Proposed Exemptions; MBNA America Bank, National Association (MBNA) [Notices] [01/27/1998]
Proposed Exemptions; MBNA America Bank, National Association
(MBNA) [01/27/1998]
Volume 63, Number 17, Page 4037-4071[[Page 4037]]
_______________________________________________________________________
Part III
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
Proposed Exemptions; MBNA America Bank, National Association (MBNA);
Notice
[[Page 4038]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10304, et al.]
Proposed Exemptions; MBNA America Bank, National Association
(MBNA)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing within 45 days from the date of
publication of this Federal Register Notice. Comments and requests for
a hearing should state: (1) The name, address, and telephone number of
the person making the comment or request, and (2) the nature of the
person's interest in the exemption and the manner in which the person
would be adversely affected by the exemption. A request for a hearing
must also state the issues to be addressed and include a general
description of the evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
MBNA America Bank, National Association (MBNA), Located in Newark,
Delaware, (Application No. D-10304)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
A. Effective as of the date this proposed exemption is granted, 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 trust,
the sponsor or an underwriter and an employee benefit plan subject to
the Act or section 4975 of the Code (a 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 Section I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of the Excluded Plan that are invested in
certificates.<SUP>1</SUP>
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\1\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective as of the date this proposed exemption is granted, 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 trust,
the sponsor or an 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 receivables contained in the trust constituting 0.5
percent or less of the fair market value of the obligations or
receivables contained in the aggregate undivided interest in the trust
allocated to the certificates of the relevant series, 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,
as defined in Section III.L., and at least 50 percent of the aggregate
undivided interest in the trust allocated to the certificates of a
series is acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates of a series
does not exceed 25 percent of all of the certificates of that class
outstanding at the time of the acquisition;
(iv) Immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with
[[Page 4039]]
respect to which the person has discretionary authority or renders
investment advice is invested in certificates representing the
aggregate undivided interest in a trust allocated to the certificates
of a series and containing receivables sold or serviced by the same
entity; <SUP>2</SUP> and
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\2\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
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(v) Immediately after the acquisition of the certificates, not more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice is
invested in certificates representing an interest in the trust, or
trusts containing receivables sold or serviced by the same entity. For
purposes of paragraphs B.(1)(iv) and B.(1)(v) only, an entity shall not
be considered to service receivables contained in a trust if it is
merely a subservicer of that trust;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that conditions set forth in Section I. B.(1)(i), (iii)
through (v) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.B.(1) or (2).
C. Effective as of the date that the proposed exemption is granted,
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,
including reassigning receivables to the sponsor, removing from the
trust receivables in accounts previously designated to the trust,
changing the underlying terms of accounts designated to the trust,
adding new receivables to the trust, designating new accounts to the
trust, the retention of a retained interest by the sponsor in the
receivables, the exercise of the right to cause the commencement of
amortization of the principal amount of the certificates, or the use of
any eligible swap transactions, provided that:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing agreement;
(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>3</SUP>
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\3\ 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 proposed exemption, all references to ``prospectus'' include
any related supplement thereto, and any documents incorporated by
reference therein, pursuant to which certificates are offered to
investors.
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(3) The addition of new receivables or designation of new accounts,
or the removal of receivables in previously-designated accounts, meets
the terms and conditions for such additions, designations or removals
as are described in the prospectus or private placement memorandum of
such certificates, which terms and conditions have been approved by
Standard & Poor's Ratings Services, Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co., or Fitch Investors Service, L.P., or
their successors (collectively, the Rating Agencies), and does not
result in the certificates receiving a lower credit rating from the
Rating Agencies than the then current rating of the certificates; and
(4) The series of which the certificates are a part will be subject
to an ``Economic Pay Out Event'' (as defined in Section III.X.), which
is set forth in the pooling and servicing agreement and described in
the prospectus or private placement memorandum associated with the
series, the occurrence of which will cause any revolving period,
scheduled amortization period or scheduled accumulation period
applicable to the certificates to end, and principal collections to be
applied to monthly payments of principal to, or the accumulation of
principal for the benefit of, the certificateholders of such series
until the earlier of payment in full of the outstanding principal
amount of the certificates of such series or the series termination
date specified in the prospectus or private placement memorandum.
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 under section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(E) or (F) of the Code, for the receipt of a fee
by the servicer of the trust, in connection with the servicing of the
receivables and the operation 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.U. below.
D. Effective as of the date that the proposed exemption is granted,
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
transaction 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 as 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.
Section II--General Conditions
A. The relief provided under Section 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 such terms would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is either: (i) in one of the two
highest generic rating categories from any one of the Rating Agencies;
or (ii) for certificates with a duration of one year or less, the
highest short-term generic rating category from any one of the Rating
Agencies; provided that, notwithstanding such ratings, this exemption
(if granted) shall apply to a particular class of certificates only if
such class (an Exempt Class) is part of a series in which credit
support is provided to the Exempt Class through a senior-subordinated
series structure or other form of third-party credit support which, at
a minimum, represents five (5) percent of the outstanding principal
balance of certificates issued for the Exempt Class, so that an
investor in the Exempt Class will not bear the initial risk of loss;
(4) The trustee is not an affiliate of any other member of the
Restricted Group. However, the trustee shall not be considered to be an
affiliate of a servicer solely because the trustee has succeeded to the
rights and responsibilities of the servicer pursuant to the terms of a
[[Page 4040]]
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 consideration received by
the sponsor as a consequence of the assignment of receivables (or
interests therein) to the trust, to the extent allocable to the series
of certificates purchased by a plan, represents not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the servicer, to the extent allocable
to the series of certificates purchased by a plan, 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 (SEC) under the Securities Act of
1933;
(7) The trustee of the trust is a substantial financial institution
or trust company experienced in trust activities and is familiar with
its duties, responsibilities, and liabilities as a fiduciary under the
Act (i.e. ERISA). The trustee, as the legal owner of, or holder of a
perfected security interest in, the receivables in the trust, enforces
all the rights created in favor of certificateholders of such trust,
including plans;
(8) Prior to the issuance by the trust of any new series,
confirmation is received from the Rating Agencies that such issuance
will not result in the reduction or withdrawal of the then current
rating of the certificates held by any plan pursuant to this exemption;
(9) To protect against fraud, chargebacks or other dilution of the
receivables in the trust, the pooling and servicing agreement and the
Rating Agencies require the sponsor to maintain a seller interest of
not less than 2 percent of the principal balance of the receivables
contained in the trust;
(10) Each receivable added to a trust is an eligible receivable,
based on criteria of the relevant Rating Agency(ies) and as specified
in the pooling and servicing agreement. The pooling and servicing
agreement requires that any change in the terms of the cardholder
agreements must be made applicable to the comparable segment of
accounts owned or serviced by the sponsor which are part of the same
program or have the same or substantially similar characteristics;
(11) The pooling and servicing agreement limits the number of the
sponsor's newly originated accounts to be designated to the trust,
unless the Rating Agencies otherwise consent in writing, to the
following: (i) With respect to any three-month period, 15 percent of
the number of existing accounts designated to the trust as of the first
day of such period, and (ii) with respect to any twelve-month period,
20 percent of the number of existing accounts designated to the trust
as of the first day of such twelve-month period;
(12) The pooling and servicing agreement requires the sponsor to
deliver an opinion of counsel semi-annually confirming the validity and
perfection of each transfer of newly originated accounts to the trust
if such opinion is not delivered with respect to each interim addition;
(13) The pooling and servicing agreement requires the sponsor and
the trustee to receive confirmation from a Rating Agency that no
Ratings Effect (i) will result from a proposed transfer of newly
originated accounts to the trust, or (ii) will have resulted from the
transfer of all newly originated accounts added to the trust during the
preceding three-month period (beginning at quarterly intervals
specified in the pooling and servicing agreement and ending in the
calendar month prior to the date such confirmation is issued), provided
that a Rating Agency confirmation shall not be required under clause
(ii) for any three-month period in which any additions of newly
originated accounts occurred only after receipt of prior Rating Agency
confirmation pursuant to clause (i);
(14) If a particular series of certificates held by any plan
involves a Ratings Dependent or Non-Ratings Dependent Swap entered into
by the trust, then each particular swap transaction relating to such
certificates:
(a) Shall be an Eligible Swap;
(b) Shall be with an Eligible Swap Counterparty;
(c) In the case of a Ratings Dependent Swap, shall include as an
early payout event, as specified in the pooling and servicing
agreement, the withdrawal or reduction by any Rating Agency of the swap
counterparty's credit rating below a level specified by the Rating
Agency where the servicer (as agent for the trustee) has failed, for a
specified period after such rating withdrawal or reduction, to meet its
obligation under the pooling and servicing agreement to:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty which is acceptable to the Rating Agency and the terms of
which are substantially the same as the current swap agreement (at
which time the earlier swap agreement shall terminate); or
(ii) Cause the swap counterparty to establish any collateralization
or other arrangement satisfactory to the Rating Agency such that the
then current rating by the Rating Agency of the particular series of
certificates will not be withdrawn or reduced;
(d) In the case of a Non-Ratings Dependent Swap, shall provide
that, if the credit rating of the swap counterparty is withdrawn or
reduced below the lowest level specified in Section III.II. hereof, the
servicer, as agent for the trustee, shall within a specified period
after such rating withdrawal or reduction:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement shall
terminate); or
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms;
and
(e) Shall not require the trust to make any termination payments to
the swap counterparty (other than a currently scheduled payment under
the swap agreement) except from ``Excess Finance Charge Collections''
(as defined below in Section III.LL.) or other amounts that would
otherwise be payable to the servicer or the seller; and
(15) Any series of certificates, to which one or more swap
agreements entered into by the trust applies, may be acquired or held
in reliance upon this proposed exemption only by Qualified Plan
Investors.
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 Section I, if the provision in Section II.A.(6) above is
not satisfied for the acquisition or holding by a plan of such
certificates, provided that:
(1) Such condition is disclosed in the prospectus or private
placement memorandum; and
[[Page 4041]]
(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 shall
be required to make a written representation regarding compliance with
the condition set forth in Section II.A.(6).
Section III--Definitions
For purposes of this proposed exemption:
A. Certificate means a certificate:
(1) That (i) represents a beneficial ownership interest in the
assets of a trust and entitles the holder to payments denominated as
principal, interest and/or other payments made as described in the
applicable prospectus or private placement memorandum and in accordance
with the pooling and servicing agreement in connection with the assets
of such trust, to the extent allocable to the series of certificates
purchased by a plan, either currently or after a revolving period
during which principal payments on assets of the trust are reinvested
in new assets, or (ii) is denominated as a debt instrument that
represents a regular interest in a financial asset securitization
investment trust (FASIT), within the meaning of section 860L(a) of the
Code, and is issued by and is an obligation of the trust.
For purposes of this proposed exemption, references to
``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust; and
(2) With respect to which (a) MBNA or any of its affiliates is the
sponsor, and (b) MBNA, any of its affiliates, or an ``underwriter'' (as
defined in Section III.C.) is the sole underwriter or the manager or
co-manager of the underwriting syndicate or a selling or placement
agent.
B. Trust means an investment pool, the corpus of which is held in
trust and consists solely of:
(1) Either
(a) Receivables (as defined in Section III.V.); or
(b) Participations in a pool of receivables (as defined in Section
III.V.) where such beneficial ownership interests are not subordinated
to any other interest in the same pool of receivables; \4\
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\4\ The Department notes that no relief would be available under
the exemption if the participation interests held by the trust were
subordinated to the rights and interests evidenced by other
participation interests in the same pool of receivables.
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(2) Property which has secured any of the assets described in
Section III.B.(1); \5\
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\5\ MBNA states that it is possible for credit card receivables
to be secured by bank account balances or security interests in
merchandise purchased with credit cards. Thus, the proposed
exemption should permit foreclosed property to be an eligible trust
asset.
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(3) Undistributed cash or permitted investments made therewith
maturing no later than the next date on which distributions are to be
made to certificate holders, except during a Revolving Period (as
defined herein) when permitted investments are made until such cash can
be reinvested in additional receivables described in paragraph (a) of
this Section III.B.(1);
(4) Rights of the trustee under the pooling and servicing
agreement, and rights under any cash collateral accounts, insurance
policies, third-party guarantees, contracts of suretyship and other
credit support arrangements for any certificates, swap transactions, or
under any yield supplement agreements,\6\ yield maintenance agreements
or similar arrangements; and
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\6\ In a series involving an accumulation period (as defined in
Section III.Z.), a yield supplement agreement may be used by the
Trust to make up the difference between (i) the reinvestment yield
on permitted investments, and (ii) the interest rate on the
certificates of that series.
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(5) Rights to receive interchange fees received by the sponsor as
partial compensation for the sponsor's taking credit risk, absorbing
fraud losses and funding receivables for a limited period prior to
initial billing with respect to accounts designated to the trust.
Notwithstanding the foregoing, the term trust does not include any
investment pool unless: (i) the investment pool consists only of
receivables of the type which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment
pools have been rated in one of the two highest generic rating
categories by at least one of the Rating Agencies for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption; and (iii) certificates evidencing an interest 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 an entity which has received from the
Department an individual prohibited transaction exemption which
provides relief for the operation of asset pool investment trusts that
issue asset-backed pass-through securities to plans that is similar in
format and substance to this proposed exemption (each, an Underwriter
Exemption); \7\ any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such entity; and any member of an underwriting syndicate or selling
group of which such firm or affiliated person described above is a
manager or co-manager with respect to the certificates.
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\7\ For a listing of Underwriter Exemptions, see the description
provided in the text of the operative language of Prohibited
Transaction Exemption (PTE) 97-34 (62 FR 39021, July 21, 1997).
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D. Sponsor means MBNA, or an affiliate of MBNA that organizes a
trust by transferring credit card receivables or interests therein to
the trust in exchange for certificates.
E. Master Servicer means MBNA or an affiliate that is a party to
the pooling and servicing agreement relating to trust receivables and
is fully responsible for servicing, directly or through subservicers,
the receivables in the trust pursuant to the pooling and servicing
agreement.
F. Subservicer means MBNA or an affiliate of MBNA, or an entity
unaffiliated with MBNA which, under the supervision of and on behalf of
the master servicer, services receivables contained in the trust, but
is not a party to the pooling and servicing agreement.
G. Servicer means MBNA or an affiliate which services receivables
contained in the trust, including the master servicer and any
subservicer or their successors pursuant to the pooling and servicing
agreement.
H. Trustee means an entity which is independent of MBNA and its
affiliates and is the trustee of the trust. In the case of certificates
which are denominated as debt instruments, ``trustee'' also means the
trustee of the indenture trust.
I. Insurer means the insurer or guarantor of, provider of other
credit support for, or other contractual counterparty of, a trust.
Notwithstanding the foregoing, a swap counterparty is not an insurer,
and 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 receivable included in
the trust.
K. Excluded Plan means any plan with respect to which any member of
[[Page 4042]]
the Restricted Group is a ``plan sponsor'' within the meaning of
section 3(16)(B) of the Act.
L. Restricted Group with respect to a class of certificates means:
(1) Each underwriter;
(2) Each insurer;
(3) The sponsor;
(4) The trustee;
(5) Each servicer;
(6) Each swap counterparty;
(7) Any obligor with respect to receivables contained in the trust
constituting more than 0.5 percent of the fair market value of the
aggregate undivided interest in the trust allocated to the certificates
of a series, determined on the date of the initial issuance of such
series of certificates by the trust; or
(8) Any affiliate of a person described in Section III.L.(1)-(7).
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 that:
(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 section 2550.408c-2.
S. Pooling and Servicing Agreement means the agreement or
agreements among a sponsor, a servicer and the trustee establishing a
trust and any supplement thereto pertaining to a particular series of
certificates. In the case of certificates which are denominated as debt
instruments, ``pooling and servicing agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
T. Series means an issuance of a class or various classes of
certificates by the trust all on the same date pursuant to the same
pooling and servicing agreement, and any supplement thereto and
restrictions therein.
U. 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 with respect to
the receivables;
(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 or described in all
material respects in the prospectus or private placement memorandum
provided to the plan before it purchases certificates issued by the
trust; and
(4) The amount paid to investors in the trust is not reduced by the
amount of any such fee waived by the servicer.
V. Receivables means secured or unsecured obligations of credit
card holders which have arisen or arise in Accounts designated to a
trust. Such obligations represent amounts charged by cardholders for
merchandise and services and amounts advanced as cash advances, as well
as periodic finance charges, annual membership fees, cash advance fees,
late charges on amounts charged for merchandise and services and
certain other fees (such as bad check fees, cash advance fees, and
other fees specified in the cardholder agreements) designated by card
issuers (other than a qualified administrative fee as defined in
Section III.U.).
W. Accounts are revolving credit card accounts serviced by MBNA or
an affiliate, which were originated or purchased by MBNA or an
affiliate, and are designated to a trust such that receivables arising
in such accounts become assets of the trust.
X. Revolving Period means a period of time, as specified in the
pooling and servicing agreement, during which principal collections
allocated to a series are reinvested in newly generated receivables
arising in the accounts.
Y. Amortization Period means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will commence to be paid to the
certificateholders of such series in installments.
Z. Accumulation Period means a period of time specified in the
pooling and servicing agreement during which a portion of the principal
collections allocated to a series will be deposited in an account to be
distributed to certificateholders in a lump sum on the expected
maturity date.
AA. Pay Out Event means any of the events specified in the pooling
and servicing agreement or supplement thereto that results (in some
instances without further affirmative action by any party) in the early
commencement of either an amortization period or an accumulation
period, including (1) the failure of the sponsor or the servicer,
whichever is subject to the relevant obligation under the pooling and
servicing agreement, (i) to make any payment or deposit required under
the pooling and servicing agreement within five (5) business days after
such payment or deposit was required to be made, or (ii) to observe or
perform any of its other covenants or agreements set forth in the
pooling and servicing agreement, which failure has a material adverse
effect on holders of investor certificates of the relevant series and
continues unremedied for 60 days; (2) a breach of any representation or
warranty made by the sponsor or the servicer in the pooling and
servicing agreement that continues to be incorrect in any material
respect for 60 days; (3) the occurrence of certain bankruptcy events
relating to the sponsor or the servicer; (4) the failure by the sponsor
to convey to the trust additional receivables to maintain the minimum
seller interest that is required by the pooling and servicing agreement
and the Rating Agencies; (5) if a class of investor certificates is in
an Accumulation Period, the amount on deposit in the accumulation
account in any month is
[[Page 4043]]
less than the amount required to be on deposit therein; (6) the failure
to pay in full amounts owing to investors on the expected maturity
date; and (7) the Economic Pay Out Event.
BB. An Economic Pay Out Event occurs automatically when the
portfolio yield for any series of certificates, averaged over three
consecutive months (or such other period approved by one of the Rating
Agencies) is less than the base rate of the series averaged over the
same period. Portfolio yield for a series of certificates for any
period is equal to the sum of the finance charge collections and other
amounts treated as finance charge collections less total defaults for
the series divided by the outstanding principal balance of the investor
certificates of the series, or such other measure approved by one of
the Rating Agencies. The base rate for a series of certificates for any
period is the sum of (i) amounts payable to certificateholders of the
series with respect to interest, (ii) servicing fees allocable to the
series payable to the servicer, and (iii) any credit enhancement fee
allocable to the series payable to a third party credit enhancer,
divided by the outstanding principal balance of the investor
certificates of the series, or such other measure approved by one of
the Rating Agencies.
CC. CCA or Cash Collateral Account means that certain account
established in the name of the trustee that serves as credit
enhancement with respect to the investor certificates and holds cash
and/or permitted investments (as defined below in Section III.KK.)
which conform to applicable provisions of the pooling and servicing
agreement.
DD. Group means a group of any number of series offered by the
trust that share finance charge and/or principal collections in the
manner described in the applicable prospectus or private placement
memorandum.
EE. Ratings Effect means the reduction or withdrawal by a Rating
Agency of its then current rating of the certificates held by any plan
pursuant to this proposed exemption.
FF. Principal Receivables Discount means, with respect to any
account designated by the sponsor, the portion of the related principal
receivables that represents a discount from the face value thereof and
that is treated under the pooling and servicing agreement as finance
charge receivables.
GG. Ratings Dependent Swap means an interest rate swap, or (if
purchased by or on behalf of the trust) an interest rate cap contract,
that is part of the structure of a series of certificates where the
rating assigned by the Rating Agency to any series of certificates held
by any plan is dependent on the terms and conditions of the swap and
the rating of the swap counterparty, and if such certificate rating is
not dependent on the existence of the swap and rating of the swap
counterparty, such swap or cap shall be referred to as a ``Non-Ratings
Dependent Swap''. With respect to a Non-Ratings Dependent Swap, each
Rating Agency rating the certificates must confirm, as of the date of
issuance of the certificates by the trust, that entering into an
Eligible Swap with such counterparty will not affect the rating of the
certificates.
HH. Eligible Swap means a Ratings Dependent or Non-Ratings
Dependent Swap:
(1) Which is denominated in U.S. Dollars;
(2) Pursuant to which the trust pays or receives, on or immediately
prior to the respective payment or distribution date for the series of
certificates, a fixed rate of interest, or a floating rate of interest
based on a publicly available index (e.g. LIBOR or the U.S. Federal
Reserve's Cost of Funds Index (COFI)), with the trust receiving such
payments on at least a quarterly basis and obligated to make separate
payments no more frequently than the swap counterparty, with all
simultaneous payments being netted;
(3) Which has a notional amount that does not exceed either (i) the
certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(4) Which is not leveraged (i.e. payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in subparagraph (2) above, and the difference
between the products thereof, calculated on a one to one ratio and not
on a multiplier of such difference);
(5) Which has a final termination date that is the earlier of the
date on which the trust terminates or the related class of certificates
is fully repaid; and
(6) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in subparagraphs (1)
through (4) above without the consent of the trustee.
II. Eligible Swap Counterparty means a bank or other financial
institution which has a rating, at the date of issuance of the
certificates by the trust, which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating
Agencies rating the certificates; provided that, if a swap counterparty
is relying on its short-term rating to establish eligibility hereunder,
such counterparty must either have a long-term rating in one of the
three highest long-term rating categories or not have a long-term
rating from the applicable Rating Agency, and provided further that if
the series of certificates with which the swap is associated has a
final maturity date of more than one year from the date of issuance of
the certificates, and such swap is a Ratings Dependent Swap, the swap
counterparty is required by the terms of the swap agreement to
establish any collateralization or other arrangement satisfactory to
the Rating Agencies in the event of a ratings downgrade of the swap
counterparty.
JJ. Qualified Plan Investor means a plan investor or group of plan
investors on whose behalf the decision to purchase certificates is made
by an appropriate independent fiduciary that is qualified to analyze
and understand the terms and conditions of any swap transaction used by
the trust and the effect such swap would have upon the credit ratings
of the certificates. For purposes of the proposed exemption, such a
fiduciary is either:
(1) a ``qualified professional asset manager'' (QPAM),<SUP>8</SUP>
as defined under Part V(a) of PTE 84-14 (49 FR 9494, 9506, March 13,
1984);
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\8\ PTE 84-14 provides a class exemption for transactions
between a party in interest with respect to an employee benefit plan
and an investment fund (including either a single customer or pooled
separate account) in which the plan has an interest, and which is
managed by a QPAM, provided certain conditions are met. QPAMs (e.g.
banks, insurance companies, registered investment advisers with
total client assets under management in excess of $50 million) are
considered to be experienced investment managers for plan investors
that are aware of their fiduciary duties under ERISA.
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(2) an ``in-house asset manager'' (INHAM),<SUP>9</SUP> as defined
under Part IV(a) of PTE 96-23 (61 FR 15975, 15982, April 10, 1996); or
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\9\ PTE 96-23 permits various transactions involving employee
benefit plans whose assets are managed by an INHAM, an entity which
is generally a subsidiary of an employer sponsoring the plan which
is a registered investment adviser with management and control of
total assets attributable to plans maintained by the employer and
its affiliates which are in excess of $50 million.
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(3) A plan fiduciary with total assets under management of at least
$100 million at the time of the acquisition of such certificates.
KK. Permitted Investments means investments that either (i) are
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 obligation is backed by
the full faith and credit of the
[[Page 4044]]
United States, or (ii) have been rated (or the obligor thereof 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 relevant Rating Agency(ies).
LL. Excess Finance Charge Collections means, as of any day funds
are distributed from the trust, the amount by which the finance charge
collections allocated to certificates of a series exceed the amount
necessary to pay certificate interest, servicing fees and expenses, to
satisfy cardholder defaults or charge-offs, and to reinstate credit
support.
The Department notes that this proposed exemption, if granted, will
be included within the meaning of the term ``Underwriter Exemption'' as
it is defined in Section V(h) of the Grant of the Class Exemption for
Certain Transactions Involving Insurance Company General Accounts,
which was published in the Federal Register on July 12, 1995 (see PTE
95-60, 60 FR 35925).
Summary of Facts and Representations
1. The applicant is MBNA America Bank, National Association (i.e.
MBNA), a national banking association located in Wilmington, Delaware.
MBNA conducts nationwide consumer lending programs principally
comprised of credit card related activities. MBNA is a wholly-owned
subsidiary of MBNA Corporation, a bank holding company organized under
the laws of Maryland in 1990.
2. The transactions for which an exemption is requested are
investments by employee benefit plans in certain certificates
(Certificates) representing the right to receive principal and interest
payments from the assets of various Trusts which hold credit card
receivables. Each Trust will issue, from time to time, a particular
series of Certificates (i.e. a Series) which will be secured by the
Trust's assets. A Series may include one or more classes of
Certificates, some of which may be subordinate to others. However, only
senior certificates issued by such Trusts, which meet the restrictive
criteria designed to ensure investor safety discussed herein would be
eligible for the exemptive relief to be provided under this proposed
exemption.
The Trusts
3. Each Trust is created under a Pooling and Servicing Agreement
(PSA) between MBNA, as Seller and Servicer, and an independent and
unaffiliated Trustee. Upon creation of a Trust, the Seller transfers to
the Trust a pool of interest-bearing credit card receivables which are
selected under strict criteria approved by one or more of certain
nationally recognized rating agencies,<SUP>10</SUP> from the portfolio
of revolving credit card accounts owned by MBNA. The PSA establishes
the general parameters for the Trust, such as the requirements for
eligible receivables to be transferred to the Trust, the manner of
transferring and administering and servicing the receivables, Seller
representations and covenants as to receivable eligibility, Servicer
and Trustee duties and eligibility, and other matters.
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\10\ As noted in Section I.C.(3) above, these rating agencies
are: (i) Standard & Poors Ratings Services, a division of McGraw-
Hill Companies Inc.; (ii) Moody's Investors Service, Inc.; (iii)
Duff & Phelps Credit Rating Co.; and (iv) Fitch Investors Service,
L.P., or their successors (collectively, the Rating Agencies).
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The applicant represents that any Trust that issues a class of
Certificates to be covered by the proposed exemption would include the
following investor safeguards:
(a) Restricted selection of receivables;
(b) Periodic reporting and monitoring of accounts;
(c) Minimum receivable requirements;
(d) Restrictions regarding addition and removal of accounts;
(e) Servicer eligibility requirements;
(f) Servicer daily reports, duties and public accounting firm
review;
(g) Trustee eligibility and duties;
(h) Restrictions on investments;
(i) Protection from the consequences of unplanned events; and
(j) Limited discretion.
These investor safeguards are discussed in the following
paragraphs.
4. Restricted Selection of Receivables. In order for a receivable
to be eligible for transfer to the Trust, either on the initial closing
date or on any subsequent date, it must have arisen under an eligible
account. An eligible account is one that is in existence and owned by
and maintained with MBNA (as of the initial selection date or, with
respect to additional accounts, as of the relevant addition date), and
is payable in U.S. dollars. In addition, an eligible account must have
a United States address for its obligor, must not have been classified
as counterfeit, canceled, fraudulent, stolen or lost, and must not have
been charged off by MBNA under its customary and usual charge-off
procedures. The eligible receivable must have been created in
compliance with applicable law. All consents, licenses and other
approvals necessary for the creation of the receivable and the
execution of the credit card agreement must have been obtained and be
in full force and effect, and MBNA must have good title to the
receivable, free and clear of liens. Finally, an eligible receivable
must constitute the legal valid and binding payment obligation of the
obligor, and constitute an ``account'' under Article 9 of the Uniform
Commercial Code (the ``UCC''), as in effect in the State of Delaware,
so as to grant the Trust a first priority security interest in the
event of bankruptcy. Once the pool of eligible accounts has been
identified, accounts are selected at random for the transfer of their
receivables to the Trust so as to provide a combination of receivables
that is representative of the entire pool of eligible receivables.
MBNA represents and warrants that the receivables transferred to
the Trust, and the accounts related to those receivables, meet the
above-described standards for eligible receivables and accounts, and
that no selection procedures adverse to the Certificateholders have
been employed in selecting accounts. These restrictions on account
selection are in place to prevent the concentration of high risk
accounts. Each relevant Rating Agency requires that all of these
safeguards be in place before a superior rating is given.
5. Periodic Reporting and Monitoring of Accounts. In connection
with the transfer of the receivables to the Trust, MBNA must record and
file a UCC financing statement (including any continuation statements,
when applicable) in order to perfect the assignment of the receivables,
and must deliver a file-stamped copy of such financing or continuation
statement to the Trustee. MBNA must also indicate in its computer
system file of credit card accounts the receivables transferred to the
Trust by identifying the accounts with a unique designation, as
described in the PSA. MBNA must deliver a complete list of all accounts
in the Trust to the Trustee on or prior to the initial closing date and
thereafter on a periodic basis as required by the PSA.
The Trustee is able to continually monitor the Trust's assets by
reviewing the monthly reports regarding pool performance which are
prepared for the Trustee and investors by MBNA, as Servicer. In
addition, MBNA provides the Trustee with a complete list of accounts on
a periodic basis, as required by the PSA. Each relevant Rating Agency
requires significant monitoring procedures for the servicing of
receivables to ensure investor safety before a superior rating is
granted.
6. Minimum Receivable Requirements. The aggregate principal amount
of the receivables held by the Trust must be at least equal to the sum
of the principal amount of the
[[Page 4045]]
Certificates (prior to the commencement of any related amortization or
accumulation) for all Series then outstanding (other than a Series
which is backed in full by accumulated cash or permitted investments
(see Paragraph 11 below)). If, on the last business day of any month,
the aggregate amount of principal receivables is less than the required
minimum, MBNA must designate additional accounts (or may convey
participations in other credit card receivable pools sponsored by MBNA)
to be transferred to the Trust so that the aggregate principal
receivables will meet the minimum requirement.
Interests in the assets of each Trust are allocated among the
Certificate holders of each Series and the Seller (i.e., MBNA). The
interest in the Trust assets allocated to the Seller is referred to as
the ``Seller Interest.'' To protect against fraud, chargebacks or other
dilution of receivables in the Trust, the PSA and the Rating Agencies
will require MBNA, as the Trust's sponsor, to maintain a seller
interest of not less than 2 percent of the principal balance of the
receivables contained in the Trust (referred to as the ``Minimum Seller
Interest''). If, during any period of 30 consecutive days, the Seller
Interest averages less than the Minimum Seller Interest, MBNA must
designate additional accounts (or participations in other MBNA credit
card receivable pools) to be transferred by MBNA to the Trust in order
to satisfy the minimum requirement. When account payments exceed
account purchases, the total pool of receivables in the relevant Trust
contracts. As a result, the Seller Interest declines, thus providing a
buffer to prevent a decline in the principal balance of the
Certificates prior to the scheduled payment of principal. Thus, when
the receivable balances in the accounts that secure the Certificates
decline, the Seller Interest decreases, not the principal balance of
the Certificates. When the account balances again increase, the Seller
Interest is increased. The Seller Interest will also decline as a
result of dilution of the receivable portfolio resulting from noncash
reductions such as merchandise returns or servicer errors.
The minimum receivable requirement and Minimum Seller Interest
requirement imposed on MBNA by the PSA (as described above) cause the
Trustee, Servicer or Seller to have limited discretion regarding the
minimum size of the Trust. Each relevant Rating Agency gains comfort
from these minimum receivable levels that the Trust will be maintained
so as not to adversely affect the ability of the Trust assets to
support the promised interest and/or principal payments to Certificate
holders.
7. Restrictions Regarding Addition and Removal of Accounts. In
addition to the limitations discussed above regarding the selection of
accounts and minimum receivable requirements, the following
restrictions apply to the addition of accounts subsequent to the
initial transfer to the Trust. Any transfer of receivables from
additional accounts must be preceded by written notice to the Trustee,
each relevant Rating Agency and the Servicer specifying the approximate
aggregate amount of receivables to be transferred. In connection with
the transfer, MBNA will warrant that the additional accounts are
eligible accounts and that each receivable is an eligible receivable,
and that no selection procedures believed by MBNA to be materially
adverse to the interest of the Certificateholders were utilized in
selecting the accounts. MBNA must deliver an opinion of counsel with
respect to the added receivables to the Trustee, with a copy to each
relevant Rating Agency, that such addition is enforceable and that the
Trust has either a valid transfer of, or a grant of security interest
in, the additional accounts. The PSA requires that the Servicer and the
Trustee receive confirmation from a Rating Agency that no Ratings
Effect (i.e., a downgrade or withdrawal of the then current rating of
any outstanding Series of Certificates) either (i) will result from a
proposed transfer of receivables from additional accounts to the Trust,
or (ii) will have resulted from the transfer of all receivables from
additional accounts added to the Trust during the preceding three-month
period (beginning at quarterly intervals specified in the PSA and
ending in the calendar month prior to the date such confirmation is
issued). However, a Rating Agency confirmation will not be required for
any three-month period in which any additions of newly originated
accounts occurred only after receipt of a prior Rating Agency
confirmation.
MBNA may remove receivables, subject to the minimum receivable
requirements discussed above, not more than once in a monthly period.
MBNA must give the Trustee and the Servicer written notice stating the
approximate aggregate principal balance of the removal, and certifying
that such removal must not result in a Pay Out Event. MBNA must warrant
that no selection procedures believed by it to be materially adverse to
the Certificateholders were utilized in selecting the removed
receivables. Each relevant Rating Agency must have confirmed that such
proposed removal will not result in a Ratings Effect. MBNA states
further that the amount of any receivables that are removed must be
less than 5 percent of the aggregate amount of principal receivables
or, if any Series is paid in full, the amount of receivables removed
must approximate the initial investor interest of such Series.
Each Rating Agency has determined that the number of additional
accounts from which receivables may be added is generally limited to:
(i) with respect to any three-month period, 15 percent of the number of
existing accounts designated to the Trust as of the first day of such
period, and (ii) with respect to any twelve-month period, 20 percent of
the number of accounts designated to the Trust as of the first day of
such 12-month period. However, if this maximum amount is greater than a
similar test (specified in the PSA) based on the calendar year, then
the calendar year test serves as the maximum addition. MBNA may be able
to exceed the maximum addition amount if approval is received from each
relevant Rating Agency.
By informing the relevant Rating Agencies of all details regarding
additions and removals, the Trust is effectively reexamined each time
these events occur in order to assure that the changes to the Trust
assets will not adversely affect the rating of any outstanding Series.
Each relevant Rating Agency scrutinizes the receivables from the
additional accounts, or the relative strength of the pool of
receivables designated to the Trust both before and after the removal,
as the case may be, in making any such re-examinations.
8. Servicer Eligibility Requirements. The Servicer of the
receivables must be either the Seller (MBNA), an affiliate of MBNA, or
an entity unaffiliated with MBNA acting as a ``Subservicer'' which is
qualified to service a portfolio of consumer revolving credit card
accounts and meets certain requirements. Under such requirements, the
entity acting as either a Servicer or Subservicer must be legally
qualified and have the capacity to service the accounts, must be
qualified to use the software used to service the accounts, must have
demonstrated the ability to professionally and competently service a
portfolio of similar accounts in accordance with customary standards of
skill and care, and must have a certain net worth (e.g. at least
$50,000,000). These requirements are in line with the Rating Agencies'
standards for servicers.
Regardless of whether the Servicer is MBNA, an affiliate, or a
third party meeting the eligibility requirements discussed above, the
Servicer's duties
[[Page 4046]]
are largely ministerial and are provided in detail in the PSA. The
Servicer administers the receivables, collects payments due thereunder,
makes withdrawals from the various accounts created under the PSA which
are forwarded to the Trustee on the dates and in the manner provided
under the PSA, commences enforcement proceedings with respect to
delinquent receivables and makes filings and other necessary reports
with the SEC and any state securities authorities as necessary to
comply with the law. The Servicer must maintain fidelity bond coverage
insuring against losses through its own wrongdoing, and is entitled to
receive a reasonable servicing fee which is specifically enumerated in
each PSA supplement.
9. Servicer Daily Reports, Duties and Public Accounting Firm
Review. On each business day the Servicer must prepare and make
available to the Trustee a record of the collections processed on the
preceding day and the aggregate amount of receivables as of the close
of business on the preceding day. The Servicer must prepare monthly for
the Trustee, the paying agent, any credit enhancement provider, and
each relevant Rating Agency, a certificate setting forth the aggregate
collections processed during the preceding month with respect to each
Series outstanding, the aggregate amounts of the investor percentages
of collections of finance charge receivables and principal receivables
processed during the preceding month with respect to each Series
outstanding, the balances in the finance charge account, the principal
account or any Series account during the preceding month, and other
detailed information.
The Servicer will provide annually a certificate from an officer
indicating that the Servicer's activities over a 12-month period were
reviewed and the officer believed such obligations were fully performed
under the PSA. Every year, a nationally recognized firm of independent
certified public accountants will review the internal accounting
controls and their relation to the servicing of the receivables as well
as the mathematical accuracy of the Servicer's monthly reports, and the
results will be provided to the Trustee, any credit enhancement
provider, and each relevant Rating Agency. These additional reviews of
the Servicer are designed to prevent Servicer fraud and limit Servicer
discretion. These safeguards protect investors and are a positive
factor in a Rating Agency's evaluation.
10. Trustee Eligibility and Duties. The Trustee must be a financial
institution organized, doing business and regulated under the laws of
the United States, any State and/or the District of Columbia and have a
long-term unsecured debt rating as specified in the PSA. The Trustee
must be independent of MBNA and its affiliates and meet the same
requirements that would be necessary for an eligible Servicer (as
discussed under ``Servicer Eligibility Requirements'' above). Any
successor Trustee must also meet these requirements and be approved by
each relevant Rating Agency.
The Trustee is responsible for receiving collections from
receivables as provided in the PSA, investing any moneys as directed in
the PSA, and directing payments to Certificateholders according to the
plan of allocation and payment detailed in the PSA. In performing these
functions, the Trustee has little, if any, discretion. The Trustee is
also responsible for examining any resolutions, statements,
certificates, opinions, reports or other instruments in order to
determine whether they substantially conform to the requirements of the
PSA. The Trustee has no power to vary the corpus of the Trust and must
perform the duties of other parties should they fail to perform under
the PSA. Like the Servicer restrictions, the restrictions on the
Trustee limit discretion, enhance investor protection, and are a
positive influence on a Rating Agency's evaluation.
11. Restrictions on Investments. The collections of principal
receivables and finance charge receivables held in the Trust may be
invested by the Trustee only in ``permitted investments'' during the
interim periods between collection and payout to the
Certificateholders. Such permitted investments are detailed in the PSA
and represent what each relevant Rating Agency considers to be secure
investments that sufficiently protect investors. Under the proposed
exemption, permitted investments would be investments that either (i)
are 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 obligation is backed by
the full faith and credit of the United States, or (ii) have been rated
(or the obligor thereof has been rated) in one of the three highest
generic rating categories by a Rating Agency. In addition, all
permitted investments must be described in the PSA and permitted by the
relevant Rating Agencies.
12. Protection From the Consequences of Unplanned Events. If MBNA
should desire to merge or consolidate with, or assume the obligations
of, another entity, certain provisions of the PSA ensure that the Trust
assets remain secure. The new entity involved in the merger or
consolidation must be a national banking association, a state banking
corporation or another entity not subject to bankruptcy laws and must
be organized and regulated under the laws of the United States, any
State and/or the District of Columbia. The new entity must expressly
assume the performance of every covenant and obligation of MBNA, and
MBNA must provide the Trustee with an opinion of counsel that such
assumption is legal, valid and binding. Finally, each relevant Rating
Agency must be notified in advance of the change. Similarly, a merger,
consolidation or assumption of the obligations of the Servicer also
requires the same protections of a full assumption of liabilities, an
opinion of counsel and Rating Agency notification.
The Certificateholders of each Series receive protection from
certain unplanned events (called ``Pay Out Events''). If a ``Pay Out
Event'' occurs with respect to a Series, either (i) a rapid
amortization period will commence during which the Certificates of such
Series will be paid down periodically, as provided in the PSA
Supplement, with the principal collections allocable to such Series or
with principal collections allocable to other Series which are shared
within the same Group (as discussed in Paragraph 15 below), or (ii) a
rapid accumulation period will commence during which the Series'
principal collections will be accumulated until a designated payment
date. Pay Out Events include ``Trust Pay Out Events,'' which apply to
all Series, and ``Series Pay Out Events,'' which apply to particular
Series. ``Trust Pay Out Events'' include: (i) certain events of
insolvency, conservatorship or receivership relating to MBNA; (ii) the
Trust becomes an ``investment company'' within the meaning of the
Investment Company Act of 1940, as amended; and (iii) MBNA becomes
unable for any reason to transfer receivables to the Trust as required
by the PSA.
Series Pay Out Events generally include:
(a) Failure of MBNA to make required payments or observe its other
covenants to the extent there is a material adverse effect on the
Certificateholders of that Series;
(b) Breach by MBNA of its representations and warranties to the
extent there is a material adverse effect on the Certificateholders of
that Series;
[[Page 4047]]
(c) A default by the Servicer that would have a material adverse
effect on the Certificateholders of that Series; and
(d) The portfolio yield for any three consecutive monthly periods
is less than the average base rate for such period (an ``Economic Pay
Out Event'').
With respect to item (d) above, MBNA states that an ``Economic Pay
Out Event'' will occur automatically when the portfolio yield for any
series of certificates, averaged over three consecutive months (or such
other period approved by one of the Rating Agencies) is less than the
base rate of the series averaged over the same period. Portfolio yield
for a series of certificates for any period is equal to the sum of the
finance charge collections and other amounts treated as finance charge
collections less total defaults for the series divided by the
outstanding principal balance of the investor certificates of the
series, or such other measure approved by one of the Rating Agencies.
The base rate for a series of certificates for any period is the sum of
(i) amounts payable to certificateholders of the series with respect to
interest, (ii) servicing fees allocable to the series payable to the
servicer, and (iii) any credit enhancement fee allocable to the series
payable to a third party credit enhancer, divided by the outstanding
principal balance of the investor certificates of the series, or such
other measure approved by one of the Rating Agencies.
MBNA states that an ``Economic Pay Out Event'' should not occur
because the amount of receivables included within the Trust has been
designed to create ``excess spread'' between the yield on the
receivables and the certificate rates. Excess spread is the amount by
which the yield on the receivables held by the Trust exceeds, at any
point in time, the amounts necessary to pay certificate interest,
principal (if such payments are due to certificateholders), servicing
fees and expenses, and to satisfy cardholder defaults or charge-offs.
The Rating Agencies examine the expected amount of ``excess spread''
very closely before providing a high credit rating for the
certificates.
A ``Pay Out Event'' accelerates the scheduled payments or
accumulation of principal on the Certificates as specified within each
PSA Supplement, and eliminates shared allocations from such Series,
thus increasing the probability of full payment to senior
Certificateholders, including plan investors. During a rapid
amortization period, which is triggered by a ``Pay Out Event'', all
collections are distributed periodically (instead of being distributed
on the originally scheduled principal payment dates), as provided in
the PSA Supplement, until the senior Certificateholders are paid in
full. During a rapid accumulation period, also triggered by a ``Pay Out
Event'', all principal collections allocated to the senior Certificates
are accumulated and invested by the Trustee until the senior
Certificateholders' interest is backed in full by cash and/or permitted
investments which will be distributed on the originally scheduled
payment date. Payments or accumulations are then directed to the next
level of Certificates below the senior Certificates, until all
Certificates have been paid or accumulated, or the Trust terminates.
Because this accelerated pay out or accumulation schedule is triggered
as a result of poor performance, senior Certificateholders are
protected from a loss which might result from long-term yield
reduction, and are, to a level of certainty necessary to support a
rating of ``AA'' (or better), likely to receive their entire investment
return. The timing or amount of the payments or accumulations is
specifically defined in each PSA Supplement, further protecting
investors from mismanagement. This automatic pay out trigger is
important to each relevant Rating Agency as well, because it strictly
limits the potential losses to investors.
Investors are also protected from the negative consequences of an
event of Seller insolvency. If one or more of a number of indications
of insolvency are present, a ``Pay Out Event'' occurs and a rapid
amortization or a rapid accumulation period is triggered. As discussed
above, this event accelerates payments or accumulation of collections
to maximize the probability that senior Certificateholders will be paid
promptly and in full. In addition, the Trustee also liquidates the
receivables (unless otherwise instructed by Certificateholders
representing undivided interests aggregating more than 50 percent of
each outstanding Series) in order to further accelerate the pay out or
accumulation process. The proceeds of the liquidation are distributed
or accumulated in the tiered manner discussed above in the low-yield
scenario.
13. Limited Discretion. Inherent in all of the restrictions
surrounding creation and management of the Trust, discussed above, is
the limited ability of any party to the transaction to make
discretionary decisions that would have a major impact on the Trust
assets. The PSA addresses every possible important decision and
provides the exact course of action required. Each detail is designed
to ensure maximum investor security, and minimum Trustee and Servicer
discretion.
The Series
14. Once a Trust is established, a Series of Certificates may be
issued pursuant to a PSA Supplement. One Trust typically supports
multiple Series of Certificates over time. Each Series issued under a
Trust is secured, along with other outstanding Series, by the assets of
the issuing Trust. The PSA Supplement builds on the PSA by specifying
the parameters for the Series, such as the number and type of
Certificates, subordination and payment structuring, and other credit
enhancement features.
The life of a Series consists of a revolving period and an
amortization or accumulation period. During both periods, daily
collections are allocated to the Trust accounts in the manner specified
in the PSA Supplement. Interest payments are made periodically to the
Certificateholders as provided in the PSA Supplement, and principal is
paid in a lump sum on the date designated in the PSA Supplement (in the
case of an accumulation period), or periodically pursuant to a schedule
in the PSA Supplement (in the case of an amortization period), for each
class of Certificates. The allocation of collections and the priority
of payments differs slightly during the revolving period and the
amortization or accumulation period.
15. During a Series' revolving period, periodic interest payments
are made to Certificateholders. Principal payments, however, are not
made until the amortization period or at the end of the accumulation
period. Principal collections during the revolving period typically are
shared among the Series that are members of the same Group. If one
Series has principal receipts greater than needed to pay principal for
that period, the excess may be used to pay principal for another Series
in the Group which may have a need for such principal collections. In
such instances, the minimum principal receivable balances required by
the Rating Agencies for all Series must be maintained. The process of
sharing within the Group spreads payment risk over a broader base of
collections and effectively allows concentration of principal
collections supporting a particular Series, resulting in increased
reliability of the payment streams.
Principal collections received during the amortization or
accumulation period are also potentially shared, but are first applied
to the principal funding for the Series to which they relate. The
[[Page 4048]]
amortization or accumulation period ends on the earliest of: (i) when
the investors interests are paid in full; (ii) the Series termination
date provided in the PSA Supplement; or (iii) the commencement of a
rapid amortization or rapid accumulation period. Finance charges and
fees collected during the revolving period and the accumulation or
amortization period are applied to the related Series, and are not
generally shared within the Group.
16. Every Trust will have a variety of credit enhancement features,
as described in the PSA and specified in the applicable PSA Supplement.
In addition to the Group sharing of collections discussed above, other
credit enhancements may include subordination and letters of credit or
other third party arrangements. The type and value of credit
enhancement for a particular Series is designed to compliment the
underlying Trust receivables so that, as a whole, the Trust assets
satisfy the relevant Rating Agency's requirements for the superior
rating desired. In this regard, MBNA represents that the particular
class of certificates for each series to which this proposed exemption
would apply (an Exempt Class) will have credit support provided to the
Exempt Class through either a senior-subordinated series structure or
other form of third party credit support which, at a minimum, will
represent five (5) percent of the outstanding principal balance of
certificates issued for the Exempt Class, so that an investor in the
Exempt Class will not bear the initial risk of loss.
Each Series with an Exempt Class covered by the proposed exemption
will include one or more of the following credit enhancing investor
safeguards (as discussed further below): (i) Subordination; (ii) Third
Party Credit Enhancement; and (iii) Allocation of Collections and
Payments to Certificateholders Allows No Variation.
17. Subordination. Typically, a Series will have some form of
subordination incorporated within the payment schedule detailed in the
PSA Supplement. Such a Series will consist of at least one class of
senior Certificates (typically designated as ``Class A Certificates'')
which will be allocated collections in a more favorable manner than,
and/or prior to, another class (or other classes) of Certificates
(i.e., the next lower level, typically designated as ``Class B
Certificates'') and often will include an uncertificated class
subordinate to the Class B Certificates (typically designated as the
``Collateral Interest'' or ``Class C Interest''). The subordination
process generally will involve both the receipt of collections and the
effect of losses. Thus, such collections will be applied to the senior
(or Class A) Certificates first and then the second tier (or Class B)
Certificates, and will be applied last to the lowest level class of
Certificates (or the Collateral Interest). Conversely, the losses will
first reduce the lowest class of Certificates (or the Collateral
Interest), only affecting the senior (or Class A) Certificates after
all other classes have been reduced to zero. The result of this tiered
structure is that the senior (or Class A) Certificates are protected
from nonpayment by the lower classes. If the certainty of payment
provided by the subordination or other credit support mechanism is
insufficient to allow each relevant Rating Agency to bestow one of its
two highest ratings on the senior Certificates, the senior Certificates
would not be eligible for the relief provided under the proposed
exemption.
18. Third Party Credit Enhancement. A Series may include a form of
credit enhancement provided by an outside party, such as a letter of
credit, a cash collateral account, insurance or a guaranty or other
extension of credit. This arrangement will be documented by a separate
contract outlining the terms of the enhancement. A holder of the
Collateral Interest (described in the preceding paragraph) or other
subordinate interest holder may be a loan provider or an investor in
the Class C Interest, and the PSA Supplement typically requires that a
minimum Collateral Interest (or subordinate interest) be a feature of
each Series. As with all the forms of credit enhancement, the terms and
the amount of the Collateral Interest will be dependent upon an
evaluation of the other Trust assets and the additional support needed
to satisfy each relevant Rating Agency that the Certificates are
sufficiently protected from default.
19. Allocation of Collections and Payments to Certificateholders
Allows No Variation. The PSA Supplement provides instructions to the
Servicer regarding each day's collections and the allocation of those
collections to the various accounts created by the PSA. These
instructions indicate how to make the payments and allocations during
the revolving period, the amortization or accumulation period and the
rapid amortization or rapid accumulation period, if any. The
instructions also cover the treatment of other moneys from loans or
other credit enhancement features, and carefully describe how to
accommodate any excess collections, or how to compensate for any
shortfalls. In following these detailed instructions, the Servicer does
not make any discretionary decisions. The tasks are predetermined and
largely ministerial. These explicit instructions, in concert with the
Servicer reporting and review requirements, are designed to permit each
relevant Rating Agency to conclude that mismanagement risks are
minimal.
The Certificates
20. Each Series may include a class or various classes of
Certificates, some of which may be subordinate to others.
Certificateholders will be entitled to receive periodic payments of
interest based upon a fixed or variable interest rate which is set
forth in the PSA Supplement and applied to the Certificateholder's
unpaid principal balance. Certificateholders will also be entitled to
receive a lump sum principal payment on the scheduled payment date, or
a series of periodic payments beginning on the scheduled payment
commencement date, as specified in the PSA Supplement, to the extent of
the Certificateholder's investor interest.
As noted earlier, only Certificates that are not subordinate to any
other class or classes of Certificates (the ``Senior Certificates'')
would be eligible for exemptive relief under the proposed exemption.
21. MBNA represents that a plan would invest in the Certificates
for the same reasons any investor would invest in a highly secure,
``AA'' (or better) rated investment with attractive yields. The Senior
Certificates represent an investment alternative which offers all the
benefits of a highly rated fixed-income security, such as fixed payment
streams, investment diversity and market rates of return. Permitting
plans to invest in Senior Certificates in reliance on the proposed
exemption would provide plans with additional and safe investment
opportunities.
22. With respect to the credit ratings of the Certificates, MBNA
states that the rating reflects a Rating Agency's opinion as to the
relative amount of protection that investors have against loss of
principal and interest during the life of the security. A high rating
comports with a low risk of loss. In order to achieve this rating, each
relevant Rating Agency requires the credit card securitizations
effected through the Trust to include a variety of safeguards--such as
subordination or other forms of credit enhancement, limitations on the
Seller's discretion, and Rating Agency approval of certain actions
taken with respect to the Trust or a Series of Certificates. Each
relevant Rating Agency typically requires legal opinions regarding the
credit card securitization's structure and performs
[[Page 4049]]
stress tests on the portfolio of selected receivables in order to
evaluate the securitization's anticipated performance within a range of
significant market fluctuations. In addition, each relevant Rating
Agency performs a comprehensive review of all documents related to the
credit card securitization before the formal rating is given. Each
relevant Rating Agency must provide confirmations that additions of
receivables from accounts to a Trust, or withdrawals of existing
accounts from a trust, will not result in a Ratings Effect on the
Certificates.
After its rating is assigned, the Rating Agency monitors the
performance of the credit card receivables included in a Trust in order
to assess whether the performance remains consistent with the rating.
Although variations in portfolio performance are expected during a
Certificate's duration and are factored into a Rating Agency's
analysis, extreme and unexpected performance results may result in a
revision of the rating. MBNA makes its Trust performance information
available to each relevant Rating Agency in a variety of ways, in order
to ensure that the Rating Agency receives all the information it deems
necessary to make its evaluation. For example, MBNA provides
information on portfolio performance broken down by account balance,
credit limit, account age, delinquency period and geographic
distribution.
MBNA states that the receipt of one of the two highest generic
ratings from a Rating Agency represents the result of an exhaustive
analysis of the many risk factors involved with a Series of
Certificates, and provides a comfort level to investors that the
potential reduction in yield as a result of credit losses is
minimal.\11\
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\11\ In this regard, the Department was advised by
representatives from two of the Rating Agencies (RA Reps) of certain
issues concerning the ratings of certificates issued by trusts
holding credit card receivables. The RA Reps discussed, among other
things, the fact that different banks use different underwriting
standards and may offer cardholders different terms on their
accounts. Some banks may be willing to accept cardholders with more
risky credit histories while other banks may not or may offer better
terms to cardholders with superior payment histories. The result may
be that some banks have a higher quality portfolio of receivables
than other banks. The RA Reps stated that if a bank securitizes a
portfolio of receivables which holds a number of riskier accounts,
the Rating Agencies will require more credit enhancement measures
because different assumptions will have to be made about the
performance of the portfolio--e.g. higher charge-off rates will be
assumed and greater ``excess spread'' will be necessary to avoid
losses--in order to achieve an ``AAA'' rating. Thus, for example,
Bank A's certificates may receive an ``AAA'' rating along with
MBNA's certificates even though Bank A may experience more charge-
offs on the credit card accounts and may have different payment
rates on the receivables associated with those accounts.
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23. MBNA represents that the statistics on Certificates backed by
credit card trusts indicate that they are sound investments. In this
regard, MBNA states that public credit card securitization transactions
have been in existence since 1987 and issuers have successfully sold
over $230 billion in Certificates backed by credit card receivables
since then with a zero investor loss rate. MBNA states further that
plans have invested during this time in such Certificates, despite the
prohibited transaction provisions of the Act, in reliance upon the
Department's regulation defining ``plan assets'' and, specifically, the
``100-Holder Exception'' for ``publicly-offered'' securities (see 29
CFR 2510.3-101).\12\
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\12\ The Department's regulation defining ``plan assets''
provides that, if a plan invests in a publicly-offered security, the
plan's assets will not include, solely by reason of such investment,
any of the underlying assets of the entity issuing the security
(i.e. the ``look-through rule'' will not apply and the operations of
the entity will not be subject to scrutiny under the prohibited
transaction provisions of the Act). The regulation defines a
``publicly-offered'' security as one that is freely transferable,
widely-held, and registered under the federal securities laws. A
class of securities is ``widely held'' if it is owned by 100 or more
investors who are independent of the issuer and of one another at
the conclusion of the offering (see 29 CFR 2510.3-101(b)(3)).
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MBNA maintains that the proposed exemption offers a number of
safeguards in the form of concentration restrictions that are designed
to provide additional protections for plan investors which are not
included in the typical 100-holder exception transactions. For example,
for purposes of the relief from the prohibitions of section 406(b) of
the Act \13\ provided under Section I.B. herein (relating to certain
obligors of the Trust who may have discretionary authority for a plan
investing in certificates of the Trust), the proposed exemption limits
such plan's investment in any class of Certificates of any Series to
not more than 25 percent of the principal amount of the Certificates of
that class outstanding at the time of acquisition. In addition,
immediately after the acquisition of the certificates, not more than 25
percent of the assets of such a plan may be invested in certificates
representing an interest in the trust, or trusts containing receivables
sold or serviced by the same entity. Further, the proposed exemption
requires that at least 50 percent of the outstanding principal amount
of each class of Certificates in which plans have invested, and at
least 50 percent of the outstanding aggregate interest of the Trust, in
connection with the initial issuance of the Certificates, must be
acquired by persons independent of the Sponsor, the Servicer and other
related parties. These restrictions are designed to protect plan
investors from the risks inherent in excessive ownership concentration
and related party transactions.
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\13\ Section 406(b) of the Act, in pertinent part, prohibits a
plan fiduciary from dealing with the assets of the plan in his own
interest or for his own account, or from acting on behalf of a party
(or representing a party) whose interests are adverse to the
interests of the plan and its participants and beneficiaries.
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24. MBNA represents that the requested exemption is similar to the
Underwriter Exemptions.\14\ The Underwriter Exemptions are a series of
exemptions granted by the Department to various underwriters or trust
sponsors for transactions relating to the acquisition by plans of
certificates representing interests in trusts holding various types of
assets (e.g. single and multi-family residential or commercial
mortgages, motor vehicle leases and related vehicles, equipment leases
or other secured obligations), as provided in Section III.B. of the
Underwriter Exemptions.
---------------------------------------------------------------------------
\14\ As indicated in Footnote 7 above, PTE 97-34 (which granted
an amendment to the Underwriter Exemptions) contains the most
comprehensive listing of these exemptions.
---------------------------------------------------------------------------
The Trusts described under the proposed exemption for Certificates
backed by credit card receivables differ from trusts holding secured
obligations in that the Trusts do not contain a fixed pool of assets
and the receivables are not secured by real or tangible personal
property. However, MBNA states that this difference in structure does
not represent a difference in the quality or safety of investments by
plans and other investors in the Certificates. Under the proposed
exemption, MBNA represents that the other forms of credit enhancement
provide at least the same level of security for investors in Trusts
holding credit card receivables as exists for investors in trusts
holding tangible or real property as collateral for the payment
obligations to Certificateholders. In addition, Trusts holding credit
card receivables do not involve the expense and administrative
complexities of foreclosure procedures relating to tangible and real
property.
25. Certificateholders are entitled to receive periodic payments of
interest based upon an interest rate, which may be variable or fixed.
This interest rate is specified or defined in the PSA Supplement for
the particular Series and is applied to the outstanding principal
balance of the Certificates. This outstanding balance (net of any
charge-offs) is known as the investor
[[Page 4050]]
interest for the senior class of Certificates. Certificateholders are
also entitled to receive principal payments on the scheduled payment
dates, or sooner or later under certain limited circumstances, pursuant
to the PSA Supplement to the extent of the Certificateholders' investor
interest. The payments are funded from collections on the related
receivables and allocated to the investor interests as provided in the
PSA Supplement.
MBNA states that a Series or class of Certificates may have the
benefit of an interest rate swap agreement entered into between the
Trustee for a Trust and a bank or other financial institution acting as
a swap counterparty. Pursuant to the swap agreement, the swap
counterparty would pay a certain rate of interest to the Trust in
return for a payment of a rate of interest by the Trust, from
collections allocable to the relevant Series or class of Certificates,
to the swap counterparty. MBNA represents that the credit rating
provided to a particular Series or class of Certificates by the
relevant Rating Agency may or may not be dependent upon the existence
of a swap agreement. Thus, in some instances, the terms and conditions
of the swap agreements will not effect the credit rating of the Series
or class of Certificates to which the swap relates (i.e. a ``Non-
Ratings Dependent Swap'').
MBNA states that whether or not the credit rating of a particular
Series or class of Certificates is dependent upon the terms and
conditions of one or more interest rate swap agreements entered into by
the Trust (i.e. a ``Ratings Dependent Swap'' or a ``Non-Ratings
Dependent Swap''), each particular swap transaction will be an
``Eligible Swap'' as defined in Section III.HH. above.
In this regard, an Eligible Swap will be a swap transaction:
(a) Which is denominated in U.S. Dollars;
(b) Pursuant to which the Trust pays or receives, on or immediately
prior to the respective payment or distribution date for the applicable
senior class of Certificates, a fixed rate of interest, or a floating
rate of interest based on a publicly available index (e.g. LIBOR or the
U.S. Federal Reserve's Cost of Funds Index (COFI)), with the Trust
receiving such payments on at least a quarterly basis and obligated to
make separate payments no more frequently than the counterparty, with
all simultaneous payments being netted;
(c) Which has a notional amount that does not exceed either (i) the
certificate balance of the class of certificates to which the swap
relates, or (ii) the portion of the certificate balance of such class
represented by receivables;
(d) Which is not leveraged (i.e. payments are based on the
applicable notional amount, the day count fractions, the fixed or
floating rates designated in item (b) above, and the difference between
the products thereof, calculated on a one to one ratio and not on a
multiplier of such difference);
(e) Which has a final termination date that is the earlier of the
date on which the Trust terminates or the related class of Certificates
is fully repaid; and
(f) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in items (a) through
(e) above without the consent of the Trustee.
In addition, any Eligible Swap entered into by the Trust will be
with an ``Eligible Swap Counterparty'', which will be a bank or other
financial institution with a rating at the date of issuance of the
Certificates by the Trust which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating
Agencies rating the Certificates (see Section III.II above). However,
if a swap counterparty is relying on its short-term rating to establish
its eligibility, such counterparty must either have a long-term rating
in one of the three highest long-term rating categories or not have a
long-term rating from the applicable Rating Agency.
With respect to a Ratings Dependent Swap, an Eligible Swap
Counterparty will be subject to certain collateralization or other
arrangements satisfactory to the Rating Agencies in the event of a
rating downgrade of such swap counterparty below a level specified by
the Rating Agency, which would be no lower than the level that would
make such counterparty ``eligible'' under this proposed exemption (see
Section III.II. above). If these arrangements are not established
within a specified period, as described in the PSA, there will be an
early payout event causing certificateholders to receive an earlier
than expected payout of principal on their certificates for the series
to which the swap relates. However, with respect to a Non-Ratings
Dependent Swap, the PSA will not specify that there be an early payout
event for the series to which the swap relates if the credit rating of
the swap counterparty falls below the level required for it to be
considered an Eligible Swap Counterparty (as described in Section
III.II. above). In such instances, in order to protect the interests of
the Trust as a swap counterparty, the servicer (as agent for the
trustee of the trust) will be required to either:
(i) Obtain a replacement swap agreement with an Eligible Swap
Counterparty, the terms of which are substantially the same as the
current swap agreement (at which time the earlier swap agreement will
terminate);
(ii) Cause the swap counterparty to post collateral with the
trustee of the trust in an amount equal to all payments owed by the
counterparty if the swap transaction were terminated; or
(iii) Terminate the swap agreement in accordance with its terms.
Under any termination of a swap, the Trust will not be required to
make any termination payments to the swap counterparty (other than a
currently scheduled payment under the swap agreement) except from
``excess finance charge collections'' or other amounts that would
otherwise be payable to the servicer or the seller (i.e. MBNA). In this
regard, ``excess finance charge collections'' will be, as of any day
funds are distributed from the Trust, the amounts by which the finance
charge collections allocated to certificates of a series exceed the
amounts necessary to pay certificate interest, servicing fees and
expenses, to satisfy cardholder defaults or charge-offs, and to
reinstate credit support.
With respect to Non-Ratings Dependent Swaps, each Rating Agency
rating the Certificates must confirm, as of the date of issuance of the
Certificates by the Trust, that entering into the swap transactions
with the Eligible Swap Counterparty will not effect the rating of the
Certificates, even if such counterparty is no longer an ``eligible''
counterparty and the swap is terminated.\15\
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\15\ RA Reps have indicated to the Department that certain
series of certificates issued by a trust holding credit card
receivables will have certificate ratings that are not dependent on
the existence of a swap transaction entered into by the trust.
Therefore, a downgrade in the swap counterparty's credit rating
would not cause a downgrade in the rating established by the Rating
Agency for the certificates. RA Reps state that in such instances
there will be more credit enhancements (e.g. ``excess spread'',
letters of credit, cash collateral accounts) for the series to
protect the certificateholders than there would be in a comparable
series where the trust enters into a so-called Ratings Dependent
Swap. Non-Ratings Dependent Swaps are generally used as a
convenience to enable the trust to pay certain fixed interest rates
on a series of certificates. However, the receipt of such fixed
rates by the trust from the counterparty is not a necessity for the
trust to be able to make its fixed rate payments to the
certificateholders.
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Any class of senior Certificates to which one or more swap
agreements entered into by the trust applies, will be acquired or held
only by Qualified Plan
[[Page 4051]]
Investors (as defined in Section III.JJ. above). Qualified Plan
Investors will be plan investors represented by an appropriate
independent fiduciary that is qualified to analyze and understand the
terms and conditions of any swap transaction relating to the class of
senior Certificates to be purchased and the effect such swap would have
upon the credit rating of the senior Certificates to which the swap
relates.
For purposes of the proposed exemption, such a qualified
independent fiduciary will be either:
(i) A ``qualified professional asset manager'' (i.e. QPAM), as
defined under Part V(a) of PTE 84-14; \16\
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\16\ See Footnote 8 above.
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(ii) an ``in-house asset manager'' (i.e. INHAM), as defined under
Part IV(a) of PTE 96-23; \17\ or
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\17\ See Footnote 9 above.
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(iii) A plan fiduciary with total assets under management of at
least $100 million at the time of the acquisition of such Certificates.
Disclosures Available to Investing Plans
26. In connection with the original issuance of certificates, the
prospectus or private offering memorandum will be furnished to
investing plans. The prospectus or private offering memorandum will
contain information pertinent to a plan's decision to invest in the
Certificates, such as:
(a) Information concerning the Certificates, including payment
terms, certain tax consequences of owning and selling Certificates, the
legal investment status and rating of the Certificates, and any special
considerations with respect to the Certificates;
(b) Information about the underlying receivables, including the
types of receivables, statistical information relating to the
receivables, their payment terms, and the legal aspects of the
receivables;
(c) Information about the servicing of the receivables, including
the identity of the servicer and servicing compensation;
(d) Information about the Sponsor of the Trust;
(e) A full description of the material terms of the Pooling and
Servicing Agreement; and
(f) Information about the scope and nature of the secondary market,
if any, for such Certificates.
Certificateholders will be provided with information concerning the
amount of principal and interest to be paid on Certificates in
connection with each distribution to Certificateholders.
Certificateholders will also be provided with periodic information
statements setting forth material information concerning the status of
the Trust.
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 (the '34 Act). 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 (i)
obtain, by application to the SEC, a complete exemption from the
requirement to file quarterly reports on Form 10-Q and a modification
of the disclosure requirements for annual reports on Form 10-K; or (ii)
are not subject to such requirements for one or more Series of
Certificates issued by the Trust. If such an exemption is obtained,
these Trusts normally would continue to have the obligation to file
current reports on Form 8-K to report material developments concerning
the Trust and the Certificates. While the SEC's interpretation of the
periodic reporting requirement is subject to change, periodic reports
concerning a Trust will be filed to the extent required under the '34
Act.
MBNA states that at or about the time distributions are made to
Certificateholders, reports will be delivered to the Trustee as to the
status of the Trust and its assets, including underlying Receivables.
Such reports will typically contain information regarding the Trust's
assets, payments received or collected by the Servicer, the amount of
delinquencies and defaults, the amount of any payments made pursuant to
any credit support or credit enhancement feature, and the amount of
compensation payable to the Servicer. Such reports will also be
delivered or made available to the Rating Agency that currently rates
the Certificates. Such reports will be available to investors and its
availability will be made known to potential investors. In addition,
promptly after each distribution date, Certificateholders will receive
a statement summarizing information regarding the Trust and its assets
and the applicable Series, including underlying receivables.
28. In summary, MBNA represents that the proposed transactions will
meet the statutory criteria of section 408(a) of the Act because, among
other things:
(a) The acquisition of senior Certificates by a plan will be on
terms (including Certificate price) that are at least as favorable to
the plan as such terms would be in an arm's-length transaction with an
unrelated party;
(b) The rights and interests evidenced by the senior Certificates
will not be subordinated to the rights and interests evidenced by other
investor Certificates of the Trust;
(c) Any senior Certificates acquired by a plan will have received a
rating at the time of such acquisition that is in one of the two
highest generic rating categories from any one of the Rating Agencies
or, for certificates with a duration of one year or less, the highest
short-term generic rating category from any one of the Rating Agencies;
(d) The Trustee of the Trust will not be an affiliate of any other
member of the Restricted Group;
(e) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
Certificates will represent not more than reasonable compensation for
underwriting or placing the Certificates; the consideration received by
the Sponsor as a consequence of the assignment of receivables (or
interests therein) to the Trust will represent not more than the fair
market value of such receivables (or interests); and the sum of all
payments made to and retained by the Servicer, which are allocable to
the Series or class of certificates purchased by a plan, will represent
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;
(f) Any plan investing in such Certificates will be an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933;
(g) The terms of each Series or class of Certificates, and the
conditions under which MBNA may designate additional accounts to, or
remove previously-designated accounts from, the Trust will be described
in the prospectus or private placement memorandum provided to investing
plans;
(h) The Trustee of the Trust will be a substantial financial
institution or trust company experienced in trust activities and would
be familiar with its duties, responsibilities and liabilities as a
fiduciary under the Act;
(i) The PSA will include ``Economic Pay Out Events'' triggered by a
decline in the performance of the receivables in the Trust;
(j) To protect against fraud, chargebacks or other dilution of the
receivables in the Trust, the PSA and the Rating Agencies will require
MBNA, as the Trust's sponsor, to maintain a seller interest of not less
than 2 percent
[[Page 4052]]
of the principal balance of the receivables contained in the Trust;
(k) Each receivable added to a Trust will be an eligible
receivable, based on criteria of the relevant Rating Agency(ies) and as
specified in the PSA;
(l) The PSA will require that any change in the terms of any
cardholder agreements also will be made applicable to the comparable
segment of accounts owned or serviced by MBNA which are part of the
same program or have the same or substantially similar characteristics;
(m) The addition of new receivables or designation of new accounts,
or removal of previously-designated accounts, will meet the terms and
conditions for such additions, designations, or removals as described
in the prospectus or private placement memorandum for such
Certificates, which terms and conditions will have been approved by
each relevant Rating Agency, and will not result in the Certificates
receiving a lower credit rating from the relevant Rating Agency than
the then current rating of the Certificates;
(n) Any swap transaction relating to senior Certificates that are
covered by the proposed exemption must satisfy the several investor-
protective conditions applicable to Eligible Swaps and must be entered
into by the Trust with an Eligible Swap Counterparty; and
(o) Any class of Certificates to which one or more swap agreements
entered into by the Trust applies may be acquired or held by plans in
reliance upon this proposed exemption only if such plans are
represented by ``Qualified Plan Investors.''
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
Citibank (South Dakota), N.A., Citibank (Nevada), N.A., and
Affiliates
Located in North Sioux Falls, South Dakota (Application No. D-10313)
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
A. Effective as of the date this proposed exemption is granted, 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 trust,
the sponsor or an underwriter and an employee benefit plan subject to
the Act or section 4975 of the Code (a 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 Section I.A.(1) or (2).
Notwithstanding the foregoing, Section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan, as defined in Section III.K. below, by any person who
has discretionary authority or renders investment advice with respect
to the assets of the Excluded Plan that are invested in
certificates.\18\
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\18\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. Effective as of the date this proposed exemption is granted, 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 trust,
the sponsor or an 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 receivables contained in the trust constituting 0.5
percent or less of the fair market value of the aggregate undivided
interest in the trust allocated to the certificates of a series, 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,
as defined in Section III.L., and at least 50 percent of the aggregate
undivided interest in the trust allocated to the certificates of a
series is acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of certificates of a series
does not exceed 25 percent of all of the certificates of that class
outstanding at the time of the acquisition;
(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 is
invested in certificates representing the aggregate undivided interest
in a trust allocated to the certificates of a series and containing
receivables sold or serviced by the same entity; <SUP>19</SUP> and
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\19\ For purposes of this proposed exemption, each plan
participating in a commingled fund (such as a bank collective trust
fund or insurance company pooled separate account) shall be
considered to own the same proportionate undivided interest in each
asset of the commingled fund as its proportionate interest in the
total assets of the commingled fund as calculated on the most recent
preceding valuation date of the fund.
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(v) Immediately after the acquisition of the certificates, not more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice is
invested in certificates representing an interest in the trust, or
trusts containing receivables sold or serviced by the same entity. For
purposes of paragraphs B.(1)(iv) and B.(1)(v) only, an entity shall not
be considered to service receivables contained in a trust if it is
merely a subservicer of that trust;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that conditions set forth in Section I. B.(1)(i), (iii)
through (v) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to Section I.B.(1) or (2).
C. Effective as of the date that the proposed exemption is granted,
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,
including the reassignment to the sponsor of receivables, the removal
from the trust of accounts previously designated to the trust, the
changing of the underlying terms of accounts designated to the trust,
the adding of
[[Page 4053]]
new receivables to the trust, the designation of new accounts to the
trust, the retention of a retained interest by the sponsor in the
receivables, the exercise of the right to cause the commencement of
amortization of the principal amount of the certificates, or the use of
any eligible swap transactions, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding pooling and servicing agreement; 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>20</SUP>
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\20\ 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 proposed exemption, all references to ``prospectus'' include
any related supplement thereto, and any documents incorporated by
reference therein, pursuant to which certificates are offered to
investors.
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(3) The addition of new receivables or designation of new accounts,
or the removal of receivables or previously-designated accounts, meets
the terms and conditions for such additions, designations or removals
as are described in the prospectus or private placement memorandum for
such certificates, which terms and conditions have been approved by
Standard & Poor's Ratings Services, Moody's Investor Service, Inc.,
Duff & Phelps Credit Rating Co., or Fitch Investors Service, L.P., or
their successors (collectively, the Rating Agencies), and does not
result in the certificates receiving a lower credit rating from the
Rating Agencies than the then current rating for the Certificates; and
(4) The series of which the certificates are a part will be subject
to an Economic Early Amortization Event, which is set forth in the
pooling and servicing agreement and described in the prospectus or
private placement memorandum associated with the series, the occurrence
of which will cause any Revolving Period, Controlled Amortization
Period, or Accumulation Period applicable to the certificates to end,
and principal collections to be applied to monthly payments of
principal to, or accumulated for the account of, the certificateholders
of suc |
