified to analyze and understand the terms and conditions of any 
swap transaction relating to the class of Securities to be purchased 
and the effect such swap would have upon the credit rating of the 
Securities to which the swap relates.
    For purposes of the Underwriter Exemptions, such a qualified 
independent fiduciary will be either:
    (a) A ``qualified professional asset manager'' (i.e., QPAM), as 
defined under Part V(a) of PTE 84-14;
    (b) An ``in-house asset manager'' (i.e., INHAM), as defined under 
Part IV(a) of PTE 96-23; or
    (c) A plan fiduciary with total assets under management of at least 
$100 million at the time of the acquisition of such Securities.

C. Yield Supplement Agreements

    A yield supplement agreement is a contract under which the issuer 
makes a single cash payment to the contract provider in return for the 
contract provider promising to make certain payments to the issuer in 
the event of market fluctuations in interest rates. For example, if a 
class of securities promises an interest rate which is the greater of 
7% or LIBOR and LIBOR increases significantly, the yield supplement 
agreement might obligate the contract provider pay to the issuer the 
excess of LIBOR over 7%. In some circumstances, the contract provider's 
obligation may be capped at a certain aggregate maximum dollar 
liability under the contract. Alternatively, a cap could be placed on 
the supplemental interest that would be paid to a securityholder from 
monies paid under the yield supplement agreement. For example, the 
yield supplement agreement would provide the difference between LIBOR 
and 7% but only to the extent that the securityholder would be paid a 
total of 9%. The interest to be paid by the contract provider to the 
issuer under the yield supplement agreement is usually calculated based 
on a notional principal balance which may mirror the principal balances 
of those classes of securities to which the yield supplement agreement 
relates or some other fixed amount. This notional amount will not 
exceed either: (i) The principal balance of the class of Securities to 
which such agreement or arrangement relates, or (ii) the portion of the 
principal balance of such class represented solely by those types of 
corpus or assets of the Issuer referred to in subsections III.B. (1), 
(2) and (3) of the Proposed Amendment. In all cases, the issuer makes 
no payments other than the fixed purchase price for the yield 
supplement agreement and may, therefore, be distinguished from an 
interest rate swap agreement, notwithstanding that both types of 
agreements may use an ISDA form of contract. The 1997 Amendment 
includes within the definition of ``Trust'' 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 provided that such arrangements 
do not involve swap agreements or other notional principal contracts. 
However, the Applicant notes that the Credit Card Exemptions (PTE 98-13 
and PTE 98-14) permit interest rate swaps which clearly feature 
notional principal amounts. In addition to requesting exemptive relief 
for ``plain vanilla'' interest rate swaps, the Applicant also requests 
relief for yield supplement arrangements that do not involve interest 
rate payments by the Trustee, even if they have a notional principal 
amount.
    Accordingly, the Applicant is requesting that yield supplement 
agreements with notional principal amounts be permitted retroactively 
to April 7, 1998, which is the date that PTE 98-13 and PTE 98-14 were 
issued as final exemptions. The Applicant's request for relief covers 
only the type of interest rate cap agreements which are currently 
covered under the Underwriter Exemptions. The only change being 
requested is to clarify that agreements which have a notional principal 
balance and/or are set forth on International Swaps and Derivatives 
Association, Inc. (``ISDA'') forms will be permitted.
    The Applicant notes that no ``plan assets'' within the meaning of 
the Plan Asset Regulation (under 29 CFR 2510-3-101) are utilized in the 
purchase of the cap agreement, as the Sponsor or some other third party 
funds such arrangement with an up-front single-sum payment. The 
Issuer's only obligation is to receive payments from the counterparty 
if interest rate fluctuations require them under the terms of the 
contract and to pass them through to securityholders. The Rating 
Agencies examine the creditworthiness of the counterparty in a ratings 
dependent yield supplement agreement. The Applicant suggests that the 
relief for yield supplement agreements should be subject to the same 
conditions as for interest rate swaps found in the Credit Card 
Exemptions ( PTE 98-13 and PTE 98-14), to the extent relevant. These 
conditions would include that the yield supplement agreement must be 
denominated in U.S. dollars, the agreement must not be leveraged, any 
changes in these conditions must be subject to the consent of the 
Trustee, and the counterparty must be subject to the same eligibility 
requirements as an interest rate swap counterparty.

IV. Other Features of Securitizations

A. Formation of the Issuer

    Each Issuer is established under a Pooling and Servicing Agreement 
or equivalent agreement between a Sponsor, a Servicer and a Trustee. 
Prior to the Closing Date under the Pooling and Servicing Agreement, 
the Sponsor and/or Servicer selects receivables from the classes of 
assets described in section III.B.(1)(a)-(f) of the Underwriter 
Exemptions to be included in the Issuer, establishes the Issuer and 
designates an independent entity as Trustee. Typically, on or prior to 
the Closing Date, the Sponsor acquires legal title to all assets 
selected for the Issuer. In some cases, legal title to some or all of 
such assets continue to be held by the originator until the Closing 
Date. On the Closing Date, the Sponsor and/or the originator conveys to 
the Issuer legal title to the assets, and the Issuer issues Securities 
representing fractional undivided interests in the Issuer's assets and/
or debt obligations of the Issuer.

B. Pre-Funding Accounts

    While in many cases all of the receivables to be held in the Issuer 
are transferred to the Issuer on or prior to the Closing Date,\22\ it 
is also common for other transactions to be structured using a Pre-
Funding Account and/or a Capitalized Interest Account as described 
below. If pre-funding is used, some portion of the receivables will be 
transferred after the Closing Date during an interim Pre-Funding 
Period. The Pre-Funding Period for any Issuer will be

[[Page 51464]]

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 \23\ or (iii) the date which is the later of 
three months or ninety days after the Closing Date. If pre-funding is 
used, cash sufficient to purchase the receivables to be transferred 
after the Closing Date will be transferred to the Issuer 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 Issuer on the 
Closing Date. Certain specificity and monitoring requirements described 
below will be met which will be disclosed in the Pooling and Servicing 
Agreement and/or the prospectus \24\ or private placement memorandum.
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    \22\ The Department is of the view that the term ``Issuer'' 
under the Underwriter Exemptions would include an Issuer: (a) The 
assets of which, although all specifically identified by the Sponsor 
or originator as of the Closing Date, are not all transferred to the 
Issuer on the Closing Date for administrative or other reasons but 
will be transferred to the Issuer shortly after the Closing Date, or 
(b) with respect to which Securities are not purchased by plans 
until after the end of the Pre-Funding Period at which time all 
receivables are contained in the Issuer.
    \23\ The minimum dollar amount is generally the dollar amount 
below which it becomes too uneconomical to administer the Pre-
Funding Account. An event of default under the Pooling and Servicing 
Agreement generally occurs when: (i) A breach of a covenant or a 
breach of a representation and warranty concerning the Sponsor, the 
Servicer or certain other parties occurs which is not cured, (ii) 
there occurs a failure to make required payments to securityholders 
or (iii) the Servicer becomes insolvent.
    \24\ References to the term ``prospectus'' herein shall include 
any related prospectus supplement thereto, pursuant to which 
Securities are offered to investors.
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    For a transaction involving an Issuer 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 Securities being issued over (ii) the 
principal balance of the receivables being transferred to the Issuer on 
such Closing Date. In certain transactions, the aggregate principal 
balance of the receivables intended to be transferred to the Issuer may 
be larger than the total principal balance of the Securities 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 Issuer over the principal balance of 
the receivables being transferred on the Closing Date.
    On the Closing Date, the Sponsor transfers the receivables to the 
Issuer in exchange for the Securities. The Securities are then sold to 
an Underwriter for cash or to the securityholders directly if the 
Securities are sold through a placement agent. The cash received by the 
Sponsor from the securityholders (or the Underwriter) from the sale of 
the Securities issued by the Issuer in excess of the purchase price for 
the receivables and certain other Issuer 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 Issuer and accounted for separately, or are held in a sub-
account or 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 Securities 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 
Issuer 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 Issuer may 
also be reduced to the extent they are used to pay transaction costs. 
In addition, in certain cases, the Sponsor may be required by the 
Rating Agencies or credit support providers to set up Issuer reserve 
accounts to protect the securityholders against credit losses.
    The exemptive relief provided under the 1997 Amendment for pre-
funding is limited so that the percentage or ratio of the amount 
allocated to the Pre-Funding Account, as compared to the total 
principal amount of the Securities being offered (the Pre-Funding 
Limit), does not exceed 25% effective for transactions occurring on or 
after May 23, 1997 and did not exceed 40% effective for transactions 
occurring on or after January 1, 1992, but prior to May 23, 1997. The 
Pre-Funding Limit (which may be expressed as a ratio or as a stated 
percentage or as 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 interest rate payable on the 
Securities (as explained below). Amounts used to support the interest 
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 Issuer, any funds remain in 
the Pre-Funding Account, such funds will be paid to the securityholders 
as principal prepayments. Upon termination of the Issuer, if no 
receivables remain in the Issuer and all amounts payable to the 
securityholders have been distributed, any amounts remaining in the 
Issuer would be returned to the Sponsor.
    A dramatic change in interest rates on the receivables held in an 
Issuer 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 market interest rates would not affect 
the receivables transferred to the Issuer after the Closing Date. In 
contrast, if interest rates fall after the Closing Date, receivables 
originated after the Closing Date will tend to be originated at lower 
rates, with the possible result that the receivables will not support 
the interest rate payable on the Securities. In such situations, the 
Sponsor could sell the receivables into the Issuer at a discount and 
more receivables will be used to fund the Issuer in order to support 
the interest rate. In a situation where interest rates drop 
dramatically and the Sponsor is unable to provide sufficient loans 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 securityholders would receive a repayment of principal 
from the unused cash held in the Pre-Funding Account. In transactions 
where the interest rates payable on the Securities are variable or 
adjustable, the effects of market interest rate fluctuations are 
mitigated. In no event will fluctuations in interest rates payable on 
the receivables affect the interest rate payable on fixed rate 
Securities.
    The cash deposited into the Issuer and allocated to the Pre-Funding 
Account is invested in certain permitted investments (see below), which 
may be commingled with other accounts of the Issuer. The allocation of 
investment earnings to each Issuer 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 amounts of interest payable to the 
securityholders with respect to a periodic distribution date, the 
Trustee is necessarily required to make periodic, separate allocations 
of

[[Page 51465]]

the Issuer's earnings to each Issuer account, thus ensuring that all 
allocable commingled investment earnings are properly credited to the 
Pre-Funding Account on a timely basis.

C. The Capitalized Interest Account

    In certain transactions where a Pre-Funding Account is used, the 
Sponsor and/or originator may also transfer to the Issuer additional 
cash on the Closing Date, which is deposited in a Capitalized Interest 
Account and used during the Pre-Funding Period to compensate the 
securityholders for any shortfall between the investment earnings on 
the Pre-Funding Account and the interest rate payable on the 
Securities.
    The Capitalized Interest Account is needed in certain transactions 
since the Securities 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 
payable on the Securities (although such investment earnings will be 
available to pay interest on the Securities). The Capitalized Interest 
Account funds are paid out periodically to the securityholders as 
needed on distribution dates to support the interest 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 Issuer 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 securityholders 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 Securities at the applicable interest rate and 
the fees payable by the Issuer. Such excess is sufficient to make up 
any shortfall resulting from the Pre-Funding Account earning less than 
the interest rate payable on the Securities. In certain of these 
transactions, this occurs because the aggregate principal amount of 
receivables exceeds the aggregate principal amount of Securities.

D. Pre-Funding Account and Capitalized Interest Account Payments and 
Investments

    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 
on the investment has been rated) in one of the three highest generic 
rating categories by Standard & Poor's Ratings Services, a division of 
The McGraw-Hill Companies Inc., (S&P's), Moody's Investors Service, 
Inc. (Moody's), Duff & Phelps Credit Rating Co. (D&P), Fitch ICBA, Inc. 
(Fitch) or any successors thereto (each a Rating Agency or 
collectively, the Rating Agencies) 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 Securities. 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 
Account 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 securityholders 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 securityholders if necessary to support the 
Security interest 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.

E. The Characteristics of the Receivables Transferred During the Pre-
Funding Period

    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 during the Pre-Funding Period:
    1. All such receivables will meet the same terms and conditions for 
eligibility as those of the original receivables used to create the 
Issuer (as described in the prospectus or private placement memorandum 
and/or Pooling and Servicing Agreement for such Securities), 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 securityholders or by a Rating 
Agency; \25\
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    \25\ In some transactions, the Insurer and/or credit support 
provider may have the right to veto the inclusion of receivables, 
even if such receivables otherwise satisfy the underwriting 
criteria. This right usually takes the form of a requirement that 
the Sponsor obtain the consent of these parties before the 
receivables can be included in the Issuer. The Insurer and/or credit 
support provider may, therefore, reject certain receivables or 
require that the Sponsor establish certain Issuer reserve accounts 
as a condition of including these receivables. Virtually all Issuers 
which have Insurers or other credit support providers are structured 
to give such veto rights to these parties. The percentage of Issuers 
that have Insurers and/or credit support providers, and accordingly 
feature such veto rights, varies.
---------------------------------------------------------------------------

    2. The transfer of the receivables acquired during the Pre-Funding 
Period will not result in the Securities 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 Securities by the Issuer;
    3. The weighted average annual percentage interest rate (the 
average interest rate) for all of the receivables in the Issuer at the 
end of the Pre-Funding Period will not be more than 100 basis points 
(``bps'') lower than the average interest rate for the receivables 
which were transferred to the Issuer on the Closing Date;
    4. 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 Issuer activities and 
familiar with its duties, responsibilities and liabilities as a 
fiduciary under the Act. The Trustee, as the legal owner of the 
receivables in the Issuer or the holder of a security interest in the 
receivables, will enforce all the

[[Page 51466]]

rights created in favor of securityholders of the Issuer, 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 
Applicant represents that for transactions occurring on or after May 
23, 1997,\26\ the characteristics of the subsequently acquired 
receivables 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 Agencies, the 
Underwriter and the Trustee) stating whether or not the characteristics 
of the additional receivables acquired after the Closing Date conform 
to the characteristics of the receivables 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 receivables which were 
transferred as of the Closing Date.
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    \26\ May 23, 1997, was the date the proposed 1997 Amendment to 
the Underwriter Exemption was published in the Federal Register.
---------------------------------------------------------------------------

    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 held by the Issuer 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 Securities 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 Issuer.

F. Parties to Transactions

    The originator of a receivable is the entity that initially lends 
money to a borrower (Obligor), such as a homeowner or automobile 
purchaser, or leases property to a lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a Sponsor.
    Originators of receivables held by the Issuer will be entities that 
originate receivables in the ordinary course of their business 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each Issuer may 
hold assets of one or more originators. The originator of the 
receivables may also function as the Sponsor or Servicer.
    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 held by the Issuer, establishing the Issuer, designating the 
Trustee, and assigning the receivables to the Issuer.
    The Trustee of a Trust (or the Issuer, if it is not a Trust) is the 
legal owner of the obligations held by the Issuer and would hold a 
security interest in the collateral securing such obligations. The 
Trustee is also a party to or beneficiary of all the documents and 
instruments transferred to the Issuer, and as such, has both the 
authority to, and the responsibility for, enforcing all the rights 
created thereby in favor of securityholders, including those rights 
arising in the event of default by the servicer.
    The Trustee will be an independent entity, and therefore will be 
unrelated to the Underwriter, the Sponsor or the Servicer or any other 
member of the Restricted Group. The Applicant represents that the 
Trustee will be a substantial financial institution or trust company 
experienced in trust activities. The Trustee receives a fee for its 
services, which will be paid by the Servicer, Sponsor or out of the 
Issuer's assets. The method of compensating the Trustee will be 
specified in the Pooling and Servicing Agreement and disclosed in the 
prospectus or private placement memorandum relating to the offering of 
the Securities.
    The rights and obligations of the Indenture Trustee are no 
different than those of the Trustee of an Issuer which is a Trust. The 
Indenture Trustee is obligated to oversee and administer the activities 
of all of the ongoing parties to the transaction and possesses the 
authority to replace those entities, sue them, liquidate the collateral 
and perform all necessary acts to protect the interests of the debt 
holders. If debt is issued in a transaction, there may not be a pooling 
and servicing agreement. Instead, there is a sales agreement and 
servicing agreement (or these two agreements are sometimes combined 
into a single agreement). The agreement(s) set(s) forth, among other 
things, the duties and responsibilities of the parties to the 
transaction relating to the administration of the Issuer. The Indenture 
Trustee is often a party to these agreements. At a minimum, the 
Indenture Trustee acknowledges its rights and responsibilities in these 
agreements or they are contractually set forth in the indenture 
agreement pursuant to which the Indenture Trustee is appointed.
    The Servicer of an Issuer administers the receivables on behalf of 
the securityholders. 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 transferred to an Issuer, it is common for 
the receivables to be ``subserviced'' by their respective originators 
and for a single entity to ``master service'' the pool of receivables 
on behalf of the owners of the related series of Securities. 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 pays them to securityholders.
    A Servicer's default is treated in the same manner whether or not 
the Issuer is a Trust. The original Servicer is replaced. The entity 
replacing the Servicer varies from transaction to transaction. In 
certain cases, it may be the Trustee (or Indenture Trustee if the 
Issuer is not a Trust) or may be a third party satisfactory to the 
Rating Agencies. In addition, there are transactions where the Trustee 
or Indenture Trustee will assume the Servicer's responsibilities on a 
temporary basis until the permanent replacement takes over. In all 
cases, the replacement entity must be capable of satisfying all of the 
duties and responsibilities of the original Servicer and must be an 
entity that is satisfactory to the Rating Agencies.
    As noted above, the Underwriter Exemptions currently require that 
the Trustee not be an Affiliate of any

[[Page 51467]]

member of the Restricted Group. Thus, if a Servicer of receivables held 
by an Issuer which has issued Securities in reliance upon the 
Underwriter Exemptions (or an Affiliate thereof) merges with or is 
acquired by (or acquires) the Trustee of such Trust (or an Affiliate 
thereof), exemptive relief would cease to be available under the 
Underwriter Exemptions. The Applicant states that, as the result of 
legal constraints applicable to such merger and acquisition 
transactions (e.g., confidentiality requirements), the entities 
involved in the transaction are unable before the transaction is 
consummated to cross check all relationships between the often numerous 
Affiliates of the entities involved in the transaction in order to 
determine whether or not any of the new affiliations resulting from the 
transaction will violate this non-affiliation condition of the 
Underwriter Exemptions. In response to this issue, the Department 
proposes to revise subsection II.A.(4) of the Underwriter Exemptions to 
provide that this condition will not be considered to be violated for 
transactions occurring on or after January 1, 1998, merely by reason of 
a Servicer becoming an Affiliate of the Trustee as the result of a 
merger or acquisition between or among the Trustee, such Servicer and/
or their Affiliates which occurs after the initial issuance of the 
Securities, provided that: (i) Such Servicer ceases to be an Affiliate 
of the Trustee no later than six months after the later of August 23, 
2000, or the date such Servicer became an Affiliate of the Trustee; and 
(ii) such Servicer did not breach any of its obligations under the 
Pooling and Servicing Agreement, unless such breach was immaterial and 
timely cured in accordance with the terms of such agreement, during the 
period from the closing date of such merger or acquisition transaction 
through the date the Servicer ceased to be an Affiliate of the Trustee. 
The Department proposes to make this revision retroactive to January 1, 
1998 in response to the Applicant's representations that recent merger 
and acquisition transactions occurring within the financial services 
industry have resulted in an unknown but potentially significant number 
of inadvertent violations of this condition.
    The Underwriter will be a registered broker-dealer that acts as 
Underwriter or placement agent with respect to the sale of Securities. 
Public offerings of Securities are generally made on a firm commitment 
or agency basis. Private placement of Securities may be made on a firm 
commitment or agency basis. It is anticipated that the lead or co-
managing Underwriters will make a market in Securities offered to the 
public.
    In some cases, the originator and Servicer of receivables to be 
held by an Issuer and the Sponsor of the Issuer (though they themselves 
may be related) will be unrelated to the Underwriter. In other cases 
however, Affiliates of the Underwriter may originate or service 
receivables held by an Issuer or may sponsor an Issuer.

G. Security Price, Interest Rate and Fees

    In some cases, the Sponsor will obtain the receivables from various 
originators or other secondary market participants pursuant to existing 
contracts with such originators or other secondary market participants 
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 Securities. In other cases, the 
Sponsor will originate the receivables itself.
    As compensation for the receivables transferred to the Issuer, the 
Sponsor receives Securities representing the entire beneficial interest 
in the Issuer and/or debt Securities representing the Issuer's 
obligations to debt securityholders, or the cash proceeds of the sale 
of such Securities. If the Sponsor receives Securities from the Issuer, 
the Sponsor sells some or all of these Securities for cash to investors 
or securities underwriters.
    The price of the Securities, both in the initial offering and in 
the secondary market, is affected by market forces including investor 
demand, the interest rate payable on the Securities in relation to the 
rate payable on investments of similar types and quality, expectations 
as to the effect on yield resulting from prepayment of the underlying 
receivables, and expectations as to the likelihood of timely payment.
    The interest rate payable on the Securities is equal to the 
interest rate on receivables included in the Issuer minus a specified 
servicing fee.\27\ This rate is generally determined by the same market 
forces that determine the price of a Security. The price of a Security 
and its interest, or coupon, rate, together determine the yield to 
investors. If an investor purchases a Security at less than par, that 
discount augments the stated interest rate; conversely, a Security 
purchased at a premium yields less than the stated coupon.
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    \ 27\ The interest rate payable on Securities representing 
interests in Issuers holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
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    As compensation for performing its servicing duties, the Servicer 
(who may also be the Sponsor or an Affiliate thereof, and receive fees 
for acting as Sponsor) will retain the difference between payments 
received on the receivables held by the Issuer and payments (payable at 
the interest rate) to securityholders, except that in some cases a 
portion of the payments on the 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 Issuer (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 
Issuer, 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 Issuer 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 
income received on the receivables in the Issuer in excess of the 
interest rate or paid in a lump sum at the time the Issuer is 
established.
    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 Securities.
    Payments on receivables held by the Issuer may be made by Obligors 
to the Servicer at various times during the period preceding any date 
on which interest payments to the Issuer are due. In some cases, the 
Pooling and Servicing Agreement may permit the Servicer to place these 
payments in non-interest bearing accounts in itself or to commingle 
such payments with its own funds prior to the distribution dates. In 
these cases, the Servicer would be entitled to the benefit derived from 
the use of the funds between the date of payment on a receivable and 
the

[[Page 51468]]

payment date on the Securities. 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 
from 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 Issuer makes payments to 
securityholders.
    The Underwriter will receive a fee in connection with the 
underwriting or private placement of Securities. In a firm commitment 
underwriting, this fee would normally consist of the difference between 
what the Underwriter receives for the Securities that it distributes 
and what it pays the Sponsor for those Securities. 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 Securities 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 Securities are sold to 
the public and what it pays the Sponsor. In some private placements, 
the Underwriter may buy Securities as principal, in which case its 
compensation would be the difference between what the Underwriter 
receives for the Securities and what it pays the Sponsor for these 
Securities.

H. Purchase of Receivables by the Servicer

    The Applicant represents that as the principal amount of the 
receivables held by an Issuer is reduced by payments, the cost of 
administering the Issuer generally increases, making the servicing of 
the receivables prohibitively expensive at some point. Consequently, 
the Pooling and Servicing Agreement generally provides that the 
Servicer may purchase the receivables remaining in the Issuer when the 
aggregate unpaid balance payable on the receivables is reduced to a 
specified percentage (usually between 5 and 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 either: (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 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 an Issuer which is not a REMIC.

V. Requested Modifications for Motor Vehicles, Residential/Home 
Equity, Manufactured Housing and Commercial Mortgage-Backed 
Securities Transactions

A. The Applicant's Request

    The Applicant requests an amendment to the 1997 Amendment to 
provide relief for the offering of investment-grade mortgage-backed 
securities (MBS) and asset-backed securities (ABS) which are either 
senior or subordinated, and/or in certain cases, permit the Issuer to 
hold receivables with loan-to-value property ratios (LTV ratios) in 
excess of 100%. Specifically, this request relates to Securities issued 
by Issuers for a limited number of asset categories: (1) Automobile and 
other motor vehicle ABS which are senior or subordinated securities 
rated ``AAA,'' ``AA,'' ``A'' or ``BBB''; (2) residential and home 
equity ABS/MBS with senior or subordinated securities rated either 
``AAA,'' ``AA,'' ``A'' or ``BBB,'' which are issued by Issuers whose 
assets may include mortgage loans with LTV ratios in excess of 100%; 
(3) manufactured housing ABS/MBS with senior or subordinated securities 
rated either ``AAA,'' ``AA,'' ``A'' or ``BBB'' and (4) commercial 
mortgage-backed securities (CMBS) which are senior or subordinated 
securities rated ``AAA,'' ``AA,'' ``A'' or ``BBB.''
    The Applicant requests that the Department include high LTV loans 
as acceptable assets of the Issuer only in residential and/or home 
equity transactions, as long as such loans are secured by collateral 
whose fair market value on the Closing Date of the securitization 
transaction is at least equal to 80% of the sum of the outstanding 
principal balance due under the loan which is held as an asset of the 
Issuer and that of other loans if any, of higher priority (whether or 
not held by the Issuer) which are secured by the same collateral. This 
modification would also address the situation where a residential or 
home equity pool of assets contains a de minimis number of 
undercollateralized loans. According to TBMA, a pool could have, for 
example, 400 loans, 399 of which are fully secured and one of which is 
99% secured, but the transaction would not qualify for the Underwriter 
Exemptions. The situation cannot always be cured by removing even a 
small number of loans from the pool because replacement loans may not 
be available by closing, and pre-funding may not be feasible. The 
Applicant has suggested as additional safeguards, that: (i) the rights 
and interests evidenced by the Securities issued in such Designated 
Transactions involving residential and/or home equity transactions with 
high LTV loans are not subordinated to the rights and interests 
evidenced by Securities of the same Issuer, and (ii) such Securities 
acquired by the plan have received a rating from a Rating Agency at the 
time of such acquisition that is in one of the two highest generic 
rating categories.
    The Applicant believes that it is appropriate for the Department to 
provide relief for Designated Transactions for three principal reasons.
    First, such ABS/MBS have proven to be extremely safe investments 
with superior credit performance and investment return. Defaults on 
investment-grade ABS/MBS have occurred in only isolated instances, 
despite significant down-market cycles experienced during the financial 
history of such securities. In addition, comparably rated corporate 
bonds have historically experienced more downgrades and a much greater 
number of defaults. Even during extreme credit market conditions, such 
as those of the late summer and early fall of 1998 which put severe 
cash flow stress on securitization Sponsors, ABS/MBS securitization 
structures maintained their integrity and continued to perform in 
accordance with their terms.
    Second, allowing a broader range of ABS/MBS to be purchased by plan 
investors as an alternative to corporate bonds is beneficial to plan 
participants and their beneficiaries because it allows greater 
diversification of investments by plans without sacrificing the safety 
and credit quality of those investments. It also gives plan investors 
the flexibility of being able to structure a portfolio of fixed income 
securities with varying maturities and cash flow characteristics that 
can be tailored to the unique requirements of each plan.
    Third, most ABS/MBS, unlike corporate bonds whose performance is 
dependent on the financial condition of one Obligor, constitute 
interests in a discrete pool of financial assets which can be evaluated 
by plan fiduciaries who have available to them a large body of 
historical data as to the performance of various types of ABS/MBS 
issued by many different issuer