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Secretary of Labor Thomas E. Perez
Proposed Amendment to Prohibited Transaction Exemptions (PTEs) 90-30 Involving Bear, Stearns & Co. Inc., (D-10245) 90-32 Involving Prudential Securities Incorporated, (D-10246) [Notices] [05/23/1997]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Amendment to Prohibited Transaction Exemptions (PTEs) 90-30 Involving Bear, Stearns & Co. Inc., (D-10245) 90-32 Involving Prudential Securities Incorporated, (D-10246) [05/23/1997]

[PDF Version]

Volume 62, Number 100, Page 28502-28515

[DOCID:fr23my97-126]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

 
Proposed Amendment to Prohibited Transaction Exemptions (PTEs) 
90-30 Involving Bear, Stearns & Co. Inc., (D-10245) 90-32 Involving 
Prudential Securities Incorporated, (D-10246)

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

ACTION: Notice of a proposed amendment to the Underwriter 
Exemptions.<SUP>1</SUP>
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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 96-11, 
61 FR 3490 (January 31, 1996); 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); and PTE 97-28, 62 
FR (Norwest Investment Services).
    In addition, the Department notes that it is also proposing 
individual exemptive relief for Ironwood Capital Partners Ltd., 
Final Authorization Number (FAN) 97-02E and Deutsche Bank AG, New 
York Branch and Deutsche Morgan Grenfell/C.J. Lawrence Inc., FAN 97-
03E, 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.
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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) Modify the definition of 
``Trust'' to include a pre-funding account (the Pre-Funding Account) 
and a capitalized interest account (the Capitalized Interest Account) 
as part of the corpus of the Trust; (2) provide retroactive relief for 
transactions involving asset pool investment trusts containing pre-
funding accounts which have occurred on or after January 1, 1992; (3) 
include in the definition of ``Certificate'' a debt instrument that 
represents an interest in a Financial Asset Securitization Investment 
Trust (FASIT); and (4) make certain changes to the Underwriter 
Exemptions that would reflect the Department's current interpretation 
of the Underwriter Exemptions.

DATES: Written comments and requests for a hearing should be received 
by the Department on or before July 7, 1997.

EFFECTIVE DATE: If adopted, the proposed amendment to the Underwriter 
Exemptions would be effective for transactions occurring on or after 
January 1, 1992, except as otherwise provided in subsection II.A.(7) 
and section III.AA. of the proposed exemption.

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 PTEs 90-30, 90-32, et al. The 
applications 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 PTEs 90-30, 55 
FR 21461 (May 24, 1990) and 90-32, 55 FR 23147 (June 6, 1990), two of 
the Underwriter Exemptions. The Underwriter Exemptions are a group of 
individual exemptions that 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.
    The proposed amendment was requested by application dated March 25, 
1996, and as restated in a later submission dated February 26, 1997, on 
behalf of Bear, Stearns & Co. Inc.<SUP>2</SUP> and Prudential Security 
Inc.\3\ (the Applicants). In preparing the application, the Applicants 
received input from members of the PSA. The Bond Market Trade 
Association (formerly the Public Securities Association) (PSA).
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    \2\ PTE 90-30, 55 FR 21461 (May 24, 1990). Bear, Stearns & Co. 
Inc. (Bear, Stearns) is an international investment banking firm 
which engages in securities transactions as both a principal and 
agent and which provides a broad range of underwriting, research and 
financial services to its clients.
    \3\ PTE 90-32, 55 FR 23147 (June 6, 1990). PTE 90-32 was granted 
to Prudential-Bache Securities, Inc. which subsequently changed its 
corporate name to Prudential Securities Incorporated (Prudential). 
Prudential is a full service securities broker-dealer and investment 
banking firm.
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    The Department is proposing the amendment to these individual 
exemptions 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).<SUP>4</SUP> 
In addition, the Department 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.<SUP>5</SUP> The Department is also proposing to provide 
the same relief to Ironwood Capital Partners Ltd. (D-10424) and 
Deutsche Bank AG, New York Branch and Deutsche Morgan Grenfell/C.J. 
Lawrence Inc. (D-10433), which received the

[[Page 28503]]

approval of the Department to engage in transactions substantially 
similar to the transactions described in the Underwriter Exemptions 
pursuant to PTE 96-62.
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    \4\ 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 section 406 
and 408 of the Act should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
    \5\ In this regard, the entities who received the other 
Underwriter Exemptions were contacted concerning their participation 
in this amendment process.
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Amendment to the Exemptions

    The Applicants state that the proposed amendment is requested in 
order to modify the definition of Trust contained in the Underwriter 
Exemptions to include a Pre-Funding Account and a related Capitalized 
Interest Account, both consisting of cash or temporary investments made 
therewith (as further described herein). This would permit the Trust to 
acquire a portion (not to exceed the limitations set forth below) of 
its assets during an interim period (the Pre-Funding Period), following 
the closing date of the Trust under the pooling and servicing agreement 
or trust agreement pursuant to which the Trust is established (the 
Closing Date). Allowing a portion of the Trust's assets to be acquired 
during the Pre-Funding Period would be an alternative to requiring that 
all of the receivables to be held in the Trust be transferred or 
constitute a fixed pool of assets as of the Closing Date.<SUP>6</SUP> 
The characteristics of the receivables to be acquired during the Pre-
Funding Period will be substantially similar to the characteristics of 
the receivables conveyed to the Trust as of the Closing Date.
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    \6\ The Department is of the view that the term ``Trust'' under 
the Underwriter Exemptions would include a Trust: (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 
Trust on the Closing Date for administrative or other reasons but 
will be transferred to the Trust shortly after the Closing Date, or 
(b) with respect to which certificates are not purchased by plans 
until after the end of the Pre-Funding Period at which time all 
receivables are contained in the Trust.
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    Additionally, the Applicants request that the proposed amendment 
include in the definition of ``Certificate'' a debt instrument that 
represents an interest in a FASIT provided that each of the applicable 
requirements of the Underwriter Exemptions are met. The Applicants also 
request that the Department update the Underwriter Exemptions to 
reflect: (1) those features which the Department has already approved 
in recently granted Underwriter Exemptions; (2) certain other technical 
corrections or clarifications; and (3) provisions authorizing yield 
supplement agreements or similar yield maintenance 
arrangements.<SUP>7</SUP>
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    \7\ In a July 14, 1994 letter to Richard A. Gilbert, Esq. of 
Orrick, Herrington & Sutcliffe, the Department expressed the view 
that the definition of ``Trust'' in PTE 90-23, 55 FR 20545 (May 17, 
1990) includes yield supplement agreements or similar yield 
maintenance arrangements which obligates the sponsor, master 
servicer or another party specified in the pooling and servicing 
agreement to supplement the interest rates otherwise payable on the 
obligations that are held in the Trust, provided that such 
arrangements do not involve swap agreements or other notional 
principal contracts.
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The Underwriter Exemptions

    The Underwriter Exemptions permit plans to invest in pass-through 
certificates representing undivided interests in the following 
categories of trusts: <SUP>8</SUP> (1) single and multi-family 
residential or commercial mortgage investment trusts; <SUP>9</SUP> (2) 
motor vehicle receivables investment trusts; (3) consumer or commercial 
receivables investment trusts; and (4) guaranteed governmental mortgage 
pool certificate investment trusts.<SUP>10</SUP> 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.<SUP>11</SUP>
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    \8\ A given trust may include receivables of the type described 
below in one or more of the categories of trusts discussed herein.
    \9\ The Department notes that PTE 83-1 (48 FR 895, January 7, 
1983), a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. 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.
    \10\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of plan assets 
(29 CFR 2510.3-101(i)) provides that where a plan acquires a 
guaranteed governmental mortgage pool certificate, the plan's assets 
include the certificate and all of its rights with respect to such 
certificate under applicable law, but do not, solely by reason of 
the plan's holding of such certificate, include any of the mortgages 
underlying such certificate. The applicant is requesting exemptive 
relief for trusts containing guaranteed governmental mortgage pool 
certificates because the certificates in the trusts may be plan 
assets.
    \11\ 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 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 continue 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 issues 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, in the past several years, the transactions 
relating to the funding of the Trust have changed.

Pre-Funding Accounts

    The Applicants represent that while many transactions still occur 
as described in the applications for the Underwriter Exemptions and as 
summarized above, it is also common for other transactions to be 
structured using a Pre-Funding Account and/or a Capitalized Interest 
Account as described below. Pre-Funding Accounts allow the sponsor 
additional time after the Closing Date to assemble the files for 
receivables, complete quality control or other due-diligence procedures 
and deliver the necessary documents to the trustee. The sale of 
certificates prior to the origination of such receivables provides a 
mechanism for both the originator and/or sponsor and plans to protect 
against fluctuations in interest rates. Since many transaction costs 
are fixed regardless of the size of the receivables pool, the sale of 
additional receivables lowers the unit costs of the transaction, both 
for the originators and/or the sponsor and for plans (who otherwise 
might not be able to purchase the same volume of receivables on their 
own at a comparable unit price).
    Pre-Funding Accounts allow originators and/or sponsors to reduce 
costs by permitting the sale of the existing receivables and delivery 
of additional receivables without the need to warehouse the existing 
receivables during the period that the additional receivables are being 
acquired. The Applicants state that all of these uses of Pre-Funding 
Accounts make

[[Page 28504]]

transactions more efficient, thereby reducing costs and producing 
better execution for both sponsors and/or originators and plan 
investors. Also, through the use of a Pre-Funding Account, sponsors 
and/or originators are able to sell, and plans are able to purchase, 
more securities at then current market rates than would be the case in 
the absence of the Pre-Funding Account.
    The Applicants assumed that the use of a Pre-Funding Account was 
authorized under the original Underwriter Exemptions and transactions 
including Pre-Funding Accounts have occurred since January 1, 1992. The 
Applicants therefore request retroactive relief for transactions 
involving Trusts containing Pre-Funding Accounts. The Applicants state 
that transactions involving Pre-Funding Accounts which have occurred on 
or after January 1, 1992 but prior to the date of this proposed 
amendment, were entered into by the parties under a good faith belief 
that the Department had sanctioned such use.
    The Applicants represent that they are unaware of any circumstances 
in which the use of pre-funding has harmed plan investors and there is 
no evidence of any failure of a sponsor to meet its representations as 
to the characteristics of the subsequently acquired receivables or of 
any down-grading of a certificate rating at the end of the Pre-Funding 
Period. PSA has canvassed its members who have been granted an 
Underwriter Exemption and have solicited this same information from 
four nationally recognized rating agencies referred to in the 
Underwriter Exemptions. No such underwriter or rating agency is aware 
of any transaction where the rating of the certificates has been down-
graded at the end of the Pre-Funding Period solely as a consequence of 
use of a pre-funding mechanism.
    The Pre-Funding Period for any Trust will be defined as the period 
beginning on the Closing Date and ending on the earliest to occur of 
(i) the date on which the amount on deposit in the Pre-Funding Account 
is less than a specified dollar amount, (ii) the date on which an event 
of default occurs under the related pooling and servicing agreement 
<SUP>12</SUP> 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 Trust by the sponsor or 
originator on the Closing Date. During the Pre-Funding Period, such 
cash and temporary investments, if any, made therewith will be held in 
a Pre-Funding Account and used to purchase the additional receivables, 
the characteristics of which will be substantially similar to the 
characteristics of the receivables transferred to the Trust on the 
Closing Date. Certain specificity and monitoring requirements described 
below must be met and will be disclosed in the pooling and servicing 
agreement and/or the prospectus <SUP>13</SUP> or private placement 
memorandum.
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    \12\ 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 
certificateholders; or (iii) the servicer becomes insolvent.
    \13\ References to the term ``prospectus'' herein shall include 
any related prospectus supplement thereto, pursuant to which 
certificates are offered to investors.
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    For transactions involving a Trust using pre-funding, on the 
Closing Date, a portion of the offering proceeds will be allocated to 
the Pre-Funding Account generally in an amount equal to the excess of 
(i) the principal amount of certificates being issued over (ii) the 
principal balance of the receivables being transferred to the Trust on 
such Closing Date. In certain transactions, the aggregate principal 
balance of the receivables intended to be transferred to the Trust may 
be larger than the total principal balance of the certificates being 
issued. In these cases, the cash deposited in the Pre-Funding Account 
will equal the excess of the principal balance of the total receivables 
intended to be transferred to the trust over the principal balance of 
the receivables being transferred on the Closing Date.
    On the Closing Date, the sponsor transfers the assets to the Trust 
in exchange for the certificates. The certificates are then sold to an 
underwriter for cash or to the certificateholders directly if the 
certificates are sold through a placement agent. The cash received by 
the sponsor from the certificateholders (or the underwriter) from the 
sale of the certificates issued by the Trust in excess of the purchase 
price for the receivables and certain other trust expenses such as 
underwriting or placement agent fees and legal and accounting fees, 
constitutes the cash to be deposited in the Pre-Funding Account. Such 
funds are either held in the trust and accounted for separately, or are 
held in a sub-trust. In either event, these funds are not part of 
assets of the sponsor.
    Generally, the receivables are transferred at par value, unless the 
interest rate payable on the receivables is not sufficient to service 
both the interest rates to be paid on the certificates and the 
transaction fees (i.e., servicing fees, trustee fees and fees to credit 
support providers). In such cases, the receivables are sold to the 
Trust at a discount, based on an objective, written, mechanical formula 
which is set forth in the pooling and servicing agreement and agreed 
upon in advance between the sponsor, the rating agency and any credit 
support provider or other insurer. The proceeds payable to the sponsor 
from the sale of the receivables transferred to the trust may also be 
reduced to the extent they are used to pay transaction costs (which 
typically include underwriting or placement agent fees and legal and 
accounting fees). In addition, in certain cases, the sponsor may be 
required by the rating agencies or credit support providers to set up 
trust reserve accounts to protect the certificateholders against credit 
losses.
    The exemptive relief requested for Pre-Funding Accounts is limited 
to those Trusts where the percentage or ratio of the amount allocated 
to the pre-funding account, as compared to the total principal amount 
of the certificates being offered (the Pre-Funding Limit) does not 
exceed 25% for transactions occurring on or after the date the proposed 
amendment is published in the Federal Register and did not exceed 40% 
for transactions occurring on or after January 1, 1992, but prior to 
the date the proposed amendment is published in the Federal Register. 
The Pre-Funding Limit (which may be expressed as a ratio or as a stated 
percentage or a combination thereof) will be specified in the 
prospectus or the private placement memorandum.
    Any amounts paid out of the pre-funding account are used solely to 
purchase receivables and to support the certificate pass-through rate 
(as explained below). Amounts used to support the pass-through rate are 
payable only from investment earnings and are not payable from 
principal. However, in the event that, after all of the requisite 
receivables have been transferred into the Trust, any funds remain in 
the Pre-Funding Account, such funds will be paid to the 
certificateholders as principal prepayments. Upon termination of the 
Trust, if no receivables remain in the Trust and all amounts payable to 
certificateholders have been distributed, any amounts remaining in the 
Trust would be returned to the sponsor.

[[Page 28505]]

    A dramatic change in interest rates on the receivables held in a 
Trust using a Pre-Funding Account would be handled as follows. If the 
receivables (other than those with adjustable or variable rates) had 
already been originated prior to the Closing Date, no action would be 
required as the fluctuations in market interest rates would not affect 
the receivables transferred to the Trust after the Closing Date. In 
contrast, if interest rates fall after the Closing Date, loans 
originated after the Closing Date will tend to be originated at lower 
rates, with the possible result that the receivables will not support 
the certificate pass-through rate. In such situations, the sponsor 
could sell the receivables into the Trust at a discount and more 
receivables will be used to fund the Trust in order to support the 
pass-through rate. In a situation where interest rates drop 
dramatically and the sponsor is unable to provide sufficient 
receivables at the requisite interest rates, the pool of receivables 
would be closed. In this latter event, under the terms of the pooling 
and servicing agreement, the certificateholders would receive a 
repayment of principal from the unused cash held in the Pre-Funding 
Account. In transactions where the certificate pass-through rates are 
variable or adjustable, the effects of market interest rate 
fluctuations are mitigated. In no event will fluctuations in interest 
rates payable on the receivables affect the pass-through rate for fixed 
rate certificates.
    The cash deposited into the Trust and allocated to the Pre-Funding 
Account is invested in certain permitted investments (see below), which 
may be commingled with other accounts of the Trust. The allocation of 
investment earnings to each Trust account is made periodically as 
earned in proportion to each account's allocable share of the 
investment returns. As Pre-Funding Account investment earnings are 
required to be used to support (to the extent authorized in the 
particular transaction) the pass-through amounts payable to the 
certificateholders with respect to a periodic distribution date, the 
trustee is necessarily required to make periodic, separate allocations 
of the Trust's earnings to each Trust account, thus ensuring that all 
allocable commingled investment earnings are properly credited to the 
Pre-Funding Account on a timely basis.

The Capitalized Interest Account

    The Applicants state that in certain transactions where a Pre-
Funding Account is used, the sponsor and/or originator may also 
transfer to the Trust additional cash on the Closing Date, which is 
deposited in a Capitalized Interest Account and used during the Pre-
Funding Period to compensate the certificateholders for any shortfall 
between the investment earnings on the Pre-Funding Account and the 
pass-through interest rate payable under the certificates.
    The Capitalized Interest Account is needed in certain transactions 
since the certificates are supported by the receivables and the 
earnings on the Pre-Funding Account, and it is unlikely that the 
investment earnings on the Pre-Funding Account will equal the interest 
rates on the certificates (although such investment earnings will be 
available to pay interest on the certificates). The Capitalized 
Interest Account funds are paid out periodically to the 
certificateholders as needed on distribution dates to support the pass-
through rate. In addition, a portion of such funds may be returned to 
the sponsor from time to time as the receivables are transferred into 
the Trust and the need for the Capitalized Interest Account diminishes. 
Any amounts held in the Capitalized Interest Account generally will be 
returned to the sponsor and/or originator either at the end of the Pre-
Funding Period or periodically as receivables are transferred and the 
proportionate amount of funds in the Capitalized Interest Account can 
be reduced. Generally, the Capitalized Interest Account terminates no 
later than the end of the Pre-Funding Period. However, there may be 
some cases where the Capitalized Interest Account remains open until 
the first date distributions are made to certificateholders following 
the end of the Pre-Funding Period.
    In other transactions, a Capitalized Interest Account is not 
necessary because the interest paid on the receivables exceeds the 
interest payable on the certificates at the applicable pass-through 
rate and the fees of the Trust. Such excess is sufficient to make up 
any shortfall resulting from the Pre-Funding Account earning less than 
the certificate pass-through rate. In certain of these transactions, 
this occurs because the aggregate principal amount of receivables 
exceeds the aggregate principal amount of certificates.

Pre-Funding Account and Capitalized Interest Account Payments and 
Investments

    Pending the acquisition of additional receivables during the Pre-
Funding Period, it is expected that amounts in the Pre-Funding Account 
and the Capitalized Interest Account will be invested in certain 
permitted investments or will be held uninvested. Pursuant to the 
pooling and servicing agreement, all permitted investments must mature 
prior to the date the actual funds are needed. The permitted types of 
investments in the Pre-Funding Account and Capitalized Interest Account 
are investments which are either: (i) Direct obligations of, or 
obligations fully guaranteed as to timely payment of principal and 
interest by, the United States or any agency or instrumentality 
thereof, provided that such obligations are backed by the full faith 
and credit of the United States or (ii) have been rated (or the obligor 
has been rated) in one of the three highest generic rating categories 
by Standard and Poor's Structured Rating Group, Moody's Investors 
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors 
Service, L.P. (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 
certificates. The types of permitted investments will be described in 
the pooling and servicing agreement.
    The ordering of interest payments to be made from the Pre-Funding 
and Capitalized Interest Accounts is pre-established and set forth in 
the pooling and servicing agreement. The only principal payments which 
will be made from the Pre-Funding Account are those made to acquire the 
receivables during the Pre-Funding Period and those distributed to the 
certificateholders in the event that the entire amount in the Pre-
Funding Account is not used to acquire receivables. The only principal 
payments which will be made from the Capitalized Interest Account are 
those made to certificateholders if necessary to support the 
certificate pass-through rate or those made to the sponsor either 
periodically as they are no longer needed or at the end of the Pre-
Funding Period when the Capitalized Interest Account is no longer 
necessary.

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

    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, the Applicants have represented that:
    (i) All such receivables will meet the same terms and conditions 
for eligibility as those of the original receivables used to create the 
Trust corpus (as described in the prospectus or private placement 
memorandum and/or pooling and

[[Page 28506]]

servicing agreement for such certificates), which terms and conditions 
have been approved by a rating agency. However, the terms and 
conditions for determining the eligibility of a receivable may be 
changed if such changes receive prior approval either by a majority 
vote of the outstanding certificateholders or by a rating agency; 
<SUP>14</SUP>
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    \14\ 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 Trust. The insurer and/or credit 
support provider may, therefore, reject certain receivables or 
require that the sponsor establish certain Trust reserve accounts as 
a condition of including these receivables. Virtually all Trusts 
which have insurers or other credit support providers are structured 
to give such veto rights to these parties. The percentage of Trusts 
that have insurers and/or credit support providers, and accordingly 
feature such veto rights, varies.
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    (ii) The transfer to the Trust of the receivables acquired during 
the Pre-Funding Period will not result in the certificates receiving a 
lower credit rating from the rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the 
initial issuance of the certificates by the trust;
    (iii) The weighted average annual percentage interest rate (the 
average interest rate) for all of the obligations in the Trust at the 
end of the Pre-Funding Period will not be more than 100 basis points 
lower than the average interest rate for the obligations which were 
transferred to the Trust on the Closing Date;
    (iv) The trustee of the trust (or any agent with which the trustee 
contracts to provide trust services) will be a substantial financial 
institution or trust company experienced in trust activities and 
familiar with its duties, responsibilities, and liabilities as a 
fiduciary under the Act. The trustee, as the legal owner of the 
obligations in the trust, will enforce all the rights created in favor 
of certificateholders of such trust, including employee benefit plans 
subject to the Act.
    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 
Applicants represent that for transactions occurring on or after the 
date of publication of the proposed exemption, the characteristics of 
the additional obligations subsequently acquired will either be 
monitored by a credit support provider or other insurance provider 
which is independent of the sponsor or an independent accountant 
retained by the sponsor will provide the sponsor with a letter (with 
copies provided to the rating agency, the underwriter and the trustees) 
stating whether or not the characteristics of the additional 
obligations acquired after the Closing Date conform to the 
characteristics of such obligations described in the prospectus, 
private placement memorandum and/or pooling and servicing agreement. In 
preparing such letter, the independent accountant will use the same 
type of procedures as were applicable to the obligations which were 
transferred as of the Closing Date.
    Each prospectus, private placement memorandum and/or pooling and 
servicing agreement will set forth the terms and conditions for 
eligibility of the receivables to be included in the Trust as of the 
related Closing Date, as well as those to be acquired during the Pre-
Funding Period, which terms and conditions will have been agreed to by 
the rating agencies which are rating the applicable certificates as of 
the Closing Date. Also included among these conditions is the 
requirement that the trustee be given prior notice of the receivables 
to be transferred, along with such information concerning those 
receivables as may be requested. Each prospectus or private placement 
memorandum will describe the amount to be deposited in, and the 
mechanics of, the Pre-Funding Account and will describe the Pre-Funding 
Period for the Trust.

FASITs

    The Applicants request that exemptive relief apply to FASITs which 
are trusts, provided that each of the other applicable requirements of 
the Underwriter Exemption are met. FASITs are a new 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.<SUP>15</SUP> FASITs are designed to facilitate the securitization 
<SUP>16</SUP> of debt obligations, such as credit card receivables, 
home equity loans, and auto loans, and thus allows certain features 
such as revolving pools of assets, trusts containing unsecured 
receivables and certain hedging types of investments. A FASIT is not a 
taxable entity and debt instruments issued by such trusts, which might 
otherwise be recharacterized as equity, will be treated as debt in the 
hands of the holder for tax purposes.
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    \15\ Section 1621 of the SBA adds sections 860H, 860I, 860J, 
860K and 860L to the Internal Revenue Code of 1986.
    \16\ 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.
---------------------------------------------------------------------------

    The Applicants represent that the rationale set forth in the 
Department's statements regarding REMICs, which were published in the 
Federal Register with respect to several of the earlier Underwriter 
Exemptions also apply to FASITs. However, the Applicants note that the 
representation in the Underwriter Exemptions <SUP>17</SUP> regarding 
the tax requirement that a Trust must be maintained as an essentially 
passive entity would not be true for all FASITs, as they are allowed 
under the Code to have revolving pools of permitted assets. The 
Applicants are only requesting exemptive relief 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 specifically authorized by 
the Underwriter Exemptions would be permissible under the proposed 
amendment.
---------------------------------------------------------------------------

    \17\ For tax reasons, the trust must be maintained as an 
essentially passive entity. Therefore, both the sponsor's discretion 
and the servicer's discretion with respect to assets included in a 
trust are severely limited. Pooling and servicing agreements provide 
for the substitution of receivables by the sponsor only in the event 
of defects in documentation discovered within a short time after the 
issuance of trust certificates (within 120 days, except in the case 
of obligations having an original term of 30 years, in which case 
the period will not exceed two years). Any receivable so substituted 
is required to have characteristics substantially similar to the 
replaced receivable and will be at least as creditworthy as the 
replaced receivable.
    In some cases, the affected receivable would be repurchased, 
with the purchase price applied as a payment on the affected 
receivable and passed through to certificateholders.
---------------------------------------------------------------------------

Parties to Transactions

    The originator of a receivable is the entity that initially lends 
money to a borrower (obligor), such as a homeowner or automobile 
purchaser, or leases property to a lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a Trust sponsor.
    Originators of receivables included in the Trust 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

[[Page 28507]]

enterprise for whom such origination is an incidental part of its 
operations. Each Trust may contain assets of one or more originators. 
The originator of the receivables may also function as the Trust 
sponsor or servicer.
    The sponsor will be one of three entities: (i) a special-purpose or 
other corporation unaffiliated with the servicer, (ii) a special-
purpose or other corporation affiliated with the servicer, or (iii) the 
servicer itself. Where the sponsor is not also the servicer, the 
sponsor's role will generally be limited to acquiring the receivables 
to be included in the trust, establishing the Trust, designating the 
trustee, and assigning the receivables to the trust. The trustee of a 
Trust is the legal owner of the obligations in the Trust. The trustee 
is also a party to or beneficiary of all the documents and instruments 
deposited in the Trust, and as such is responsible for enforcing all 
the rights created thereby in favor of certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to the Underwriter, the Trust sponsor, the servicer or any 
other member of the Restricted Group. The Underwriter 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 Trust assets. The method of compensating the trustee which is 
specified in the pooling and servicing agreement will be disclosed in 
the prospectus or private placement memorandum relating to the offering 
of the certificates.
    The servicer of a Trust administers the receivables on behalf of 
the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a Trust, the receivables may be 
``subserviced'' by their respective originators and a single entity may 
``master service'' the pool of receivables on behalf of the owners of 
the related series of certificates. Where this arrangement is adopted, 
a receivable continues to be serviced from the perspective of the 
borrower by the local subservicer, while the investor's perspective is 
that the entire pool of receivables is serviced by a single, central 
master servicer who collects payments from the local subservicers and 
passes them through to certificateholders.
    The underwriter will be a registered broker-dealer that acts as 
underwriter or placement agent with respect to the sale of the 
certificates. Public offerings of certificates are generally made on a 
firm commitment basis. Private placement of certificates may be made on 
a firm commitment or agency basis. It is anticipated that the lead and 
co-managing underwriters will make a market in certificates offered to 
the public.
    In some cases, the originator and servicer of receivables to be 
included in a Trust and the sponsor of the Trust (although they may 
themselves be related) will be unrelated to the Underwriter. In other 
cases, however, the Underwriter may originate or service receivables 
included in a Trust or may sponsor a Trust.

Certificate Price, Pass-Through Rate and Fees

    In some cases, the sponsor will obtain the receivables from various 
originators pursuant to existing contracts with such originators under 
which the sponsor continually buys receivables. In other cases, the 
sponsor will purchase the receivables at fair market value from the 
originator or a third party pursuant to a purchase and sale agreement 
related to the specific offering of certificates. In other cases, the 
sponsor will originate the receivables itself.
    As compensation for the receivables transferred to the Trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the Trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the Trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters.
    The price of the certificates, both in the initial offering and in 
the secondary market, is affected by market forces, including investor 
demand, the pass-through interest rate on the certificates in relation 
to the rate payable on investments of similar types and quality, 
expectations as to the effect on yield resulting from prepayment of 
underlying receivables, and expectations as to the likelihood of timely 
payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the Trust minus a specified servicing 
fee.<SUP>18</SUP> This rate is generally determined by the same market 
forces that determine the price of a certificate. The price of a 
certificate and its pass-through, or coupon, rate together determine 
the yield to investors. If an investor purchases a certificate at less 
than par, that discount augments the stated pass-through rate; 
conversely, a certificate purchased at a premium yields less than the 
stated coupon.
---------------------------------------------------------------------------

    \18\ The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
---------------------------------------------------------------------------

    As compensation for performing its servicing duties, the servicer 
(who may also be the sponsor or an affiliate thereof, and receive fees 
for acting in that capacity) will retain the difference between 
payments received on the receivables in the trust and payments payable 
(at the pass-through rate) to certificateholders, except that in some 
cases a portion of the payments on receivables may be paid to a third 
party, such as a fee paid to a provider of credit support. The servicer 
may receive additional compensation by having the use of the amounts 
paid on the receivables between the time they are received by the 
servicer and the time they are due to the Trust (which time is set 
forth in the pooling and servicing agreement). The servicer typically 
will be required to pay the administrative expenses of servicing the 
trust, including in some cases the trustee's fee, out of its servicing 
compensation.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the Trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid out of the 
interest income received on the receivables in the Trust in excess of 
the pass-through rate or paid in a lump sum at the time the Trust 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 certificates.
    Payments on receivables may be made by obligors to the servicer at 
various times during the period preceding any date on which pass-
through payments to the Trust are due. In some cases, the pooling and 
servicing agreement may

[[Page 28508]]

permit the servicer to place these payments in non-interest bearing 
accounts maintained with itself or to commingle such payments with its 
own funds prior to the distribution dates. In these cases, the servicer 
would be entitled to the benefit derived from the use of the funds 
between the date of payment on a receivable and the pass-through date. 
Commingled payments may not be protected from the creditors of the 
servicer in the event of the servicer's bankruptcy or receivership. In 
those instances when payments on receivables are held in non-interest 
bearing accounts or are commingled with the servicer's own funds, the 
servicer is required to deposit these payments by a date specified in 
the pooling and servicing agreement into an account from which the 
trustee makes payments to certificateholders.
    The underwriter will receive a fee in connection with the 
securities underwriting or private placement of certificates. In a firm 
commitment underwriting, this fee would consist of the difference 
between what the underwriter receives for the certificates that it 
distributes and what it pays the sponsor for those certificates. In a 
private placement, the fee normally takes the form of an agency 
commission paid by the sponsor. In a best efforts underwriting in which 
the underwriter would sell certificates in a public offering on an 
agency basis, the underwriter would receive an agency commission rather 
than a fee based on the difference between the price at which the 
certificates are sold to the public and what it pays the sponsor. In 
some private placements, the underwriter may buy certificates as 
principal, in which case its compensation would be the difference 
between what it receives for the certificates that it sells and what it 
pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

    The applicants represent that as the principal amount of the 
receivables in a Trust is reduced by payments, the cost of 
administering the Trust generally increases, making the servicing of 
the trust prohibitively expensive at some point. Consequently, the 
pooling and servicing agreement generally provides that the servicer 
may purchase the receivables remaining in the Trust when the aggregate 
unpaid balance payable on the receivables is reduced to a specified 
percentage (usually 5 to 10 percent) of the initial aggregate unpaid 
balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to 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 (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
receivables in the case of a trust that is not a REMIC.

Certificate Ratings

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

Provision of Credit Support

    In some cases, the master servicer, or an affiliate of the master 
servicer, may provide credit support to the Trust (i.e. act as an 
insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) from the credit support provider (which 
may be the master servicer or an affiliate thereof) or, (c) in the case 
of a Trust that issues subordinated certificates, from amounts 
otherwise distributable to holders of subordinated certificates, and 
the master servicer will advance such funds in a timely manner. When 
the servicer is the provider of the credit support and provides its own 
funds to cover defaulted payments, it will do so either on the 
initiative of the trustee, or on its own initiative on behalf of the 
trustee, but in either event it will provide such funds to cover 
payments to the full extent of its obligations under the credit support 
mechanism. In some cases, however, the master servicer may not be 
obligated to advance funds but instead would be called upon to provide 
funds to cover defaulted payments to the full extent of its obligations 
as insurer. Moreover, a master servicer typically can recover advances 
either from the provider of credit support or from future payments on 
the affected assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to enforce the certificateholders' rights, 
as both a party to the pooling and servicing agreement and the owner of 
the Trust estate, including rights under the credit support mechanism. 
Therefore, the trustee, who is independent of the servicer, will have 
the ultimate right to enforce the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the master servicer out of future payments on 
receivables held by the Trust to the extent not covered by credit 
support. However, where the master servicer provides credit support to 
the Trust, there are protections in place to guard against a delay in 
calling upon the credit support to take advantage of the fact that the 
credit support declines proportionally with the decrease in the 
principal amount of the obligations in the Trust as payments on 
receivables are passed through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;
    (c) As frequently as payments are due on the receivables included 
in the Trust (monthly, quarterly or semi-annually, as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all payments which are 
past due more than a specified number of days and the amount of all 
servicer advances, along with other current information as to 
collections on the receivables and draws upon the credit support. 
Further, the master servicer is required to deliver to the trustee 
annually a certificate of an executive officer of the master servicer 
stating that a review of the servicing activities has been made under 
such officer's supervision, and either stating that the master servicer 
has fulfilled all of its obligations under the pooling and servicing 
agreement or, if the master servicer has defaulted under any of its 
obligations, specifying any such default. The master servicer's reports 
are reviewed at least annually by

[[Page 28509]]

independent accountants to ensure that the master servicer is following 
its normal servicing standards and that the master servicer's reports 
conform to the master servicer's internal accounting records. The 
results of the independent accountants' review are delivered to the 
trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the Trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount thereafter is subject 
to reduction only for actual draws. From the time that the floor amount 
is effective until the end of the life of the Trust, there are no 
proportionate reductions in the credit support amount caused by 
reductions in the pool principal balance. Indeed, since the floor is a 
fixed dollar amount, the amount of credit support ordinarily increases 
as a percentage of the pool principal balance during the period that 
the floor is in effect.

Disclosure

    In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, and any material risk factors with 
respect to the certificates and the fact that principal amounts left in 
the Pre-Funding Account at the end of the Pre-Funding Period will be 
paid to certificateholders as a repayment of principal.
    (b) A description of the Trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (c) Identification of the independent trustee for the Trust;
    (d) A description of the receivables contained in the Trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects, 
and a description of any Pre-Funding Account used or Capitalized 
Interest Account used in connection with a Pre-Funding Account;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the Trust assets, including the terms and conditions for 
eligibility of any receivables transferred during the Pre-Funding 
Period and the trustee's remedy for any breach thereof; a description 
of the procedures for collection of payments on receivables and for 
making distributions to investors, and a description of the accounts 
into which such payments are deposited and from which such 
distributions are made; a description of permitted investments for any 
Pre-Funding Account or Capitalized Interest Account; identification of 
the servicing compensation and a description of any fees for credit 
enhancement that are deducted from payments on receivables before 
distributions are made to investors; a description of periodic 
statements provided to the trustee, and provided to or made available 
to investors by the trustee; and a description of the events that 
constitute events of default under the pooling and servicing contract 
and a description of the trustee's and the investors' remedies incident 
thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors; and
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates; and
    (k) A statement as to the duration of any Pre-Funding Period and 
the Pre-Funding Limit for the Trust.
    Reports indicating the amount of payments of principal and interest 
are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    In the case of a Trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some Trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many Trusts obtain, by 
application to the Securities and Exchange Commission, relief from the 
requirement to file quarterly reports on Form 10-Q and a modification 
of the disclosure requirements for annual reports on Form 10-K. If such 
relief is obtained, these Trusts normally would continue to have the 
obligation to file current reports on Form 8-K to report material 
developments concerning the Trust and the certificates and copies of 
the statements sent to certificateholders. While the Securities and 
Exchange Commission's interpretation of the periodic reporting 
requirements is subject to change, periodic reports concerning a Trust 
will be filed to the extent required under the Securities Exchange Act 
of 1934.
    At or about the time distributions are made to certificateholders, 
a report will be delivered to the trustee as to the status of the Trust 
and its assets, including underlying obligations. Such report will 
typically contain information regarding the Trust's assets (including 
those purchased by the Trust from any Pre-Funding Account), payments 
received or collected by the servicer, the amount of prepayments, 
delinquencies, servicer advances, defaults and foreclosures, the amount 
of any payments made pursuant to any credit support, and the amount of 
compensation payable to the servicer. Such report also will be 
delivered to or made available to the rating agency or agencies that 
have rated the Trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the servicer, 
paying agent or trustee summarizing information regarding the Trust and 
its assets. Such statement will include information regarding the Trust 
and its assets, including underlying receivables. Such statement will 
typically contain information regarding payments and prepayments, 
delinquencies, the remaining amount of the guaranty or other credit 
support and a breakdown of payments between principal and interest.

Secondary Market Transactions

    It is the Underwriter's normal policy to attempt to make a market 
for securities for which it is lead or co-managing underwriter, and it 
is the underwriter's intention to make a market for any certificates 
for which the Underwriter is a lead or co-managing underwriter. At 
times the Underwriter will facilitate sales by investors who purchase 
certificates if the Underwriter has acted as agent or principal in the 
original private placement of the certificates and if such investors 
request the Underwriter's assistance.

[[Page 28510]]

Summary

    In summary, the Applicants represents that the transactions for 
which exemptive relief is requested satisfy the statutory criteria of 
section 408(a) of the Act due to the following:
    (a) The Trusts contain ``fixed pools'' of assets. There is little 
discretion on the part of the Trust sponsor to substitute receivables 
contained in the Trust once the Trust has been formed.
    (b) In the case where a Pre-Funding Account is used, the 
characteristics of the receivables to be transferred to the Trust 
during the Pre-Funding Period must be substantially similar to the 
characteristics of those transferred to the Trust on the Closing Date 
thereby giving the sponsor and/or originator little discretion over the 
selection process, and compliance with this requirement will be assured 
by the specificity of the characteristics and the monitoring mechanisms 
contemplated under the Proposed Amendment. In addition, certain cash 
accounts will be established to support the certificate pass-through 
rate and such cash accounts will be invested in short-term, 
conservative investments; the Pre-Funding Period will be of a 
reasonably short duration; a Pre-Funding Limit will be imposed; and any 
Internal Revenue Service requirements with respect to pre-funding 
intended to preserve the passive income character of the Trust will be 
met. The fiduciary of the plans making the decision to invest in 
certificates is thus fully apprised of the nature of the receivables 
which will be held in the Trust and has sufficient information to make 
a prudent investment decision.
    (c) Certificates in which plans invest will have been rated in one 
of the three highest rating categories by a rating agency. Credit 
support will be obtained to the extent necessary to attain the desired 
rating;
    (d) All transactions for which the Underwriter seeks exemptive 
relief will be governed by the pooling and servicing agreement, the 
principal provisions of which are described in the prospectus or 
private placement memorandum and which is made available to plan 
fiduciaries for their review prior to the plan's investment in 
certificates;
    (e) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (f) The Underwriter has made and anticipates that it will continue 
to make, a secondary market in certificates.

Notice to Interested Persons

    The applicant represents that because those potentially interested 
participants and beneficiaries cannot all be identified, the only 
practical means of notifying such participants and beneficiaries of 
this proposed exemption is by the publication of this notice in the 
Federal Register. Comments and requests for a hearing must be received 
by the Department not later than 45 days from the date of publication 
of this notice of proposed exemption in the Federal Register.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2) of the Code does 
not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and the Code, including 
any prohibited transaction provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which require, among other things, a fiduciary to 
discharge his or her duties respecting the plan solely in the interest 
of the participants and beneficiaries of the plan and in a prudent 
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it 
affect the requirements of section 401(a) of the Code that the plan 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption can be granted under section 408(a) of the 
Act and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the 
plans and of their participants and beneficiaries and protective of the 
rights of participants and beneficiaries of the plans;
    (3) The proposed amendment, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed amendment, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete and accurately describe all 
material terms of the transaction which is the subject of the 
exemption.

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the proposed amendment to the address above, 
within the time period set forth above. All comments will be made a 
part of the record. Comments and requests for a hearing should state 
the reasons for the writer's interest in the proposed amendment. 
Comments received will be available for public inspection with the 
referenced applications at the address set forth above.

Proposed Exemption

    Under section 408(a) of ERISA 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, August 10, 1990), the Department proposes to 
amend 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 96-11, 61 FR 
3490 (January 31, 1996); 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);

[[Page 28511]]

and PTE 97-, 62 FR (Norwest Investment Services)(collectively, the 
Underwriter Exemptions). In addition, the Department is considering 
granting exemptions to Ironwood Capital Partners Ltd (D-10424) and 
Deutsche Bank AG, New York Branch and Deutsche Morgan Grenfell/C.J. 
Lawrence Inc. (D-10433), 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.
I. Transactions
    A. The restrictions of sections 406(a) and 407(a) of the Act and 
the taxes imposed by section 4975 (a) and (b) of the Code by reason of 
section 4975(c)(1) (A) through (D) of the Code shall not apply to the 
following transactions involving trusts and certificates evidencing 
interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and an employee benefit plan when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.A.(1) or (2).
    Notwithstanding the foregoing, section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 of the Act for the acquisition or holding of a certificate on 
behalf of an Excluded Plan by any person who has discretionary 
authority or renders investment advice with respect to the assets of 
that Excluded Plan.<SUP>19</SUP>
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    \19\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 of the Act for any person rendering investment 
advice to an Excluded Plan within the meaning of section 
3(21)(A)(ii) of the Act, and regulation 29 CFR 2510.3-21(c).
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    B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act 
and the taxes imposed by section 4975(a) and (b) of the Code by reason 
of section 4975(c)(1)(E) of the Code shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) A plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) Immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold serviced by the same entity.<SUP>20</SUP> For purposes of 
this paragraph B.(1)(iv) only, an entity will not be considered to 
service assets contained in a trust if it is merely a subservicer of 
that trust;
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    \20\ For purposes of this exemption, each plan participating in 
a commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
---------------------------------------------------------------------------

    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certifi cates, 
provided that the conditions set forth in paragraphs B.(1)(i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B.(1) or (2).
    C. The restrictions of sections 406(a), 406(b) and 407(a) of the 
Act, and the taxes imposed by section 4975(a) and (b) of the Code by 
reason of section 4975(c) of the Code, shall not apply to transactions 
in connection with the servicing, management and operation of a trust, 
provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing arrangement; and
    (2) The pooling and servicing agreement is provided to, or 
described in all material respects in the prospectus or private 
placement memorandum provided to, investing plans before they purchase 
certificates issued by the trust.<SUP>21</SUP>

    \21\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions. For purposes 
of this Amendment, references to ``prospectus'' include any related 
prospectus supplement thereto, pursuant to which certificates are 
offered to investors.
---------------------------------------------------------------------------

Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act or from 
the taxes imposed by reason of section 4975(c) of the Code for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. The restrictions of sections 406(a) and 407(a) of the Act, and 
the taxes imposed by sections 4975 (a) and (b) of the Code by reason of 
sections 4975(c)(1) (A) through (D) of the Code, shall not apply to any 
transactions to which those restrictions or taxes would otherwise apply 
merely because a person is deemed to be a party in interest or 
disqualified person (including a fiduciary) with respect to a plan by 
virtue of providing services to the plan (or by virtue of having a 
relationship to such service provider described in section 3(14)(F), 
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of 
the Code), solely because of the plan's ownership of certificates.
II. General Conditions
    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating 
from a rating agency (as defined in section III.W) at the time of such 
acquisition that is in one of the three highest generic rating 
categories;
    (4) The trustee is not an affiliate of any other member of the 
Restricted

[[Page 28512]]

Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith;
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933; 
and
    (7) In the event that the obligations used to fund a trust have not 
all been transferred to the trust on the closing date, additional 
obligations as specified in subsection III.B.(1) may be transferred to 
the trust during the pre-funding period (as defined in Section III.BB.) 
in exchange for amounts credited to the pre-funding account (as defined 
in Section III.Z.), provided that:
    (a) The pre-funding limit (as defined in Section III.AA.), is not 
exceeded;
    (b) All such additional obligations meet the same terms and 
conditions for eligibility as those of the original obligations used to 
create the trust corpus (as described in the prospectus or private 
placement memorandum and/or pooling and servicing agreement for such 
certificates), which terms and conditions have been approved by a 
rating agency. Notwithstanding the foregoing, the terms and conditions 
for determining the eligibility of an obligation may be changed if such 
changes receive prior approval either by a majority vote of the 
outstanding certificateholders or by a rating agency;
    (c) The transfer of such additional obligations to the trust during 
the pre-funding period does not result in the certificates receiving a 
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the 
initial issuance of the certificates by the trust;
    (d) The weighted average annual percentage interest rate (the 
average interest rate) for all of the obligations in the trust at the 
end of the pre-funding period will not be more than 100 basis points 
lower than the average interest rate for the obligations which were 
transferred to the trust on the closing date;
    (e) Effective for transactions occurring on or after May 23, 1997, 
in order to ensure that the characteristics of the receivables actually 
acquired during the pre-funding period are substantially similar to 
those which were acquired as of the closing date, the characteristics 
of the additional obligations will either be monitored by a credit 
support provider or other insurance provider which is independent of 
the sponsor or an independent accountant retained by the sponsor will 
provide the sponsor with a letter (with copies provided to the rating 
agency, the underwriter and the trustees) stating whether or not the 
characteristics of the additional obligations conform to the 
characteristics of such obligations described in the prospectus, 
private placement memorandum and/or pooling and servicing agreement. In 
preparing such letter, the independent accountant will use the same 
type of procedures as were applicable to the obligations which were 
transferred as of the closing date;
    (f) The pre-funding period shall be described in the prospectus or 
private placement memorandum provided to investing plans; and
    (g) The trustee of the trust (or any agent with which the trustee 
contracts to provide trust services) will be a substantial financial 
institution or trust company experienced in trust activities and 
familiar with its duties, responsibilities, and liabilities as a 
fiduciary under the Act. The trustee, as the legal owner of the 
obligations in the trust, will enforce all the rights created in favor 
of certificateholders of such trust, including employee benefit plans 
subject to the Act.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.
III. Definitions
    For purposes of this exemption:
    A. ``Certificate'' means:
    (1) A certificate--
    (a) That represents a beneficial ownership interest in the assets 
of a trust; and
    (b) That entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) A certificate denominated as a debt instrument--
    (a) That represents an interest in either a Real Estate Mortgage 
Investment Conduit (REMIC) or a Financial Asset Securitization 
Investment Trust (FASIT) within the meaning of section 860D(a) or 
Section 860L, respectively, of the Internal Revenue Code of 1986, as 
amended: and
    (b) That is issued by and is an obligation of a trust; with respect 
to certificates defined in (1) and (2) above for which the Underwriter 
is either (i) the sole underwriter or the manager or co-manager of the 
underwriting syndicate, or (ii) a selling or placement agent.

For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1)(a) Secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association); and/or
    (b) Secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T.); and/or
    (c) Obligations that bear interest or are purchased at a discount 
and which are

[[Page 28513]]

secured by single-family residential, multi-family residential and 
commercial real property (including obligations secured by leasehold 
interests on residential or commercial real property); and/or
    (d) Obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U.); and/or
    (e) ``Guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2); and/or
    (f) Fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this subsection B.(1); <SUP>22</SUP>
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    \22\ It is the Department's view that the definition of 
``Trust'' contained in subsection III.B. includes a two-tier trust 
structure under which certificates issued by the first trust, which 
contains a pool of receivables described above, are transferred to a 
second trust which issues certificates that are sold to plans. 
However, the Department is of the further view that, since the 
exemption provides relief for the direct or indirect acquisition or 
disposition of certificates that are not subordinated, no relief 
would be available if the certificates held by the second trust were 
subordinated to the rights and interests evidenced by other 
certificates issued by the first trust.
---------------------------------------------------------------------------

    (2) Property which had secured any of the obligations described in 
subsection III.B.(1);
    (3) (a) Undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to made 
to certificateholders; and/or
    (b) Cash or investments made therewith which are credited to an 
account to provide payments to certificateholders pursuant to any yield 
supplement agreement or similar yield maintenance arrangement to 
supplement the interest rates otherwise payable on obligations 
described in subsection III.B.(1) held in the trust, provided that such 
arrangements do not involve swap agreements or other notional principal 
contracts; and/or <SUP>23</SUP>
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    \23\ The Department notes that the definition of ``Trust'' 
contained in Section III.B. includes cash or investments credited to 
an account to provide payments to certificateholders pursuant to a 
yield supplement agreement or similar yield maintenance arrangement 
to supplement the interest rates otherwise payable on obligations 
described in section B.(1) held in the trust, provided that such 
arrangements do not involve swap agreements or other notional 
principal contracts.
---------------------------------------------------------------------------

    (c) Cash transferred to the trust on the closing date and permitted 
investments made therewith which:
    (i) Are credited to a pre-funding account established to purchase 
additional obligations with respect to which the conditions set forth 
in clauses (a)-(g) of subsection II.A.(7) are met and/or
    (ii) Are credited to a capitalized interest account (as defined in 
Section III.X.); and
    (iii) Are held in the trust for a period ending no later than the 
first distribution date to certificateholders occurring after the end 
of the pre-funding period,
    For purposes of this clause (c) of subsection III.B.(3), the term 
``permitted investments'' means investments which are either: (i) 
direct obligations of, or obligations fully guaranteed as to timely 
payment of principal and interest by, the United States or any agency 
or instrumentality thereof, provided that such obligations are backed 
by the full faith and credit of the United States or (ii) have been 
rated (or the obligor has been rated) in one of the three highest 
generic rating categories by a rating agency; are described in the 
pooling and servicing agreement; and are permitted by the rating 
agency.
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship, yield supplement agreements 
described in clause (b) of subsection III.B.(3) and other credit 
support arrangements with respect to any obligations described in 
subsection III.B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) the obligations contained in the 
investment pool consist only of assets of the type described in clauses 
(a)-(f) of subsection III.B.(1) which have been included in other 
investment pools, (ii) certificates evidencing interests in such other 
investment pools have been rated in one of the three highest generic 
rating categories by a rating agency for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. ``Underwriter'' means: (1) An entity defined as an Underwriter 
in subsection III.C.(1) of each of the Underwriter Exemptions that are 
being amended by this proposed exemption. In addition, the term 
Underwriter includes Ironwood Capital Partners Ltd. and Deutsche Bank 
AG, New York Branch and Deutsche Morgan Grenfell/C.J. Lawrence Inc. 
(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);
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such entity; or
    (3) Any member of an underwriting syndicate or selling group of 
which a person described in subsections III.C.(1) or (2) above is a 
manager or co-manager with respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services loans contained in 
the trust, including the master servicer and any subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;

[[Page 28514]]

    (6) Any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) Any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section III.Q. below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations:
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as would 
be the case if the equipment note were secured only by the equipment 
and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust owns or holds a security interest in the lease;
    (2) The trust owns or holds a security interest in the leased motor 
vehicle; and
    (3) The trust's interest in the leased motor vehicle is at least as 
protective of the trust's rights as the trust would receive under a 
motor vehicle installment loan contract.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and ServicingAgreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    W. ``Rating Agency'' means Standard & Poor's Structured Rating 
Group, Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. 
or Fitch Investors Service, L.P.
    X. ``Capitalized Interest Account'' means a trust account: (i) 
which is established to compensate certificateholders for shortfalls, 
if any, between investment earnings on the pre-funding account and the 
pass-through rate payable under the certificates; and (ii) which meets 
the requirements of clause (c) of subsection III.B.(3).
    Y. ``Closing Date'' means the date the trust is formed, the 
certificates are first issued and the trust's assets (other than those 
additional obligations which are to be funded from the pre-funding 
account pursuant to subsection II.A.(7)) are transferred to the trust.
    Z. ``Pre-Funding Account''--means a trust account: (i) which is 
established to purchase additional obligations, which obligations meet 
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and 
(ii) which meets the requirements of clause (c) of subsection 
III.B.(3).
    AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount 
allocated to the pre-funding account, as compared to the total 
principal amount of the certificates being offered which is less than 
or equal to: (i) 40 percent, effective for transactions occurring on or 
after January 1, 1992, but prior to May 23, 1997; and (ii) 25 percent, 
for transactions occurring on or after May 23, 1997.
    BB. ``Pre-Funding Period'' means the period commencing on the 
closing date and ending no later than the earliest to occur of: (i) the 
date the amount on deposit in the pre-funding account is less than the 
minimum dollar amount specified in the pooling and servicing agreement; 
(ii) the date on which an event of default occurs under the pooling and 
servicing agreement; or (iii) the date which is the later of three 
months or 90 days after the closing date.
IV. Modifications
    For the Underwriter Exemptions provided to Residential Funding 
Corporation, Residential Funding Mortgage Securities, Inc., et. al. and 
GE Capital Mortgage Services, Inc. and GECC Capital Markets (the 
Applicants) (PTEs 94-29 and 94-73, respectively);
    A. Section III.A. of this proposed amendment is modified to read as 
follows:
    A. ``Certificate'' means:
    (1) A certificate--
    (a) That represents a beneficial ownership interest in the assets 
of a trust; and
    (b) That entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (c) With respect to which (i) one of the Applicants or any of its 
affiliates is the sponsor, and an entity which has received from the 
Department an individual prohibited transaction exemption relating to 
certificates which is similar to this exemption is the sole underwriter 
or the manager or co-manager of the underwriting syndicate

[[Page 28515]]

or a selling or placement agent; or (ii) one of the Applicants or any 
of its affiliates is the sole underwriter or the manager or co-manager 
of the underwriting syndicate or a selling or placement agent; or
    (2) A certificate denominated as a debt instrument--
    (a) That represents an interest in either a Real Estate Mortgage 
Investment Conduit (REMIC) or a Financial Asset Securitization 
Investment Trust (FASIT) within the meaning of section 860D(a) or 
section 860L, respectively, of the Internal Revenue Code of 1986, as 
amended: and
    (b) That is issued by and is an obligation of a trust with respect 
to which (i) one of the Applicants or any of its affiliates is the 
sponsor, and an entity which has received from the Department an 
individual prohibited transaction exemption relating to certificates 
which is similar to this exemption is the sole underwriter or the 
manager or co-manager of the underwriting syndicate or a selling or 
placement agent or (ii) one of the Applicants or any of its affiliates 
is the sole underwriter or the manager or co-manager of the 
underwriting syndicate, or a selling or placement agent.
    For purposes of this exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. Section III.C. of this proposed amendment is modified to read as 
follows:
    C. ``Underwriter'' means:
    (1) An entity defined as an Underwriter in subsection III.C.(1) of 
each of the Underwriter Exemptions that are being amended by this 
proposed exemption. In addition, the term Underwriter includes Ironwood 
Capital Partners Ltd. and Deutsche Bank AG, New York Branch and 
Deutsche Morgan Grenfell/C.J. Lawrence Inc. (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);
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
such entity;
    (3) Any member of an underwriting syndicate or selling group of 
which a person described in subsections III.C.(1) or (2) above is a 
manager or co-manager with respect to the certificates; or
    (4) An entity which has received from the Department an individual 
prohibited transaction exemption relating to certificates which is 
similar to this exemption.

EFFECTIVE DATE: This exemption will be effective for transactions 
occurring on or after January 1, 1992 except as otherwise provided in 
subsection II.A.(7) and section III.AA.

    Signed at Washington, D.C., this 20th day of May, 1997.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 97-13673 Filed 5-22-97; 8:45 am]
BILLING CODE 4510-29-P