[Federal Register: August 15, 2003 (Volume 68, Number 158)]
[Notices]
[Page 49301-49321]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15au03-147]
[[Page 49301]]
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Part IV
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions; Liberty Media 401(k) Savings Plan (the Plan);
Notice
[[Page 49302]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11170, et al.]
Proposed Exemptions; Liberty Media 401(k) Savings Plan (the Plan)
AGENCY: Employee Benefits Security 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
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, 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 requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), 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. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 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, 5 U.S.C. App. 1 (1996), 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.
Liberty Media 401(k) Savings Plan (the Plan)
Located in Englewood, Colorado
[Application No. D-11170].
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, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) and
407(a) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply, effective November 25, 2002, to (1)
The acquisition of certain stock rights (the Rights) by the Plan in
connection with a Rights offering by Liberty Media Corporation (LMC), a
party in interest with respect to the Plan; (2) the holding of the
Rights by the Plan during the subscription period of the offering; and
(3) the exercise of the Rights by the Plan, provided that the following
conditions were met:
(a) The Rights were acquired pursuant to Plan provisions for
individually-directed investment of such accounts;
(b) The Plan's receipt of the Rights occurred in connection with
the Rights offering made available to all shareholders of common stock
of LMC;
(c) All decisions regarding the holding and disposition of the
Rights by the Plan were made, in accordance with the Plan provisions
for individually-directed investment of participant accounts, by the
individual Plan participants whose accounts in the Plan received the
Rights in connection with the offering;
(d) The Plan's acquisition of the Rights resulted from an
independent act of LMC as a corporate entity, and all holders of the
Rights, including the Plan, were treated in the same manner with
respect to the acquisition; and
(e) The Plan received the same proportionate number of the Rights
as other owners of Liberty Media Series A and Series B common stock
(the Stock).
This exemption, if granted, will be effective as of November 25,
2002.
Summary of Facts and Representations
1. The Plan is a defined contribution plan that is intended to
satisfy the requirements of Code Sections 401(a) and 401(k). As of
December 31, 2001, the Plan had approximately 3,466 participants and
total assets of $104,044,000. The shares of LMC common stock held by
the Plan were valued at $46,265,000 as of December 31, 2001, and
comprised approximately 44.8% percent of the total assets in the Plan.
The Plan permits participants to contribute a portion of their
respective annual compensation to the Plan as a salary reduction
contribution under Code Section 401(k). LMC makes a matching
contribution to the Plan, which differs for different groups of
employees. Participant salary reduction contributions are immediately
100% vested. The matching contributions are vested according to a
schedule based on the years of service each participant has completed.
The stock received from exercising the Rights will be vested according
to the Plan vesting schedule.
2. The trustee of the Plan is Fidelity Management Trust Company
(the Trustee). The Trustee acts as the custodian of Plan assets,
holding legal title to the assets, and executing investment directions
in accordance with the participants' written instructions. The Plan
Administrative Committee is the fiduciary responsible for Plan matters.
The Plan allows participants to direct investments of their 401(k)
contributions into one of 18 investment categories, including the
[[Page 49303]]
Liberty Media Common Stock Fund. Matching contributions always are
invested in the Liberty Media Common Stock Fund.
LMC owns interests in a broad range of video programming, broadband
distribution, interactive technology services and communications
businesses. LMC and its affiliated companies operate in the United
States, Europe, South America, and Asia.
3. LMC announced a special rights offering. Holders of record of
the Stock on October 31, 2002 (the Record Date), each received 0.04 of
a transferable subscription Right for each share of Series A and Series
B common stock held. Each whole Right entitled the holder to purchase
one share of Series A common stock at a subscription price determined
by a special pricing committee of LMC's board of directors, which was
determined to be $6.00 per share.
LMC stock is traded on the New York Stock Exchange. Series A common
stock is traded under the symbol L and Series B common stock is traded
under the symbol LMC.B.
The Plan was a holder of record of the Stock on the Record Date.
The Plan established two temporary investment funds under a separate
trust called the ``Liberty Media Rights Trust'' (the Rights Trust). The
Rights Holding Fund is a separate fund established under the Rights
Trust to hold the Rights when they are issued. Rights were credited to
participants' accounts based on their respective balances in the
Liberty Media Common Stock Fund on October 31, 2002. The second fund,
the ``Liberty Media Receivable Fund'' (the Receivable Fund), following
the exercise of Rights as directed by the Plan participants, reflected
the approximate value of the Liberty Media Series A shares due from the
subscription agent.
With respect to Rights allocated to their accounts, Plan
participants either may elect to (1) exercise the Rights or (2) sell
the Rights. These elections apply to both Stock held in the
participant's account attributable to 401(k) contributions and to
matching contributions (including vested and unvested matching
contributions). Due to securities law restrictions, certain
Participants who are reporting persons under Rule 16(b) will not have
the right to instruct Fidelity to either Sell or Exercise the Rights
credited to their account. Liberty Media provided Fidelity with a list
of those Participants. Fidelity established the appropriate
restrictions to prevent these participants from exercising or selling
the Rights credited to their accounts. As provided by the Plan,
Fidelity sold the Rights credited to these Rule 16(b) participant
accounts as soon as administratively feasible after the receipt and
allocation of the Rights to the participant accounts.\1\
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\1\ The Rights issued to the Plan that were sold from the Plan
were sold to unrelated third parties on the open market. Those
Rights were traded on the New York Stock Exchange under the symbol
``LMC.RT''.
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4. With the exception of those reporting persons under Rule 16(b)
as described above, each participant in the Plan may elect to exercise
any percentage of the Rights granted on the participant's Stock
allocated to the participant's account in the Plan. Under the offering,
a participant of the Plan could elect to exercise a Right by speaking
to a Fidelity representative at any time prior to 4 p.m. Eastern Time,
November 25, 2002, (the Election Close-Out Date). Participants had the
opportunity prior to the Election Close-Out Date to revoke or change
instructions to exercise by (1) electing a new percentage; (2) by
placing an order to sell; or (3) a combination of both.
The dollar amount required to exercise the Rights were exchanged
from other investments in the participant's account into the Receivable
Fund established under the Rights Trust. The required dollar amount
equals the percentage of Rights to be exercised (as elected by the
participant) multiplied by the number of Rights credited to the
participant's account and multiplied by the exercise price for the
Rights offering. The dollar amount was exchanged from the other
investment categories in which the account is invested on a
proportional basis by source. The Liberty Media Stock Fund was not
included unless insufficient funds did not exist in the other
investment categories under the participant's account. For those
individuals with insufficient funds to permit exercise of the entire
elected amount, Fidelity exercised as many rights as the account
balance permitted.
On or about November 29, 2002, the Rights to be exercised and
necessary funds were submitted to the subscription agent for the
purchase of shares. Participant's balances in the Rights Holding Fund
were reduced by the number of Rights exercised on a participant's
behalf. Fidelity sold all remaining Rights on the open market between
November 29, 2002, and December 2, 2002, at which time the Rights
expired. Upon receipt of the new shares, the Receivable Fund was closed
and the newly received shares were transferred into the Liberty Media
Stock Fund and allocated to the participant's accounts.
For any Rights sold by the Plan, a commission of 3.4 cents per
Right was charged to the Plan account from which the Right was sold.
The commission was not paid to LMC but to the broker dealer, National
Financial Services (NFS) for the sale transaction. NFS is an affiliate
of Fidelity Management Trust Company, which serves as a non-
discretionary Trustee for the Plan. The discretionary fiduciary for the
Plan is the Plan Administrative Committee appointed by the Board of
Directors of LMC. The Administrative Committee determined, after
reasonable consideration of the alternatives, that the use of NFS was
in the best interests of the Plan.\2\
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\2\ The Department provides no opinion as to whether the
selection of the broker dealer meets the conditions set forth under
section 408(b)(2).
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Those participants who elected to exercise only a portion of their
Rights later could elect to exercise additional Rights if sufficient
time existed prior to the Election Close-Out Date. The Election Close-
Out Date was established to permit sufficient time for the Trustee to
liquidate the other assets in an orderly manner so that the necessary
cash would be available to exercise the Rights before the Rights
offering expiration date (December 2, 2002). All Rights were exercised
or sold prior to the end of the Rights offering period, no Rights held
by the Plan expired. A participant may have elected to sell rather than
exercise the Rights allocated to his or her account. In order to do so,
the participant was required to (1) contact the Fidelity
representative; and (2) specify the percentage (in whole amounts) of
the Rights he desired to sell. The selling period for participants ran
from November 8, 2002, through November 25, 2002.
Participants in the Plan will be in a like position with other
shareholders who are receiving the Rights with the sole exception that
the Plan participants were not entitled to participate in the
oversubscription privilege described in the prospectus. No expense will
be incurred by the Plan from the Rights offering, and full disclosure
of the Rights offering was made in the public documents filed with the
SEC. The Rights offering and the resulting transactions were in the
best interests of and beneficial to the Plan and its participants and
beneficiaries. The rights of the participants and beneficiaries of the
Plan were protected in the Rights offering and subsequent transactions.
All involved participants were notified in advance of the Rights
offering of the procedure for instructing the Trustee of the
participant's desires
[[Page 49304]]
for exercise or sale under the Rights offering, and all instructions
given by the involved participants to the Trustee were properly
executed.
All actions by the Trustee with respect to the Rights offering were
made pursuant to express instructions except when the involved
participant failed to act or acted in violation of the published
procedures, in which case the Rights were placed on the open market for
sale and any unsold rights were allowed to expire unexercised. These
instructions as to the disposition of the Rights upon the failure of
the involved participant to act or to give valid instructions were
fully disclosed in the procedural instructions given to the involved
participants. These instructions are consistent with the nature of
participant-directed investments under the Plan.
5. In summary, it is represented that the proposed transaction
meets the statutory criteria of section 408(a) of the Act because:
(a) The Rights were acquired pursuant to Plan provisions for
individually-directed investment of such accounts;
(b) The Plan's receipt of the Rights occurred in connection with
the Rights offering made available to all shareholders of common stock
of LMC;
(c) All decisions regarding the holding and disposition of the
Rights by the Plan were made, in accordance with the Plan provisions
for individually-directed investment of participant accounts, by the
individual Plan participants whose accounts in the Plan received the
Rights in connection with the offering;
(d) The Plan's acquisition of the Rights resulted from an
independent act of LMC as a corporate entity; and
(e) The Plan received the same proportionate number of the Rights
as other owners of the Stock.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the Employer and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department,
telephone (202) 219-8883 (this is not a toll-free number).
RBC Dain Rauscher, Inc. (RBC-DR)
Located in Minneapolis, Minnesota
[Application No. D-11189]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act, and section 4975 of the Code,
in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).
I. Transactions
A. Effective for transactions occurring on or after April 18, 2003,
the restrictions of section 406(a) and 407(a) of the Employee
Retirement Income Security Act of 1974, as amended (the Act), and the
taxes imposed by section 4975(a) and (b) of the Internal Revenue Code
of 1986, as amended (the Code), by reason of section 4975(c)(1)(A)
through (D) of the Code, shall not apply to the following transactions
involving Issuers and Securities evidencing interests therein:
(1) The direct or indirect sale, exchange or transfer of Securities
in the initial issuance of Securities between the Sponsor or
Underwriter and an employee benefit plan when the Sponsor, Servicer,
Trustee or Insurer of an Issuer, the Underwriter of the Securities
representing an interest in the Issuer, or an Obligor is a party in
interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of Securities
by a plan in the secondary market for such Securities; and
(3) The continued holding of Securities acquired by a plan pursuant
to subsection I.A.(1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 of the Act for the acquisition or holding of a Security on behalf
of an Excluded Plan, by any person who has discretionary authority or
renders investment advice with respect to the assets of that Excluded
Plan.\3\
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\3\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 of the Act for any person rendering investment
advice to an Excluded Plan within the meaning of section
3(21)(A)(ii) and regulation 29 CFR 2510.3-21(c).
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B. Effective for transactions occurring on or after April 18, 2003,
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 Securities
in the initial issuance of Securities between the Sponsor or
Underwriter and a plan when the person who has discretionary authority
or renders investment advice with respect to the investment of plan
assets in the Securities is (a) an obligor with respect to 5 percent or
less of the fair market value of obligations or receivables contained
in the Issuer, or (b) an affiliate or a person described in (a); if (i)
The plan is not an Excluded Plan;
(ii) Solely in the case of an acquisition of Securities in
connection with the initial issuance of the Securities, at least 50
percent of each class of Securities in which plans have invested is
acquired by persons independent of the members of the Restricted Group,
and at least 50 percent of the aggregate interest in the Issuer is
acquired by persons independent of the Restricted Group;
(iii) A plan's investment in each class of Securities does not
exceed 25 percent of all of the Securities of that class outstanding at
the time of the acquisition; and
(iv) Immediately after the acquisition of the Securities, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in Securities representing an interest in a Issuer containing
assets sold or serviced by the same entity.\4\ For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in an Issuer if it is merely a Subservicer of that
Issuer;
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\4\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of Securities
by a plan in the secondary market for such Securities, provided that
conditions set forth in paragraphs B.(1)(i), (iii) and (iv) are met;
and
(3) The continued holding of Securities acquired by a plan pursuant
to subsection I.B.(1) or (2).
C. Effective for transactions occurring on or after April 18, 2003,
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 an Issuer,
including the use of any Eligible Swap transaction; or the defeasance
of a mortgage obligation held as an asset of the Issuer through the
substitution of a new mortgage obligation in a commercial mortgage-
backed Designated Transaction, provided:
(1) Such transactions are carried out in accordance with the terms
of a binding Pooling and Servicing Agreement;
[[Page 49305]]
(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
Securities issued by the Issuer; \5\ and
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\5\ 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 Securities
were made in a registered public offering under the Securities Act
of 1933. In the Department's view, the private placement memorandum
must contain sufficient information to permit plan fiduciaries to
make informed investment decisions.
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(3) The defeasance of a mortgage obligation and the substitution of
a new mortgage obligation in a commercial mortgage-backed Designated
Transaction meet the terms and conditions for such defeasance and
substitution as are described in the prospectus or private placement
memorandum for such Securities, which terms and conditions have been
approved by a Rating Agency and does not result in the Securities
receiving a lower credit rating from the Rating Agency than the current
rating of the Securities.
Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by the Servicer of the Issuer from a person other than
the Trustee or Sponsor, unless such fee constitutes a ``Qualified
Administrative Fee.''
D. Effective for transactions occurring on or after April 18, 2003,
the restrictions of sections 406(a) and 407(a) of the Act, and the
taxes imposed by sections 4975(a) and (b) of the Code by reason of
sections 4975(c)(1)(A) through (D) of the Code shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of Securities.
II. General Conditions
A. The relief provided under section I is available only if the
following conditions are met:
(1) The acquisition of Securities by a plan is on terms (including
the Security 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 Securities are not
subordinated to the rights and interests evidenced by other Securities
of the same Issuer, unless the Securities are issued in a Designated
Transaction;
(3) The Securities acquired by the plan have received a rating from
Rating Agency at the time of such acquisition that is in one of the
three (or in the case of Designated Transactions, four) highest generic
rating categories.
(4) The Trustee is not an Affiliate of any member of the Restricted
Group, other than an Underwriter. For purposes of this requirement:
(a) The Trustee shall not be considered to be an Affiliate of a
Servicer solely because the Trustee has succeeded to the rights and
responsibilities of the Servicer pursuant to the terms of a Pooling and
Servicing Agreement providing for such succession upon the occurrence
of one or more events of default by the Servicer; and
(b) Subsection II.A.(4) will be deemed satisfied notwithstanding a
Servicer becoming an Affiliate of the Trustee as a result of a merger
or acquisition involving the Trustee, such Servicer and/or their
Affiliates which occurs after the initial issuance of the Securities
provided that:
(i) Such Servicer ceases to be an Affiliate of the Trustee no later
than six months after the date such Servicer became an Affiliate of the
Trustee; and
(ii) Such Servicer did not breach any of its obligations under the
Pooling and Servicing Agreement, unless such breach was immaterial and
timely cured in accordance with the terms of such agreement, during the
period from the closing date of such merger or acquisition transaction
through the date the Servicer ceased to be an Affiliate of the Trustee;
(5) The sum of all payments made to and retained by the
Underwriters in connection with the distribution or placement of
Securities represents not more than Reasonable Compensation for
underwriting or placing the Securities; the sum of all payments made to
and retained by the Sponsor pursuant to the assignment of obligations
(or interests therein) to the Issuer represents not more than the fair
market value of such obligations (or interests); and the sum of all
payments made to and retained by the Servicer represents not more than
Reasonable Compensation for the Servicer's services under the Pooling
and Servicing Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith;
(6) The plan investing in such Securities 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; and
(7) In the event that the obligations used to fund an Issuer have
not all been transferred to the Issuer on the Closing Date, additional
obligations as specified in subsection III.B.(1) may be transferred to
the Issuer during the Pre-Funding Period in exchange for amounts
credited to the Pre-Funding Account, provided that:
(a) The Pre-Funding Limit is not exceeded;
(b) All such additional obligations meet the same terms and
conditions for eligibility as the original obligations used to create
the Issuer (as described in the prospectus or private placement
memorandum and/or Pooling and Servicing Agreement for such Securities),
which terms and conditions have been approved by a Rating Agency.
Notwithstanding the foregoing, the terms and conditions for
determining the eligibility of an obligation may be changed if such
changes receive prior approval either by a majority vote of the
outstanding securityholders or by a Rating Agency;
(c) The transfer of such additional obligations to the Issuer
during the Pre-Funding Period does not result in the Securities
receiving a lower credit rating from a Rating Agency, upon termination
of the Pre-Funding Period than the rating that was obtained at the time
of the initial issuance of the Securities by the Issuer;
(d) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the Issuer at the
end of the Pre-Funding Period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the Issuer on the Closing Date;
(e) In order to ensure that the characteristics of the receivables
actually acquired during the Pre-Funding Period are substantially
similar to those which were acquired as of the Closing Date, the
characteristics of the additional obligations will either be monitored
by a credit support provider or other insurance provider which is
independent of the Sponsor or an independent accountant retained by the
Sponsor will provide the Sponsor with a letter (with copies provided to
the Rating Agency, the Underwriter and the Trustee) stating whether or
not the characteristics of the additional
[[Page 49306]]
obligations conform to the characteristics of such obligations
described in the prospectus, private placement memorandum and/or
Pooling and Servicing Agreement. In preparing such letter, the
independent accountant will use the same type of procedures as were
applicable to the obligations which were transferred on the Closing
Date;
(f) The Pre-Funding Period shall be described in the prospectus or
private placement memorandum provided to investing plans; and
(g) The Trustee of the Trust (or any agent with which the Trustee
contracts to provide Trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities, and liabilities as a
fiduciary under the Act. The Trustee, as the legal owner of the
obligations in the Trust or the holder of a security interest in the
obligations held by the Issuer, will enforce all the rights created in
favor of securityholders of such Issuer, including employee benefit
plans subject to the Act;
(8) In order to insure that the assets of the Issuer may not be
reached by creditors of the Sponsor in the event of bankruptcy or other
insolvency of the Sponsor:
(a) The legal documents establishing the Issuer will contain:
(i) Restrictions on the Issuer's ability to borrow money or issue
debt other than in connection with the securitization;
(ii) Restrictions on the Issuer merging with another entity,
reorganizing, liquidating or selling assets (other than in connection
with the securitization);
(iii) Restrictions limiting the authorized activities of the Issuer
to activities relating to the securitization;
(iv) If the Issuer is not a Trust, provisions for the election of
at least one independent director/partner/member whose affirmative
consent is required before a voluntary bankruptcy petition can be filed
by the Issuer; and
(v) If the Issuer is not a Trust, requirements that each
independent director/partner/member must be an individual that does not
have a significant interest in, or other relationships with, the
Sponsor or any of its Affiliates;
(b) The Pooling and Servicing Agreement and/or other agreements
establishing the contractual relationships between the parties to the
securitization transaction will contain covenants prohibiting all
parties thereto from filing an involuntary bankruptcy petition against
the Issuer or initiating any other form of insolvency proceeding until
after the Securities have been paid; and
(c) Prior to the issuance by the Issuer of any Securities, a legal
opinion is received which states that either:
(i) A ``true sale'' of the assets being transferred to the Issuer
by the Sponsor has occurred and that such transfer is not being made
pursuant to a financing of the assets by the Sponsor; or
(ii) In the event of insolvency or receivership of the Sponsor, the
assets transferred to the Issuer will not be part of the estate of the
Sponsor;
(9) If a particular class of Securities held by any plan involves a
Ratings Dependent or Non-Ratings Dependent Swap entered into by the
Issuer, then each particular swap transaction relating to such
Securities:
(a) Shall be an Eligible Swap;
(b) Shall be with an Eligible Swap Counterparty;
(c) In the case of a Ratings Dependent Swap, shall provide that if
the credit rating of the counterparty is withdrawn or reduced by any
Rating Agency below a level specified by the Rating Agency, the
Servicer (as agent for the Trustee) shall, within the period specified
under the Pooling and Servicing Agreement:
(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 class of
Securities will not be withdrawn or reduced.
In the event that the Servicer fails to meet its obligations under
this subsection II.A.(9)(c), plan securityholders will be notified in
the immediately following Trustee's periodic report which is provided
to securityholders, and sixty days after the receipt of such report,
the exemptive relief provided under section I.C. will prospectively
cease to be applicable to any class of Securities held by a plan which
involves such Ratings Dependent Swap; provided that in no event will
such plan securityholders be notified any later than the end of the
second month that begins after the date on which such failure occurs.
(d) In the case of a Non-Ratings Dependent Swap, shall provide
that, if the credit rating of the counterparty is withdrawn or reduced
below the lowest level specified in section III.GG., 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 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 Issuer to make any termination payments
to the counterparty (other than a currently scheduled payment under the
swap agreement) except from Excess Spread or other amounts that would
otherwise be payable to the Servicer or the Sponsor;
(10) Any class of Securities, to which one or more swap agreements
entered into by the Issuer applies, may be acquired or held in reliance
upon this Underwriter Exemption only by Qualified Plan Investors; and
(11) Prior to the issuance of any debt securities, a legal opinion
is received which states that the debt holders have a perfected
security interest in the Issuer's assets.
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 Securities, shall be denied the relief
provided under Part I, if the provision in subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
Securities, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of Securities, the Trustee obtains a representation
of 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 Securities) is required to obtain from its
transferee a representation regarding compliance with the Securities
Act of 1933, any such transferees will be required to make a written
representation regarding compliance with the condition set forth in
section II.A.(6).
III. Definitions
For purposes of this proposed exemption:
[[Page 49307]]
A. ``Security'' means:
(1) A pass-through certificate or trust certificate that represents
a beneficial ownership interest in the assets of an Issuer which is a
Trust and which entitles the holder to pass-through payments of
principal, interest, and/or other payments made with respect to the
assets of such Trust; or
(2) A Security which is denominated as a debt instrument that is
issued by and is an obligation of an Issuer; with respect to which the
Underwriter is either (i) the sole underwriter or the manager or co-
manager of the underwriting syndicate, or (ii) a selling or placement
agent.
B. ``Issuer'' means an investment pool, the corpus or assets of
which are held in trust (including a grantor or owner Trust) or whose
assets are held by a partnership, special purpose corporation or
limited liability company (which Issuer may be a Real Estate Mortgage
Investment Conduit (REMIC) or a Financial Asset Securitization
Investment Trust (FASIT) within the meaning of section 860D(a) or
section 860L, respectively, of the Code); and the corpus or assets of
which consist solely of:
(1)(a) Secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association); and/or
(b) Secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, Qualified Equipment Notes Secured by
Leases); and/or
(c) Obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and/or commercial real property (including obligations
secured by leasehold interests on residential or commercial real
property); and/or
(d) Obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or Qualified
Motor Vehicle Leases; and/or
(e) Guaranteed governmental mortgage pool certificates, as defined
in 29 CFR Sec. 2510.3-101(1)(2)\6\ and/or
---------------------------------------------------------------------------
\6\ In Advisory Opinion 99-05A (Feb. 22, 1999), the Department
expressed its view that mortgage pool certificates guaranteed and
issued by the Federal Agricultural Mortgage Corporation (``Farmer
Mac'') meet the definition of a guaranteed governmental mortgage
pool certificate as defined in 29 CFR 2510.3-101(i)(2).
---------------------------------------------------------------------------
(f) Fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this subsection B.(1);\7\
---------------------------------------------------------------------------
\7\ It is the Department's view that the definition of
``Issuer'' contained in section III.B. includes a two-tier structure
under which Securities issued by the first Issuer, which contains a
pool of receivables described above, are transferred to a second
Issuer which issues Securities that are sold to plans. However, the
Department is of the further view that, since the exemption
generally provides relief for the direct or indirect acquisition or
disposition of Securities that are not subordinated, no relief would
be available if the Securities held by the second Issuer were
subordinated to the rights and interests evidenced by other
Securities issued by the first Issuer, unless such Securities were
issued in a Designated Transaction.
---------------------------------------------------------------------------
Notwithstanding the foregoing, residential and home equity loan
receivables issued in Designated Transactions may be less than fully
secured, provided that (i) the rights and interests evidenced by the
Securities issued in such Designated Transactions are not subordinated
to the rights and interests evidenced by Securities of the same Issuer;
(ii) such Securities acquired by the plan have received a rating from a
Rating Agency at the time of such acquisition that is in one of the two
highest generic rating categories; and (iii) any obligation included in
the corpus or assets of the Issuer must be secured by collateral whose
fair market value on the Closing Date of the Designated Transaction is
at least equal to 80% of the sum of: (I) The outstanding principal
balance due under the obligation which is held by the Issuer and (II)
the outstanding principal balance(s) of any other obligation(s) of
higher priority (whether or not held by the Issuer) which are secured
by the same collateral.
(2) Property which had secured any of the obligations described in
subsection III.B.(1);
(3)(a) Undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to securityholders; and/or
(b) Cash or investments made therewith which are credited to an
account to provide payments to securityholders pursuant to any Eligible
Swap Agreement meeting the conditions of subsection I.A.(9) or pursuant
to any Eligible Yield Supplement Agreement, and/or
(c) Cash transferred to the Issuer on the Closing Date and
permitted investments made therewith which:
(i) Are credited to a Pre-Funding Account established to purchase
additional obligations with respect to which the conditions set forth
in clauses (a)-(g) of subsection II.A.(7) are met; and/or
(ii) Are credited to a Capitalized Interest Account; and
(iii) Are held by the Issuer for a period ending no later than the
first distribution date to securityholders occurring after the end of
the Pre-Funding Period.
For purposes of this clause (c) of subsection III.B.(3), the term
``permitted investments'' means investments which are either (i) Direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or
instrumentality thereof, provided that such obligations are backed by
the full faith and credit of the United States, or (ii) have been rated
(or the Obligor has been rated) in one of the three highest generic
rating categories by a Rating Agency; are described in the Pooling and
Servicing Agreement; and are permitted by the Rating Agency.
(4) Rights of the Trustee under the Pooling and Servicing
Agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship, Eligible Yield Supplement
Agreements, Eligible Swap Agreements meeting the conditions of
subsection II.A.(9) or other credit support arrangements with respect
to any obligations described in section III.B.(1).
Notwithstanding the foregoing, the term ``Issuer'' does not include
any investment pool unless: (i) The assets of the type described in
paragraphs (a)-(f) of subsection III.B.(1) which are contained in the
investment pool have been included in other investment pools, (ii)
Securities evidencing interests in such other investment pools have
been rated in one of the three (or in the case of Designated
Transactions, four) highest generic rating categories by a Rating
Agency for at least one year prior to the plan's acquisition of
Securities pursuant to this exemption, and (iii) Securities evidencing
interests in such other investment pools have been purchased by
investors other than plans for at least one year prior to the plan's
acquisition of Securities pursuant to this exemption.
C. ``Underwriter'' means.
(1) RBC-DR;
(2) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
such investment banking firm; and
(3) Any member of an underwriting syndicate or selling group of
which such firm or person described in subsections III.C.(1) or (2)
above is a manager or co-manager with respect to the Securities.
D. ``Sponsor'' means the entity that organizes an Issuer by
depositing
[[Page 49308]]
obligations therein in exchange for Securities.
E. ``Master Servicer'' means the entity that is a party to the
Pooling and Servicing Agreement relating to assets of the Issuer and is
fully responsible for servicing, directly or through Subservicers, the
assets of the Issuer.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the Master Servicer, services loans contained in the
Issuer, but is not a party to the Pooling and Servicing Agreement.
G. ``Servicer'' means any entity which services loans contained in
the Issuer, including the Master Servicer and any Subservicer.
H. ``Trust'' means an Issuer which is a trust (including an owner
trust, grantor trust or a REMIC or FASIT which is organized as a Trust.
I. ``Trustee'' means the trustee of any Trust which issues
Securities and also includes an Indenture Trustee. ``Indenture
Trustee'' means the Trustee appointed under the indenture pursuant to
which the subject Securities are issued, the rights of holders of the
Securities are set forth and a security interest in the Trust assets in
favor of the holders of the Securities is created. The Trustee or the
Indenture Trustee is also a party to or beneficiary of all the
documents and instruments transferred to the Trust, and as such, has
both the authority to, and the responsibility for, enforcing all the
rights created thereby in favor of holders of the Securities, including
those rights arising in the event of default by the servicer.
J. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, an Issuer. Notwithstanding the foregoing, a
person is not an Insurer solely because it holds securities
representing an interest in an Issuer which are of a class subordinated
to Securities representing an interest in the same Issuer.
K. ``Obligor'' means any person, other than the Insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the Issuer. Where an Issuer contains Qualified Motor
Vehicle Leases or Qualified Equipment Notes secured by Leases,
``Obligor'' shall also include any owner of property subject to any
Lease included in the Issuer, or subject to any Lease securing an
obligation included in the Issuer.
L. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
M. ``Restricted Group'' with respect to a class of Securities
means:
(1) Each Underwriter;
(2) Each Insurer;
(3) The Sponsor;
(4) The Trustee;
(5) Each Servicer;
(6) Any Obligor with respect to obligations or receivables included
in the Issuer constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the Issuer, determined
on the date of the initial issuance of Securities by the Issuer;
(7) Each counterparty in an Eligible Swap Agreement; or
(8) Any Affiliate of a person described in (1)-(7) above.
N. ``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.
O. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
P. 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 assets of such person.
Q. ``Sale'' includes the entrance into a Forward Delivery
Commitment, provided:
(1) The terms of the Forward Delivery Commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's-length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the Forward
Delivery Commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
R. ``Forward Delivery Commitment'' means a contact for the purchase
or sale of one or more Securities to be delivered at an agreed future
settlement date. The term includes both mandatory contracts (which
contemplate obligatory delivery and acceptance of the Securities) and
optional contracts (which give one party the right but not the
obligation to deliver Securities to, or demand delivery of Securities
from, the other party).
S. ``Reasonable Compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
T. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) The fee is triggered by an act or failure to act by the Obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) The Servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) The ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the Pooling and Servicing Agreement; and
(4) The amount paid to investors in the Issuer will not be reduced
by the amount of any such fee waived by the Servicer.
U. ``Qualified Equipment Note Secured by a Lease'' means an
equipment note:
(1) Which is secured by equipment which is leased;
(2) Which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) With respect to which the Issuer's security interest in the
equipment is at least as protective of the rights of the Issuer as
would be the case if the equipment note were secured only by the
equipment and not the lease.
V. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) The Issuer owns or holds a security interest in the lease;
(2) the Issuer owns or holds a security interest in the leased
motor vehicle; and
(3) the Issuer's security interest in the leased motor vehicle is
at least as protective of the Issuer's rights as the Issuer would
receive under a motor vehicle installment loan contract.
W. ``Pooling and Servicing Agreement'' means the agreement or
agreements among a Sponsor, a Servicer and the Trustee establishing a
Trust. ``Pooling and Servicing Agreement'' also includes the indenture
entered into by the Issuer and the Indenture Trustee.
X. ``Rating Agency'' means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch, Inc. or any successors thereto.
Y. ``Capitalized Interest Account'' means an Issuer account (i)
which is established to compensate securityholders for shortfalls, if
any, between investment earnings on the Pre-
[[Page 49309]]
Funding Account and the pass-through rate payable under the Securities;
and (ii) which meets the requirements of clause (c) of subsection
III.B.(3).
Z. ``Closing Date'' means the date the Issuer is formed, the
Securities are first issued and the Issuer's assets (other than those
additional obligations which are to be funded from the Pre-Funding
Account pursuant to subsection III.A.(7)) are transferred to the
Issuer.
AA. ``Pre-Funding Account'' means an Issuer account (i) which is
established to purchase additional obligations, which obligations meet
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and
(ii) which meets the requirements of clause (c) of subsection
III.B.(3).
BB. ``Pre-Funding Limit'' means a percentage or ratio of the amount
allocated to the Pre-Funding Account, as compared to the total
principal amount of the Securities being offered which is less than or
equal to 25 percent.
CC. ``Pre-Funding Period'' means the period commencing on the
Closing Date and ending no later than the earliest to occur of (i) the
date the amount on deposit in the Pre-Funding Account is less than the
minimum dollar amount specified in the Pooling and Servicing Agreement;
(ii) the date on which an event of default occurs under the Pooling and
Servicing Agreement; or (iii) the date which is the later of three
months or 90 days after the Closing Date.
DD. ``Designated Transaction'' means a securitization transaction
in which the assets of the Issuer consist of secured consumer
receivables, secured credit instruments or secured obligations that
bear interest or are purchased at a discount and are: (i) Motor
vehicle, home equity and/or manufactured housing consumer receivables;
and/or (ii) motor vehicle credit instruments in transactions by or
between business entities; and/or (iii) single-family residential,
multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are secured by single-family
residential, multi-family residential, commercial real property or
leasehold interests therein. For purposes of this section III.CC., the
collateral securing motor vehicle consumer receivables or motor vehicle
credit instruments may include motor vehicles and/or Qualified Motor
Vehicle Leases.
EE. ``Ratings Dependent Swap'' means an interest rate swap, or (if
purchased by or on behalf of the Issuer) an interest rate cap contract,
that is part of the structure of a class of Securities where the rating
assigned by the Rating Agency to any class of Securities held by any
plan is dependent on the terms and conditions of the swap and the
rating of the counterparty, and if such Security rating is not
dependent on the existence of the swap and rating of the 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 Securities must confirm, as of the date of issuance
of the Securities by the Issuer, that entering into an Eligible Swap
with such counterparty will not affect the rating of the Securities.
FF. ``Eligible Swap'' means a Ratings Dependent or Non-Ratings
Dependent Swap:
(1) Which is denominated in U.S. dollars;
(2) Pursuant to which the Issuer pays or receives, on or
immediately prior to the respective payment or distribution date for
the class of Securities to which the swap relates, a fixed rate of
interest, or a floating rate of interest based on a publicly available
index (e.g., the London Interbank Offered Rate (LIBOR) or the U.S.
Federal Reserve's Cost of Funds Index (COFI)), with the Issuer
receiving such payments on at least a quarterly basis and obligated to
make separate payments no more frequently than the counterparty, with
all simultaneous payments being netted;
(3) Which has a notional amount that does not exceed either: (i)
The principal balance of the class of Securities to which the swap
relates, or (ii) the portion of the principal balance of such class
represented solely by those types of corpus or assets of the Issuer
referred to in subsections III.B.(1), (2) and (3);
(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 subsection III.EE.(2), 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 either the earlier
of the date on which the Issuer terminates or the related class of
securities is fully repaid; and
(6) Which does not incorporate any provision which could cause a
unilateral alteration in any provision described in subsections
III.EE.(1) through (4) without the consent of the Trustee.
GG. ``Eligible Swap Counterparty'' means a bank or other financial
institution which has a rating, at the date of issuance of the
Securities by the Issuer, which is in one of the three highest long-
term credit rating categories, or one of the two highest short-term
credit rating categories, utilized by at least one of the Rating
Agencies rating the Securities; provided that, if a swap Counterparty
is relying on its short-term rating to establish eligibility under the
Underwriter Exemption, such swap Counterparty must either have a long-
term rating in one of the three highest long-term rating categories or
not have a long-term rating from the applicable Rating Agency, and
provided further that if the class of Securities with which the swap is
associated has a final maturity date of more than one year from the
date of issuance of the Securities, and such swap is a Ratings
Dependent Swap, the swap Counterparty is required by the terms of the
swap agreement to establish any collateralization or other arrangement
satisfactory to the Rating Agencies in the event of a ratings downgrade
of the swap Counterparty.
HH. ``Qualified Plan Investor'' means a plan investor or group of
plan investors on whose behalf the decision to purchase Securities 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 Issuer and the effect such swap would have upon the credit
ratings of the Securities. For purposes of the Underwriter Exemption,
such a fiduciary is either:
(1) A ``qualified professional asset manager'' (QPAM),\8\ as
defined under Part V(a) of PTE 84-14, 49 FR 9494, 9506 (March 13,
1984);
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
(2) An ``in-house asset manager'' (INHAM),\9\ as defined under part
IV(a) of PTE 96-23, 61 FR 15975, 15982 (April 10, 1996); or
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
(3) A plan fiduciary with total assets under management of at least
$100 million at the time of the acquisition of such Securities.
II. ``Excess Spread'' means, as of any day funds are distributed
from the Issuer, the amount by which the interest
[[Page 49310]]
allocated to Securities exceeds the amount necessary to pay interest to
securityholders, servicing fees and expenses.
JJ. ``Eligible Yield Supplement Agreement'' means any yield
supplement agreement, similar yield maintenance arrangement or, if
purchased by or on behalf of the Issuer, an interest rate cap contract
to supplement the interest rates otherwise payable on obligations
described in subsection III.B.(1). Such an agreement or arrangement may
involve a notional principal contract provided that:
(1) It is denominated in U.S. dollars;
(2) The Issuer receives on, or immediately prior to the respective
payment date for the Securities covered by such agreement or
arrangement, a fixed rate of interest or a floating rate of interest
based on a publicly available index (e.g., LIBOR or COFI), with the
Issuer receiving such payments on at least a quarterly basis;
(3) It is not ``leveraged'' as described in subsection III.EE.(4);
(4) It does not incorporate any provision which would cause a
unilateral alteration in any provision described in subsections
III.II.(1)-(3) without the consent of the Trustee;
(5) It is entered into by the Issuer with an Eligible Swap
Counterparty; and
(6) It has a notional amount that does not exceed either:
(i) The principal balance of the class of Securities to which such
agreement or arrangement relates, or (ii) the portion of the principal
balance of such class represented solely by those types of corpus or
assets of the Issuer referred to in subsections III.B.(1), (2) and (3).
The Department notes that this proposed exemption is included
within the meaning of the term ``Underwriter Exemption'' as it is
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions
Involving Insurance Company General Accounts at (see 60 FR 35932).
Effective Date: This exemption is effective for all transactions
described herein which occurred on or after April 18, 2003.
Summary of Facts and Representations
1. RBC-DR is a Minnesota corporation organized on December 29, 1981
and is a wholly-owned subsidiary of RBC Dain Rauscher Corporation which
is a wholly-owned subsidiary of Royal Bank of Canada. RBC-DR is a
registered broker-dealer, a registered investment adviser and a member
of the New York Stock Exchange, the National Association of Securities
Dealers, Inc., and other major securities exchanges, as well as the
Securities Investor Protection Corporation. RBC-DR engages in the
purchase and sale of securities for the account of its customers, which
include individual and institutional accounts. It also purchases and
sells securities for its own proprietary trading accounts and for the
accounts of its affiliates. RBC-DR engages in trading mortgage-related
and other securities, including pass-through certificates issued by the
Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC), callable agency debt, and collateralized mortgage
obligations for the account of its customers and for its own accounts.
RBC-DR similarly trades certificates of deposit issued by banks, the
deposits of which are insured by the Bank Insurance Fund. Through its
division ``RBC Capital Markets,'' RBC-DR also conducts similar
business.
RBC-DR maintains its principal office at 60 South Sixth Street,
Minneapolis, Minnesota 55402-4422. It maintains branch sales offices in
39 states and the District of Columbia.
2. RBC Mortgage Company (RBC Mortgage) is an Illinois corporation
organized on June 22, 1992 and is a wholly-owned subsidiary of Royal
Bank of Canada, the ultimate parent corporation to the RBC-DR. RBC
Mortgage, formerly known as Prism Mortgage Company, is engaged
primarily in the mortgage banking business, and originates, purchases,
sells and services prime mortgage loans, sub-prime mortgage loans and
home equity loans. It originates mortgage loans through a retail branch
system and through mortgage loan brokers and purchases loans originated
by correspondents nationwide. It also conducts this business through
its affiliated entities Lenders Mortgage Services, LLC (Illinois),
Mortgage Market Inc. (Oregon), and Pacific Guaranty Mortgage
Corporation (California). It sells substantially all loans that it
originates or purchases. In the calendar year ending 2001, RBC Mortgage
originated over $17 billion in loans. The principal executive offices
of RBC Mortgage are located at 440 North Orleans, Chicago, Illinois
60610. RBC Mortgage may participate as an issuer or servicer in
securitizations underwritten by RBC-DR or one of its Affiliates.
3. RBC Centura Bank (RBC Centura) is a state chartered banking
corporation organized under the laws of North Carolina on February 14,
1990. It is a wholly-owned subsidiary of Royal Bank of Canada. RBC
Centura offers financial services, including deposit accounts,
investments and mutual funds, financial advice, credit and debit cards,
business and personal loans, insurance, residential and commercial
mortgages. Its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC). RBC Centura offers personal and commercial
customers banking services through more than 240 banking centers
located in five Southeastern states. Through its division, RBC Builder
Finance (``RBC-BF''), headquartered in Houston, Texas, RBC Centura
engages in lending activity designed to fund single-family construction
loans, residential land acquisition and development loans, including
finished lot facilities, and participating debt loans. The RBC-BF
division targets professional, middle-market, residential homebuilders
and developers in major metropolitan markets throughout the United
States. Loan production offices are located in the District of Columbia
and 16 states, primarily in the South and West. RBC Centura (including
its division RBC-BF) may participate as an issuer, servicer or trustee
in securitizations underwritten by RBC-DR or one of its Affiliates.
4. Other Affiliates. For purposes of this application, the term
``Affiliate'' shall mean any U.S.-domiciled corporation, partnership,
or other business entity controlled by Royal Bank of Canada. The term
``Applicant'' herein shall be used to denote RBC-DR and its Affiliates.
5. RBC-DR seeks exemptive relief to permit plans to invest in pass-
through certificates representing undivided interests in the following
categories of trusts: (1) Single and multi-family residential or
commercial mortgage investment trusts;\10\ (2) motor vehicle receivable
investment trusts; (3) consumer or commercial receivables investment
trusts; and (4) guaranteed governmental mortgage pool certificate
investment trusts.\11\ For purposes of the
[[Page 49311]]
following discussion, the term ``trust'' includes partnerships, special
purpose corporations or limited liability companies. The term
``certificate'' includes a security which is either a pass-through
certificate or a security denominated as a debt security that is issued
by one of the above-enumerated entities.
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\10\ PTE 83-1 (48 F.R. 895, January 7, 1983), a class exemption
for mortgage pool investment trusts, would generally apply to trusts
containing single-family residential mortgages, provided that the
applicable conditions of PTE 83-1 are met. RBC-DR requests relief
for single-family residential mortgages in this exemption because it
would prefer one exemption for all trusts of similar structure, and
because the relief in PTE 83-1 is narrower than that in the
requested exemption. However, RBC-DR may still avail itself of the
exemptive relief provided by PTE 83-1.
\11\ Guaranteed governmental mortgage pool certificates are
mortgage-backed securities with respect to which interest and
principal payable is guaranteed by GNMA, FHLMC, or FNMA. The
Department's regulation relating to the definition of plan assets
(29 CFR 2510.3-101(i)) provides that where a plan acquires a
guaranteed governmental mortgage pool certificate, the plan's assets
include the certificate and all of its rights with respect to such
certificate under applicable law, but do not, solely by reason of
the plan's holding of such certificate, include any of the mortgages
underlying such certificate. The Applicant is requesting exemptive
relief for trusts containing guaranteed governmental mortgage pool
certificates because the certificates in such trusts may be plan
assets.
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Securitization transactions in which the assets of the
securitization vehicle reflect the following categories of receivables
(all of which are also described in more detail below) are referred to
herein as ``Designated Transactions'': (1) Automobile and other motor
vehicle loans, (2) residential and home equity loans (which may have
high loan-to value (HLTV) ratios in excess of 100%), (3) manufactured
housing loans and (4) commercial mortgages.
Trust Structure
6. Each trust is established under a pooling and servicing
agreement between a sponsor, a servicer and a trustee. Prior to the
closing date under the pooling and servicing agreement, the sponsor or
servicer of a trust establishes the trust, designates an entity as
trustee, and, except to the extent a pre-funding account, as described
below, will be used, selects assets to be included in the trust. The
assets are receivables, which may have been originated by a sponsor or
servicer of the trust, an affiliate of the sponsor or servicer, or by
an unrelated lender and subsequently acquired by the trust sponsor or
servicer.
Typically, on or prior to the closing date, the sponsor acquires
legal title to all assets selected for the trust. In some cases, legal
title to some or all of such assets continues to be held by the
originator of the receivable until the closing date. On the closing
date, the sponsor and/or the originator of the receivables conveys to
the trust legal title to the assets, and the trustee issues
certificates representing fractional undivided interests in the trust
assets. RBC-DR, alone or together with other broker-dealers, acts as
underwriter or placement agent with respect to the sale of the
certificates. RBC-DR currently anticipates that the public offerings of
certificates will be underwritten by it on a firm commitment basis. In
addition, RBC-DR anticipates that it may privately place certificates
on both a firm commitment and an agency basis. RBC-DR may also act as
the lead or co-managing underwriter for a syndicate of securities
underwriters.
Certificateholders will be entitled to receive monthly, quarterly
or semi-annual installments of principal and/or interest, or lease
payments due on the receivables, adjusted, in the case of payments of
interest, to a specified rate--the pass-through rate--which may be
fixed or variable.
When installments or payments are made on a semi-annual basis,
funds are not permitted to be commingled with the servicer's assets for
longer than would be permitted for a monthly-pay security. A segregated
account is established in the name of the trustee (on behalf of
certificateholders) to hold funds received between distribution dates.
The account is under the sole control of the trustee, who invests the
account's assets in short-term securities (i.e., permissible
investments), which have received a rating comparable to the rating
assigned to the certificates. In some cases, the servicer may be
permitted to make a single deposit into the account once a month. When
the servicer makes such monthly deposits, payments received from
obligors by the servicer may be commingled with the servicer's assets
during the month prior to deposit. Usually, the period of time between
receipt of funds by the servicer and deposit of these funds in a
segregated account does not exceed one month.
Furthermore, in those cases where distributions are made
semiannually, the servicer will furnish a report on the operation of
the trust to the trustee on a monthly basis. At or about the time this
report is delivered to the trustee, it will be made available to
certificateholders and delivered to, or made available to, each rating
agency that has rated the certificates.
The trust may elect to be treated as a real estate mortgage
investment conduit (``REMIC'') or a financial asset securitization
investment trust (``FASIT''), or may be treated as a grantor trust or a
partnership, for federal income tax purposes.
7. Some of the certificates will be multi-class certificates. RBC-
DR requests exemptive relief for two types of multi-class certificates:
``strip'' certificates and ``senior/subordinate'' (also sometimes
referred to as ``fast pay/slow pay'') certificates. Strip certificates
are a type of security in which the stream of interest payments on
receivables is split from the flow of principal payments and separate
classes of certificates are established, each representing rights to
disproportionate payments of principal and interest.\12\
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\12\ When a plan invests in REMIC ``residual'' interest
certificates to which this exemption applies, some of the income
received by the plan as a result of such investment may be
considered unrelated business taxable income to the plan, which is
subject to federal income tax under the Code. The prudence
requirement of section 404(a)(1)(B) of the Act would require plan
fiduciaries to carefully consider this and other tax consequences
prior to causing plan assets to be invested in certificates pursuant
to this exemption.
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``Senior/subordinate'' certificates involve the issuance of classes
of certificates having different stated maturities or the same
maturities with different payment schedules. Interest and/or principal
payments received on the underlying receivables are distributed first
to the class of certificates having the earliest stated maturity of
principal, and/or earlier payment schedule, and only when that class of
certificates has been paid in full (or has received a specified amount)
will distributions be made with respect to the second class of
certificates. Distributions on certificates having later stated
maturities will proceed in like manner until all the certificateholders
have been paid in full. The only difference between this multi-class
pass-through arrangement and a single-class pass-through arrangement is
the order in which distributions are made to certificateholders. In
each case, certificateholders will have a beneficial ownership interest
in the underlying assets. Except as permitted in a Designated
Transaction, the rights of a plan purchasing a certificate will not be
subordinated to the rights of another certificateholder in the event of
default on any of the underlying obligations. In particular, unless the
certificates are issued in a Designated Transaction, if the amount
available for distribution to certificateholders is less than the
amount required to be so distributed, all senior certificateholders
then entitled to receive distributions will share in the amount
distributed on a pro rata basis.\13\
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\13\ If a trust issues subordinated certificates, holders of
such subordinated certificates may not share in the amount
distributed on a pro rata basis with the senior certificateholders.
The Department notes that the proposed exemption does not provide
relief for plan investments in such subordinated certificates,
unless such certificates are issued in a Designated Transaction.
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8. For tax reasons, the trust will be maintained as an essentially
passive entity. Therefore, both the sponsor's discretion and the
servicer's discretion with respect to assets included in a trust are
severely limited. Pooling and servicing agreements provide for the
substitution of receivables by the sponsor only in the event of defects
in documentation discovered within a
[[Page 49312]]
short time after the issuance of investor certificates (within 120
days, except in the case of obligations having an original term of 30
years, in which case the period will not exceed two years). Any
receivable so substituted is required to have characteristics
substantially similar to the replaced receivable and will be at least
as creditworthy as the replaced receivable.
In some cases, the affected receivable would be repurchased, with
the purchase price applied as a payment on the affected receivable and
passed-through to certificateholders.
Interest Rate Swaps
9. RBC-DR requests relief for both ratings dependent and non-
ratings dependent swaps as described in Prohibited Transaction
Exemption 2000-58 (65 FR 67765, November 13, 2000) (PTE 2000-58),
subject to the same terms and conditions regarding interest rate swaps
contained in that exemption.
Conditions to Interest Rate Swaps
10. Any class of certificates to which one or more swap agreements
entered into by the trust applies will be acquired or held only by
qualified plan investors. Qualified plan investors will be plan
investors represented by an appropriate independent fiduciary that is
qualified to analyze and understand the terms and conditions of any
swap transaction relating to the class of certificates to be purchased
and the effect such swap would have upon the credit rating of the
certificates to which the swap relates.
Yield Supplement Agreements
11. A yield supplement agreement is a contract under which the
trust makes a single cash payment to the contract provider in return
for the contract provider promising to make certain payments to the
trust in the event of market fluctuations in interest rates. For
example, if a class of certificates promises an interest rate which is
the greater of 7% per annum or LIBOR and LIBOR increases significantly,
the yield supplement agreement might obligate the contract provider to
pay to the trust the excess of LIBOR over 7% per annum. In some
circumstances, the contract provider's obligation may be capped at a
certain aggregate maximum dollar liability under the contract.
Alternatively, a cap could be placed on the supplemental interest that
would be paid to a securityholder from monies paid under the yield
supplement agreement. For example, the yield supplement agreement would
provide the difference between LIBOR and 7% but only to the extent that
the securityholder would be paid a total of 9% per annum. The interest
to be paid by the contract provider to the trust under the yield
supplement agreement is usually calculated based on a notional
principal balance which may mirror the principal balances of those
classes of certificates to which the yield supplement agreement relates
or some other fixed amount. This notional amount will not exceed
either: (i) The principal balance of the class of certificates to which
such agreement or arrangement relates, or (ii) the portion of the
principal balance of such class represented solely by those types of
corpus or assets of the trust referred to in subsections III.B. (1),
(2) and (3) of the proposed exemption. In all cases, the trust makes no
payments other than the fixed purchase price for the yield supplement
agreement and may, therefore, be distinguished from an interest rate
swap agreement, notwithstanding that both types of agreements may use
an International Swaps and Derivatives Association, Inc. (``ISDA'')
form of contract.
The Applicant notes that no ``plan assets'' within the meaning of
the plan asset regulation (under 29 CFR 2510-3-101) are utilized in the
purchase of the yield supplement agreement, as the sponsor or some
other third party funds such arrangement with an up-front single-sum
payment. The trust's only obligation is to receive payments from the
counterparty if interest rate fluctuations require them under the terms
of the contract and to pass them through to securityholders. The rating
agencies examine the creditworthiness of the counterparty in a ratings
dependent yield supplement agreement. The Applicant suggests that the
relief for yield supplement agreements should be subject to the same
conditions as for interest rate swaps, to the extent relevant. These
conditions would include that the yield supplement agreement must be
denominated in U.S. dollars, the agreement must not be leveraged, any
changes in these conditions must be subject to the consent of the
trustee, and the counterparty must be subject to the same eligibility
requirements as an interest rate swap counterparty.
Pre-Funding Accounts
12. Although many transactions occur as described above, it is also
common for other transactions to be structured using a pre-funding
account and/or a capitalized interest account as described below.
The pre-funding period for any trust will be defined as the period
beginning on the closing date and ending on the earliest to occur of
(i) The date on which the amount on deposit in the pre-funding account
is less than a specified dollar amount, (ii) the date on which an event
of default occurs under the related pooling and servicing agreement
\14\ or (iii) the date which is the later of three months or ninety
days after the closing date. If pre-funding is used, the sponsor or
originator will transfer to the trust on the closing date cash
sufficient to purchase the receivables to be transferred after the
closing date. During the pre-funding period, such cash and temporary
investments, if any, made therewith will be held in a pre-funding
account and used to purchase the additional receivables, the
characteristics of which will be substantially similar to the
characteristics of the receivables transferred to the trust on the
closing date. Certain specificity and monitoring requirements must be
met and will be disclosed in the pooling and servicing agreement and/or
the prospectus \15\ or private placement memorandum.\16\
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\14\ The minimum dollar amount is generally the dollar amount
below which it becomes too uneconomical to administer the pre-
funding account. An event of default under the pooling and servicing
agreement generally occurs when: (i) A breach of a covenant or a
breach of a representation and warranty concerning the sponsor, the
servicer, or certain other parties occurs which is not cured; (ii) a
required payment to certificateholders is not made; or (iii) the
servicer becomes insolvent.
\15\ References to the term ``prospectus'' herein shall include
any prospectus supplement related thereto, pursuant to which
certificates are offered to investors.
\16\ See the Proposal to PTE 2000-58 (August 23, 2000, 65 FR
51454, at page 51463) for a fuller explanation of pre-funding
accounts.
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Capitalized Interest Accounts
13. When a pre-funding account is used, the sponsor and/or
originator may also transfer to the trust additional cash on the
closing date, to be deposited in a capitalized interest account and
used during the pre-funding period to compensate the certificateholders
for any shortfall between the investment earnings on the pre-funding
account and the pass-through interest rate payable under the
certificates.
Because the certificates are supported by the receivables in the
trust and the earnings on the pre-funding account, the capitalized
interest account is needed when the investment earnings on the pre-
funding account and the interest paid on the receivables are less than
the interest payable on the certificates. The capitalized interest
account funds are paid out periodically to the certificateholders as
needed on distribution dates to support the pass-through rate. In
addition, a portion of such funds may be returned to the
[[Page 49313]]
sponsor from time to time as the receivables are transferred into the
trust and the need for the capitalized interest account diminishes. Any
amounts held in the capitalized interest account generally will be
returned to the sponsor and/or originator either at the end of the pre-
funding period or periodically as receivables are transferred and the
proportionate amount of funds in the capitalized interest account can
be reduced. Generally, the capitalized interest account terminates no
later than the end of the pre-funding period. However, there may be
some cases where the capitalized interest account remains open until
the first date distributions are made to certificateholders following
the end of the pre-funding period.
In other transactions, a capitalized interest account is not
necessary because the interest paid on the receivables exceeds the
interest payable on the certificates at the applicable interest rate
and the fees payable by the issuer. Such excess is sufficient to make
up any shortfall resulting from the pre-funding account earning less
than the interest rate payable on the certificates. In certain of these
transactions, this occurs because the aggregate principal amount of
receivables exceeds the aggregate principal amount of certificates.
Pre-Funding Account and Capitalized Interest Account Payments and
Investments
14. Pending the acquisition of additional receivables during the
pre-funding period, it is expected that amounts in the pre-funding
account and the capitalized interest account will be invested in
certain permitted investments or will be held uninvested. Pursuant to
the pooling and servicing agreement, all permitted investments must
mature prior to the date the actual funds are needed. The permitted
types of investments in the pre-funding account and capitalized
interest account are investments which 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 obligations are backed by
the full faith and credit of the United States or (ii) have been rated
(or the obligor has been rated) in one of the three highest generic
rating categories (or four, in the case of Designated Transactions) by
a rating agency, as set forth in the pooling and servicing agreement
and as required by the rating agencies. The credit grade quality of the
permitted investments is generally no lower than that of the
certificates. The types of permitted investments will be described in
the pooling and servicing agreement.
The ordering of interest payments to be made from the pre-funding
and capitalized interest accounts is pre-established and set forth in
the pooling and servicing agreement. The only principal payments which
will be made from the pre-funding account are those made to acquire the
receivables during the pre-funding period and those distributed to the
certificateholders in the event that the entire amount in the pre-
funding account is not used to acquire receivables. The only principal
payments which will be made from the capitalized interest account are
those made to certificateholders if necessary to support the
certificate pass-through rate or those made to the sponsor either
periodically as they are no longer needed or at the end of the pre-
funding period when the capitalized interest account is no longer
necessary.
The Characteristics of the Receivables Transferred During the Pre-
Funding Period
15. In order to ensure that there is sufficient specificity as to
the representations and warranties of the sponsor regarding the
characteristics of the receivables to be transferred after the closing
date:
(i) The pre-funding limit will not be exceeded;
(ii) All such receivables will meet the same terms and conditions
for eligibility as those of the original receivables used to create the
trust corpus (as described in the prospectus or private placement
memorandum and/or pooling and servicing agreement for such
certificates), which terms and conditions have been approved by a
rating agency. However, the terms and conditions for determining the
eligibility of a receivable may be changed if such changes receive
prior approval either by a majority vote of the outstanding
certificateholders or by a rating agency; \17\
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\17\ In some transactions, the insurer and/or credit support
provider may have the right to veto the inclusion of receivables,
even if such receivables otherwise satisfy the underwriting
criteria. This right usually takes the form of a requirement that
the sponsor obtain the consent of these parties before the
receivables can be included in the trust. The insurer and/or credit
support provider may, therefore, reject certain receivables or
require that the sponsor establish certain trust reserve accounts as
a condition of including these receivables. Virtually all trusts
which have insurers or other credit support providers are structured
to give such veto rights to these parties. The percentage of trusts
that have insurers and/or credit support providers, and accordingly
feature such veto rights, varies.
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(iii) The transfer to the trust of the receivables acquired during
the pre-funding period will not result in the certificates receiving a
lower credit rating from the rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the
initial issuance of the certificates by the trust;
(iv) The weighted average annual percentage interest rate (the
average interest rate) for all of the obligations in the trust at the
end of the pre-funding period will not be more than 100 basis points
lower than the average interest rate for the obligations which were
transferred to the trust on the closing date; and
(v) The trustee of the trust (or any agent with which the trustee
contracts to provide trust services) will be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities, and liabilities as a
fiduciary under ERISA. The trustee, as the legal owner of the
obligations in the trust, will enforce all the rights created in favor
of certificateholders of such trust, including employee benefit plans
subject to ERISA.
In order to ensure that the characteristics of the receivables
actually acquired during the pre-funding period are substantially
similar to receivables that were acquired as of the closing date, the
characteristics of the additional obligations subsequently acquired
will either be monitored by a credit support provider or other
insurance provider which is independent of the sponsor or an
independent accountant retained by the sponsor will provide the sponsor
with a letter (with copies provided to the rating agency, the
underwriter and the trustees) stating whether or not the
characteristics of the additional obligations acquired after the
closing date conform to the characteristics of such obligations
described in the prospectus, private placement memorandum and/or
pooling and servicing agreement. In preparing such letter, the
independent accountant will use the same type of procedures as were
applicable to the obligations which were transferred as of the closing
date.
Each prospectus, private placement memorandum and/or pooling and
servicing agreement will set forth the terms and conditions for
eligibility of the receivables to be included in the trust as of the
related closing date, as well as those to be acquired during the pre-
funding period, which terms and conditions will have been agreed to by
the rating agencies which are rating the applicable certificates as of
the closing date. Also included among these conditions is the
requirement that the
[[Page 49314]]
trustee be given prior notice of the receivables to be transferred,
along with such information concerning those receivables as may be
requested. Each prospectus or private placement memorandum will
describe the amount to be deposited in, and the mechanics of, the pre-
funding account and will describe the pre-funding period for the trust.
Parties to Transactions
16. The originator of a receivable is the entity that initially
lends money to a borrower (obligor), such as a homeowner or automobile
purchaser, or leases property to a lessee. The originator may either
retain a receivable in its portfolio or sell it to a purchaser, such as
a trust sponsor. Originators of receivables included in the trusts will
be entities that originate receivables in the ordinary course of their
business, including finance companies for whom such origination
constitutes the bulk of their operations, financial institutions for
whom such origination constitutes a substantial part of their
operations, and any kind of manufacturer, merchant, or service
enterprise for whom such origination is an incidental part of its
operations. The originator of the receivables may also function as the
trust sponsor or servicer. Each trust may contain assets of one or more
originators.
17. The sponsor will be one of three entities: (i) A special-
purpose or other corporation unaffiliated with the servicer, (ii) a
special-purpose or other corporation affiliated with the servicer, or
(iii) the servicer itself. Where the sponsor is not also the servicer,
the sponsor's role will generally be limited to acquiring the
receivables to be included in the trust, establishing the trust,
designating the trustee, and assigning the receivables to the trust.
18. The trustee of a trust (or the issuer if it is not a trust) is
the legal owner of the obligations in the trust and would hold a
security interest in the collateral securing such obligations. The
trustee is also a party to or beneficiary of all the documents and
instruments deposited in the trust, and as such is responsible for
enforcing all the rights created thereby in favor of
certificateholders. The trustee generally will be an independent
entity, although that the trustee may be related to the Applicant.\18\
The Applicant represents that the trustee will be a substantial
financial institution or trust company experienced in trust activities.
The trustee receives a fee for its services, which will be paid from
cash flows in the trust. The method of compensating the trustee, which
is specified in the pooling and servicing agreement, will be disclosed
in the prospectus or private placement memorandum relating to the
offering of the certificates.
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\18\ See Prohibited Transaction Exemption 2002-41 (67 FR 54487,
August 22, 2002), an amendment to the prior individual exemptions
granted for mortgage-backed and other asset-backed securities (the
Underwriter Exemptions), which permits the trustee of the trust to
be an affiliate of the underwriter of the certificates.
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The rights and obligations of the indenture trustee are no
different than those of the trustee of an issuer which is a trust. The
indenture trustee is obligated to oversee and administer the activities
of all of the ongoing parties to the transaction and possesses the
authority to replace those entities, sue them, liquidate the collateral
and perform all necessary acts to protect the interests of the debt
holders. If debt is issued in a transaction, there may not be a pooling
and servicing agreement. Instead, there is a sales agreement and
servicing agreement (or these two agreements are sometimes combined
into a single agreement). The agreement(s) set(s) forth, among other
things, the duties and responsibilities of the parties to the
transaction relating to the administration of the Issuer. The indenture
trustee is often a party to these agreements. At a minimum, the
indenture trustee acknowledges its rights and responsibilities in these
agreements or they are contractually set forth in the indenture
agreement pursuant to which the indenture trustee is appointed.
19. The servicer of a trust administers the receivables on behalf
of the certificateholders. The servicer's functions typically involve,
among other things, notifying borrowers of amounts due on receivables,
maintaining records of payments received on receivables and instituting
foreclosure or similar proceedings in the event of default. In cases
where a pool of receivables has been purchased from a number of
different originators and deposited in a trust, the receivables may be
``subserviced'' by their respective originators and a single entity may
``master service'' the pool of receivables on behalf of the owners of
the related series of certificates. Where this arrangement is adopted,
a receivable continues to be serviced from the perspective of the
borrower by the local subservicer, while the investor's perspective is
that the entire pool of receivables is serviced by a single, central
master servicer who collects payments from the local subservicers and
passes them through to certificateholders.
A servicer's default is treated in the same manner whether or not
the issuer is a trust. The original servicer can be replaced, and the
entity replacing the servicer varies from transaction to transaction.
In certain cases, it may be the trustee (or indenture trustee if the
issuer is not a trust) or it may be a third party satisfactory to the
rating agencies and/or credit support provider. In addition, there are
transactions where the trustee or indenture trustee will assume the
servicer's responsibilities on a temporary basis until the permanent
replacement takes over. In all cases, the replacement entity must be
capable of satisfying all of the duties and responsibilities of the
original servicer and must be an entity that is satisfactory to the
rating agencies.
If, after the initial issuance of certificates, a servicer of
receivables held by a trust which has issued certificates in reliance
upon the Underwriter Exemptions (or an affiliate thereof) merges with
or is acquired by (or acquires) the trustee of such trust (or an
affiliate thereof), and thereby becomes an affiliate of the trustee,
the requirement that the trustee not be an affiliate of the restricted
group (other than the underwriter) will not be violated, provided that:
(i) Such servicer ceases to be an affiliate of the trustee no later
than six months after the date such servicer became an affiliate of the
trustee; and (ii) such servicer did not breach any of its obligations
under the pooling and servicing agreement, unless such breach was
immaterial and timely cured in accordance with the terms of such
agreement, during the period from the closing date of such merger or
acquisition transaction through the date the servicer ceased to be an
affiliate of the trustee.
20. The underwriter will be a registered broker-dealer that acts as
underwriter or placement agent with respect to the sale of the
certificates. Public offerings of certificates are generally made on a
firm commitment basis. Private placements of certificates may be made
on a firm commitment or agency basis. It is anticipated that the lead
and co-managing underwriters will make a market in certificates offered
to the public.
In most cases, the originator and servicer of receivables to be
included in a trust and the sponsor of the trust (although they may
themselves be related) will be unrelated to RBC-DR. In other cases,
however, affiliates of RBC-DR may originate or service receivables
included in a trust or may sponsor a trust.
[[Page 49315]]
Certificate Price, Interest Rate and Fees
21. As compensation for the receivables transferred to the trust,
the sponsor receives certificates representing the entire beneficial
interest in the trust, or the cash proceeds of the sale of such
certificates. If the sponsor receives certificates from the trust, the
sponsor sells all or a portion of these certificates for cash to
investors or securities underwriters.
22. The price of the certificates, both in the initial offering and
in the secondary market, is affected by market forces, including
investor demand, the specified interest rate on the certificates in
relation to the rate payable on investments of similar types and
quality, expectations as to the effect on yield resulting from
prepayment of underlying receivables, and expectations as to the
likelihood of timely payment.
The interest rate for certificates is typically equal to the
interest rate on receivables included in the trust minus a specified
servicing fee.\19\ This rate is generally determined by the same market
forces that determine the price of a certificate. The price of a
certificate and its interest, or coupon, rate together determine the
yield to investors. If an investor purchases a certificate at less than
par, that discount augments the stated interest rate; conversely, a
certificate purchased at a premium yields less than the stated coupon.
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\19\ The interest rate on certificates representing interests in
trusts holding leases is determined by breaking down lease payments
into ``principal'' and ``interest'' components based on an implicit
interest rate. Certificates issued by trusts that are classified as
REMICs for federal income tax purposes may use different formulas
for setting the specified interest rate with respect to
certificates.
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23. As compensation for performing its servicing duties, the
servicer (who may also be the sponsor or an affiliate thereof, and
receive fees for acting in that capacity) will retain the difference
between payments received on the receivables in the trust and payments
payable (at the interest rate) to certificateholders, except that in
some cases a portion of the payments on receivables may be paid to a
third party, such as a fee paid to a provider of credit support. The
servicer may receive additional compensation by having the use of the
amounts paid on the receivables between the time they are received by
the servicer and the time they are due to the trust (which time is set
forth in the pooling and servicing agreement). The servicer typically
will be required to pay the administrative expenses of servicing the
trust, including in some cases the trustee's fee, out of its servicing
compensation.
The servicer is also compensated to the extent it may provide
credit enhancement to the trust or otherwise arrange to obtain credit
support from another party. This ``credit support fee'' may be
aggregated with other servicing fees, and is either paid out of the
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is
established.
24. The servicer may be entitled to retain certain administrative
fees paid by a third party, usually the obligor. These administrative
fees fall into three categories: (a) Prepayment fees; (b) late payment
and payment extension fees; and (c) expenses, fees and charges
associated with foreclosure or repossession, or other conversion of a
secured position into cash proceeds, upon default of an obligation.
Compensation payable to the servicer will be set forth or referred
to in the pooling and servicing agreement and described in reasonable
detail in the prospectus or private placement memorandum relating to
the certificates.
25. Payments on receivables may be made by obligors to the servicer
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and
servicing agreement may permit the servicer to place these payments in
non-interest bearing accounts maintained with itself or to commingle
such payments with its own funds prior to the distribution dates. In
these cases, the servicer would be entitled to the benefit derived from
the use of the funds between the date of payment on a receivable and
the pass-through date. Commingled payments may not be protected from
the creditors of the servicer in the event of the servicer's bankruptcy
or receivership. In those instances when payments on receivables are
held in non-interest bearing accounts or are commingled with the
servicer's own funds, the servicer is required to deposit these
payments by a date specified in the pooling and servicing agreement
into an account from which the trustee makes payments to
certificateholders.
26. The underwriter will receive a fee in connection with the
securities underwriting or private placement of certificates. In a firm
commitment underwriting, this fee would consist of the difference
between what the underwriter receives for the certificates that it
distributes and what it pays the sponsor for those certificates. In a
private placement, the fee normally takes the form of an agency
commission paid by the sponsor. In a best efforts underwriting in which
the underwriter would sell certificates in a public offering on an
agency basis, the underwriter would receive an agency commission rather
than a fee based on the difference between the price at which the
certificates are sold to the public and what it pays the sponsor. In
some private placements, the underwriter may buy certificates as
principal, in which case its compensation would be the difference
between what it receives for the certificates that it sells and what it
pays the sponsor for these certificates.
Certificate Ratings
27. The certificates for which exemptive relief is requested will
have received one of the three highest ratings (four, in the case of
Designated Transactions) available from the rating agency. Insurance or
other credit support (such as surety bonds, letters of credit,
guarantees, or overcollateralization) will be obtained by the trust
sponsor to the extent necessary for the certificates to attain the
desired rating. The amount of this credit support is set by the rating
agencies at a level that is a multiple of the worst historical net
credit loss experience for the type of obligations included in the
issuing trust.
Subordination
28. The market has now evolved to the point where asset-backed
securities/mortgage-backed securities (``ABS/MBS'') offerings typically
include multiple tranches of senior and subordinated investment-grade
securities. The Applicant believes that rating agencies can rate
subordinated classes of securities with a high level of expertise,
thereby ensuring the safety of these investments for plans through the
use of other credit support (including increased levels of non-
investment-grade securities). The subordination of a security, while
factored into the evaluation made by the rating agencies in their
assessment of credit risk, is not indicative of whether a security is
more or less safe for investors. In fact, there are ``AAA'' rated
subordinated securities.\20\ Subordination is simply another form of
credit support. The rating agencies, after determining the level of
credit support required to achieve a given rating level, are
essentially indifferent as to how these credit support requirements are
implemented-- whether through
[[Page 49316]]
subordination or other means. If subordination is used, however, the
subordinated class will have no greater credit risks or fewer legal
protections in comparison with other credit-supported classes that
possesses the same rating.
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\20\ For example, a transaction may have two classes of ``AAA''
rated securities and one is subordinated to the other. The
subordinated class would be required to have more credit support to
qualify for the ``AAA'' rating than the more senior ``AAA'' rated
class.
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There is much benefit to plan investors in having subordinated
securities eligible for exemptive relief. First, credit support
provided through third-party credit providers is more expensive than an
equal amount of credit support provided through subordination. As a
result, the ability to use subordinated tranches to provide credit
support for the more senior classes (which may or may not themselves be
subordinated) creates economic savings for all the parties to the
transaction which, in turn, can allow greater returns to investors. In
addition, if the credit rating of a third-party credit support provider
is downgraded, the rating of the securities is also downgraded. Second,
the yields available on subordinated securities are often higher than
those paid on comparably rated non-subordinated securities because
investors expect to receive higher returns for subordinated securities.
Third, subordinated securities are usually paid after other more senior
securities, which results in their having longer terms to maturity.
This is appealing to many investors who are looking for medium-term
fixed income investments to diversify their portfolios. The combination
of these factors benefits investors by making available securities
which can provide higher yields for longer periods. It should be noted
that as the rating of a security generally addresses the probability of
all interest being timely paid and all principal being paid by maturity
under various stress scenarios, the rating agencies are particularly
concerned with the ability of the pool to generate sufficient cash flow
to pay all amounts due on subordinated tranches, and several features
of the credit support mechanisms discussed below are designed to
protect subordinated classes of securities.
Types of Credit Support
29. Credit support consists of two general varieties: external
credit support and internal credit support. The Applicant notes that
the choice of the type of credit support depends on many factors.
Internal credit support which is generated by the operation of the
Issuer is preferred because it is less expensive than external credit
support which must be purchased from outside third parties. In
addition, there is a limited number of appropriately rated third-party
credit support providers available. Further, certain types of credit
support are not relevant to certain asset types. For example, there is
generally little or no excess spread available in residential or CMBS
transactions because the interest rates on the obligations being
securitized are relatively low. Third, the ratings agencies may require
certain types of credit support in a particular transaction. In this
regard, the selection of the types and amounts of the various kinds of
credit support for any given transaction are usually a product of
negotiations between the underwriter of the securities and the ratings
agencies. For example, the underwriter might propose using excess
spread and subordination as the types of credit support for a
particular transaction and the rating agency might require cash reserve
accounts funded up front by the sponsor, excess spread and a smaller
sized subordinated tranche than that proposed by the underwriter. In
addition, market forces can affect the types of credit support. For
example, there may not be a market for subordinated tranches because
the transaction cannot generate sufficient cash flow to pay a high
enough interest rate to compensate investors for the subordination
feature, or the market may demand an insurance wrap on a class of
securities before it will purchase certain classes of securities. All
of these considerations interact to dictate which particular
combination of credit support will be used in a particular transaction.
External Credit Support
30. In the case of external credit support, credit enhancement for
principal and interest repayments is provided by a third party so that
if required collections on the pooled receivables fall short due to
greater than anticipated delinquencies or losses, the credit
enhancement provider will pay the securityholders the shortfall.
Examples of such external credit support features include: insurance
policies from ``AAA'' rated monoline \21\ insurance companies (referred
to as ``wrapped'' transactions), corporate guarantees, letters of
credit and cash collateral accounts. In the case of wrapped or other
credit supported transactions, the Insurer or other credit provider
will usually take a lead role in negotiating with the sponsor
concerning levels of overcollateralization and selection of receivables
for inclusion into the pool as it is the Insurer or credit provider
that will bear the ultimate risk of loss.
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\21\ The term ``monoline'' is used to describe such insurance
companies because writing these types of insurance policies is their
sole business activity.
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Internal Credit Support
31. Internal credit support relies upon some combination of
utilization of excess interest generated by the receivables, specified
levels of overcollateralization and/or subordination of junior classes
of certificates. Transactions that look almost exclusively to the
underlying pooled assets for cash payments (or ``senior/subordinated''
transactions) will contain multiple classes of certificates, some of
which bear losses prior to others and, therefore, support more senior
certificates. A subordinate certificate will absorb realized losses
from the asset pool, and have its principal amount ``written down'' to
zero, before any losses will be allocated to the more senior classes.
In this way, the more senior classes will receive higher rating
classifications than the more subordinate classes. However, the rating
agencies require cash flow modeling of all senior/subordinated
structures. These cash flows must be sufficient so that all rated
classes, including the subordinated classes, will receive timely
payment of interest and ultimate repayment of principal by the maturity
date. The cash flow models are tested assuming a variety of stressed
prepayment speeds, declining weighted average interest payments and
loss assumptions. Other structural mechanisms to assure payment to
subordinated classes are to allow collections held in the reserve
account for the next payment date to be used if necessary to pay
current interest to the subordinated class or to create a separate
interest liquidity reserve. The collections held in the reserve account
are from principal and interest paid on the underlying mortgages or
other receivables held in the trust and are not from the securities
issued by the issuer.\22\ Also, some structures allow
[[Page 49317]]
both principal and interest to be applied to all payments to
securityholders and, in others, principal can be used to pay interest
to the subordinate tranches.
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\22\ A collections reserve account is established for almost all
transactions to hold interest and principal payments on the
mortgages or receivables as they are collected until the necessary
amounts are paid to securityholders on the next periodic
distribution date. In some transactions, the rating agencies or
other interested parties may require, in order to protect the
interests of the securityholders, that excess interest in amount(s)
equal to a specified number of future period anticipated collections
be retained in the collection account. This protects both senior and
subordinated securityholders in situations where there are
shortfalls in collections on the underlying obligations because it
provides an additional source of funds from which these
securityholders can be paid their current distributions before the
holders of the residual or more subordinated securities receive
their periodic distributions, if any. Accordingly, any reference to
``collections'' from principal and interest paid on the mortgages is
intended to describe such excess interest or principal not required
to cover current payments to the senior and subordinated class
eligible to be purchased by plans. Thus, this mechanism is not
harmful to the interests of senior securityholders.
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Interest which is received but is not required to make monthly
payments to securityholders (or to pay servicing or other
administrative fees or expenses) can be used as credit support. This
excess interest is known as ``excess spread'' or ``excess servicing''
and may be paid out to holders of certain securities, returned to the
sponsor or used to build up overcollateralization or a loss reserve.
The credit given to excess spread is conservatively evaluated to ensure
sufficient cash flow at any one point in time to cover losses. The
rating agencies reduce the credit given to excess spread as credit
support to take into account the risk of higher coupon loans prepaying
first, higher than expected total prepayments, timing mismatching of
losses with excess spread collections and the amounts allowed to be
returned to the sponsor once minimum overcollateralization targets are
met (thereby reducing the amounts available for credit support).
``Overcollateralization'' is the difference between the outstanding
principal balance of the pool of assets and the outstanding principal
balance of the certificates backed by such pool of assets. This results
in a larger principal balance of underlying assets than the amount
needed to make all required payments of principal to investors. In all
senior/subordinated transactions, the requisite level of
overcollateralization and the amount of principal that may be paid to
holders of the more subordinated certificates before the more senior
securities are retired (since once such amounts are paid, they are
unavailable to absorb future losses) is determined by the rating
agencies and varies from transaction to transaction, depending on the
type of assets, quality of the assets, the term of the certificates and
other factors.
The senior/subordinated structure often combines the use of
subordinated tranches with overcollateralization that builds over time
from the application of excess interest to pay principal on more senior
classes. This is often referred to as a ``turbo'' structure. The credit
enhancement for each more senior class is provided by the aggregate
dollar amount of the respective subordinated classes, plus
overcollateralization that results from the payment of principal to the
more senior classes using excess spread prior to payment of any
principal to the more subordinated classes. As overcollateralization
grows, the pool of loans can withstand a larger dollar amount of losses
without resulting in losses on the senior certificates. This also has
the effect of increasing the amount of funds available to pay the more
subordinated classes as an ever-decreasing portion of the principal
cash flow is needed to pay the more senior classes. Excess interest is
used to pay down the more senior certificate balances until a specific
dollar amount of overcollateralization is achieved. This is referred to
as the overcollateralization target amount required by the rating
agencies. Typically, the targeted amount is set to ensure that even in
a worst-case loss scenario commensurate with the assigned rating level,
all securityholders, including holders of subordinated classes, will
receive timely payment of interest and ultimate payment of principal by
the applicable maturity date. In these transactions, the targeted
amount is usually set as a percentage of the original pool balance. It
may be reduced after a fixed number of years after the closing date,
subject to the satisfaction of certain loss and delinquency triggers.
These triggers ensure that overcollateralization continues to be
available if pool performance begins to deteriorate. In a senior/
subordinated structure, every investment-grade class (whether or not
subordinated) is protected by either a lower rated subordinated class
or classes or other credit support.
Provision of Credit Support Through Servicer Advancing
32. In some cases, the master servicer, or an affiliate of the
master servicer, may provide credit support to the trust. In these
cases, the master servicer, in its capacity as servicer, will first
advance funds to the full extent that it determines that such advances
will be recoverable (a) Out of late payments by the obligors, (b) from
the credit support provider (which may be the master servicer or an
affiliate thereof) or (c) in the case of a trust that issues
subordinated certificates, from amounts otherwise distributable to
holders of subordinated certificates; and the master servicer will
advance such funds in a timely manner. When the servicer is the
provider of the credit support and provides its own funds to cover
defaulted payments, it will do so either on the initiative of the
trustee, or on its own initiative on behalf of the trustee, but in
either event it will provide such funds to cover payments to the full
extent of its obligations under the credit support mechanism. In some
cases, however, the master servicer may not be obligated to advance
funds but instead would be called upon to provide funds to cover
defaulted payments to the full extent of its obligations as insurer.
Moreover, a master servicer typically can recover advances either from
the provider of credit support or from future payments on the affected
assets.
If the master servicer fails to advance funds, fails to call upon
the credit support mechanism to provide funds to cover delinquent
payments, or otherwise fails in its duties, the trustee would be
required and would be able to enforce the certificateholders' rights,
as both a party to the pooling and servicing agreement and the owner of
the trust estate, including rights under the credit support mechanism.
Therefore, the trustee, who is independent of the servicer, will have
the ultimate right to enforce the credit support arrangement.
When a master servicer advances funds, the amount so advanced is
recoverable by the master servicer out of future payments on
receivables held by the trust to the extent not covered by credit
support. However, where the master servicer provides credit support to
the trust, there are protections in place to guard against a delay in
calling upon the credit support to take advantage of the fact that the
credit support declines proportionally with the decrease in the
principal amount of the obligations in the trust as payments on
receivables are passed through to investors.\23\
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\23\ See the Proposal to PTE 2000-58 (August 23, 2000, 65 FR
51454, at page 51475) for a fuller explanation of these safeguards.
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Description of Designated Transactions
33. The Applicant requests relief for senior and/or subordinated
investment-grade certificates with respect to a limited number of asset
categories: Motor vehicles, residential/home equity, manufactured
housing and commercial mortgage backed securities. Accordingly, set
forth below are separate profiles of a typical transaction for each
asset category. Each profile describes specifically how each type of
transaction generally is structured. Information on the due diligence
that the rating agencies conduct before assigning a rating to a
particular class of such securities, the calculations that are
performed to determine projected cash flows, loss frequency and loss
severity and the manner in which credit support requirements are
determined for each rating class is not included because such
information has been provided previously to the Department in
connection with PTE 2000-58. The
[[Page 49318]]
motor vehicle, residential/home equity, manufactured housing and
commercial mortgage backed transactions, as described in this section,
are collectively referred to herein as ``Designated Transactions.''
Motor Vehicle Loan Transactions
34. In a typical motor vehicle transaction, ``AAA'' rated senior
certificates are issued that might represent approximately 90% or more
of the principal balances of the certificates, with ``A'' rated
subordinated certificates issued that might represent the remaining 10%
or less of the principal balance of the certificates. The total level
of credit enhancement from all sources, including excess spread,
typically averages approximately 7% of the initial principal balance of
certificates issued by prime issuers and 14% for subprime issuers in
order to obtain an ``AAA'' rated certificate. Credit support equaling
3% for prime issuers is usually required in order to obtain an ``A'' or
better rating on the subordinated certificates. Typical types of credit
support used in auto transactions are subordination, reserve accounts,
excess spread and financial guarantees from ``AAA'' rated monoline
insurance companies. Transactions with subprime sponsors generally use
surety bonds as credit enhancement, so there is no subordinated class.
Residential/Home Equity Mortgage Transactions
35. In a typical prime residential mortgage transaction, ``AAA''
rated senior Securities might be issued which represent approximately
95% of the principal balances of the Securities; ``AA'' rated
subordinated Securities might comprise 2%; ``A'' rated subordinated 1%;
``BBB'' rated subordinated 1% and junior subordinated Securities might
constitute 1%. The total level of credit enhancement from all sources
averages about 4% in order to obtain ``AAA'' rated Securities, 2% for
an ``AA'' rating, 1.5% for an ``A'' rating and 1% for a ``BBB'' rating.
Subordination is the predominant type of credit support used in
traditional prime residential mortgage transactions.
In a typical ``B&C home/equity loan'' transaction (loans made
primarily to B and C quality borrowers for consolidating credit card
and other consumer debt or refinancing mortgage loans), ``AAA'' rated
senior certificates might be issued which represent 80% of the
principal balances of the certificates; ``AA'' rated subordinated
certificates might comprise 11%; ``A'' rated subordinated 6%; ``BBB''
or lower rated subordinated certificates might constitute 3%. The total
level of credit enhancement from all sources averages about 13% in
order to obtain ``AAA'' rated certificates, 10% for an ``AA'' rating,
7% for an ``A'' rating and 3% for a ``BBB'' rating.
In a typical HLTV ratio (i.e., above 100%) second-lien loan
transaction, ``AAA'' rated senior certificates might be issued which
represent approximately 76% of the principal balances of the
certificates; ``AA'' rated subordinated certificates might comprise
10%; ``A'' rated subordinated 3%; ``BBB'' rated subordinated 4% and
junior subordinated certificates might constitute 7%. The total level
of credit enhancement from all sources averages about 24% in order to
obtain ``AAA'' rated certificates, 14% for an ``AA'' rating, 10% for an
``A'' rating and 7% for a ``BBB'' rating. Typical types of credit
support used in home equity transactions are subordination, reserve
accounts, excess spread, overcollateralization and in transactions
which do not use subordination, financial guarantees from ``AAA'' rated
monoline insurance companies or highly rated sponsors.
Manufactured Housing Transactions
36. In a typical manufactured housing transaction, ``AAA'' rated
senior certificates might be issued which represent approximately 80%
of the principal balances of the certificates; ``AA'' rated
subordinated certificates might comprise 6%; ``A'' rated subordinated
5%; ``BBB'' rated subordinated 5% and junior subordinated certificates
might constitute 4%. The total level of credit enhancement from all
sources including excess spread averages about 15%-16% in order to
obtain ``AAA'' rated certificates, 10%-11% for an ``AA'' rating, 7.5%-
8.5% for an ``A'' rating and 3.5%-9% for a ``BBB'' rating. Typical
types of credit support used in manufactured housing transactions are
subordination, reserve accounts, excess spread, overcollateralization
and financial guarantees from ``AAA'' rated monoline insurance
companies or highly rated sponsors. Overcollateralization is also used
as credit support for the subordinated certificates once the seniors
have been paid. Because the coupon rate on manufactured housing loans
is substantially higher than that charged on traditional residential
mortgages, there is a large amount of excess spread (typically more
than 300 bps) that can be used for credit support of both senior and
subordinated tranches. In other structures, the excess spread is
trapped into a reserve fund which provides the credit support for the
subordinated tranches. In still other cases, credit support is provided
to an investment-grade subordinated tranche through a junior
subordinated tranche which receives principal only after the more
senior subordinated tranches are paid. Sponsor guarantees are also used
as credit support.
Commercial Mortgage-Backed Securities (CMBS)
37. In a typical CMBS transaction, two classes of ``AAA'' rated
certificates might be issued which represent approximately 78% of the
principal balances of the certificates (one such ``AAA'' class will be
issued with a shorter, and the other ``AAA'' class with a longer,
expected maturity); ``AA'' rated subordinated certificates might
represent 5%; ``A'' rated subordinated 5%; ``BBB'' rated subordinated
5% and junior subordinated certificates 7%. The total level of credit
enhancement from all sources averages about 23% in order to obtain
``AAA'' rated certificates, 18% for an ``AA'' rating, 13% for an ``A''
rating and 7% for a ``BBB'' rating. Subordination is generally the only
type of credit support used in CMBS transactions.
The servicer function in a CMBS transaction is particularly
important because not only does the servicer or servicers fulfill the
normal functions of collecting and remitting loan payments from
borrowers to securityholders and advancing funds for such purposes, but
the servicer may also become responsible for activities relating to
defaulted or potentially defaulting loans (which are more likely to be
restructured than in non-commercial transactions where the loans are
usually liquidated). If a servicer advances funds, its credit rating
cannot be more than one rating category below the highest rated tranche
in the securitization and no less than ``BBB'' unless it has a
qualifying back-up advancer. All entities servicing CMBS transactions
must be approved by the rating agencies.
An additional responsibility of the servicer is ensuring that
insurance is maintained by each borrower covering each mortgaged
property in accordance with the applicable mortgage documents.
Insurance coverage typically includes, at a minimum, fire and casualty,
general liability and rental interruption insurance but may include
flood and earthquake coverage depending on the location of a particular
mortgaged property. If a borrower fails to maintain the required
insurance coverage or the mortgaged property defaults and becomes an
asset
[[Page 49319]]
of the trust, the servicer is obligated to obtain insurance which, in
pool transactions, may be provided by a blanket policy covering all
pool properties. Generally, the blanket policy must be provided by an
insurance provider with a rating of at least ``BBB.''
Each servicer, special servicer and subservicer is required to
maintain a fidelity bond and a policy of insurance covering loss
occasioned by the errors and omissions of its officers and employees in
connection with its servicing obligations unless the rating agency
allows self-insurance. All fidelity bonds and policies of errors and
omissions insurance must be issued in favor of the trustee or other
issuer by insurance carriers which are rated by the rating agency with
a claims-paying ability rating no lower than two categories below the
highest rated certificates in the transaction but no less than ``BBB.''
Subservicers may not make important servicing decisions (such as
modifications of the mortgage loans or the decision to foreclose)
without the involvement of the master servicer or special servicer, and
the trustee or any successor servicer may be permitted to terminate the
subservicing agreement without cause and without cost or further
obligation to the issuer or the holders of the rated certificates.
Loans secured by credit tenant leases require special analysis.
Credit enhancement for credit tenant loans is based on an analysis of
the probability that the lessee will file bankruptcy, and the
likelihood that the lessee will disaffirm the lease and loan structures
that may present a risk other than that of the lessee filing
bankruptcy.
Environmental reports for each property are generally required. A
reserve is usually required for any reported remediation costs, and any
actions covenanted must be completed within a specified period. Risks
that cannot be quantified or that have not been mitigated through
either remediation or reserves are assumed to pose a risk to the trust
and are reflected in the credit enhancement requirements. Properties
with certain types of asbestos problems, or those that are assumed to
have such problems given their date of construction, are assumed to
have higher losses due to the clean-up costs and increased difficulty
or cost in leasing or selling the asset. Seasoned or acquired pools
that may not have current reports for each property are also assumed to
have higher environmental losses.
In general, although there are other types of credit support
available, subordination is the only type of credit support used in
CMBS. However, protection is also provided to subordinated classes
through the concept of a ``directing class'' which has evolved to give
those holders of rated subordinated certificates in the first loss
position some control over the servicing and realization on defaulted
mortgage loans. In a typical transaction, the servicer might be
required to obtain the consent of the directing class before proceeding
with any of the following: any modification, consent or forgiveness of
principal or interest with respect to a defaulted mortgage loan; any
proposed foreclosure or acquisition of a mortgaged property by deed-in-
lieu of foreclosure; any proposed sale of a defaulted mortgage loan and
any decision to conduct environmental clean up or remediation. The
directing class might also have the right to remove a servicer, with or
without cause, subject to the rating agency's confirmation that
appointment of the successor servicer would not result in a
qualification, withdrawal or downgrade of the then-applicable rating
assigned to the rated certificates, compliance with the terms and
conditions of the pooling and servicing agreement and payment by the
directing class of any and all termination or other fees relating to
such removal. Holders of CMBS enjoy additional protection, in that the
master servicer or servicer occupies a first-loss position and usually
holds an equity stake in the offering, which gives it an incentive to
maximize recoveries on defaulted loans. The master servicer and
servicer are in a first loss position because they hold the most
subordinated equity position interest(s) in the trust. Accordingly,
they absorb losses before any other classes of securityholders.
Additional cash flow stability is created through call protection
features on the commercial mortgages held in the trust. Call protection
prevents the borrowers from prepaying the mortgage loans during a fixed
``lock-out period.'' In certain transactions, under the terms of the
mortgage agreement, the borrower is only allowed to prepay the loan at
the end of the lock-out period if it provides ``yield maintenance''\24\
whereby it is required to contribute a cash payment derived from a
formula which is calculated based on current interest rates and is
intended to offset the borrower's refinancing incentive. This amount
also effectively compensates the trust for the loss of interest payable
on the mortgage loan.
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\24\ The Applicant represents that the yield maintenance
provision in the mortgage agreement would meet the definition of a
``yield supplement agreement'' currently permitted under section
III.B.(3)(b) of the Underwriter Exemptions.
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Another mechanism, referred to as ``defeasance'', assures stability
of cash flow and operates as follows. If a borrower wishes to have the
mortgage lien released on the property (for example, where it is being
sold), the original obligation either remains an asset of the trust and
is assumed by a third party, or a new obligation with the same
outstanding principal balance, interest rate, periodic payment dates,
maturity date and default provisions is entered into with such third
party. The new obligation replicates the cash flows over the remaining
term of the original obligor's obligation. In either case, the property
or assets originally collateralizing the obligation are replaced by
collateral consisting of United States Treasury securities or any other
security guaranteed as to principal and interest by the United States,
or by a person controlled or supervised by and acting as an
instrumentality of the Government of the United States (referred to
herein as ``government securities'').
Defeasance generally operates so that, pursuant to an assumption
and release or similar arrangement valid under applicable state law,
the original obligor is replaced with a new obligor.
The new obligor is generally a bankruptcy-remote special purpose
entity (SPE), the assets of which consist of government securities. In
the defeasance of a mortgage loan held in a CMBS pool, a new entity
must be created (the SPE) which becomes the obligor on the mortgage
loan and holds the government securities being substituted for the
original collateral securing the mortgage loan. This newly formed
entity is required by the rating agencies to be an SPE in order to
assure that the owner of the securities to be pledged has no
liabilities or creditors other than the CMBS pool trustee, has no
assets or business other than the ownership of the government
securities and is not susceptible to substantive consolidation with the
original mortgage borrower in the event of the original mortgage
borrower's bankruptcy. Such an SPE is purely passive and does not
engage in any activities other than the ownership of securities.
Although there is no prescribed market requirement as to ownership of
the SPE, the securitization sponsor (e.g., the original mortgage
lender) is usually its owner, except that in certain circumstances the
original mortgage borrower may own the SPE for a variety of reasons;
e.g., to be entitled to any excess value of securities pledged as
collateral at maturity of the new defeasance note over the amount
[[Page 49320]]
due at such time. As a condition to defeasance, all fees and expenses
are paid at the substitution of the government securities for the
mortgage lien.
Mechanically, the government securities are transferred to a
custodian which holds then as collateral for the securitization trust.
The payments on the government securities are actually made directly to
the trust so that the SPE does not receive any payments or make any
payments.
Whether the original mortgage obligation is replaced with a new
securitized obligation or the original obligation remains an asset of
the trust, is usually dictated by how the transaction is treated for
mortgage recording tax purposes under state law. Both call protection
and defeasance are intended to protect investors from the risk of
prepayments of the loans.
Disclosure
38. In connection with the original issuance of certificates, the
prospectus or private placement memorandum will be furnished to
investing plans. The prospectus or private placement memorandum will
contain information material to a fiduciary's decision to invest in the
certificates.\25\
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\25\ See the Proposal to PTE 2000-58 (August 23, 2000, 65 FR
51454, at page 51486) for a description of types of disclosure.
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Reports indicating the amount of payments of principal and interest
are provided to certificateholders at least as frequently as
distributions are made to certificateholders. Certificateholders will
also be provided with periodic information statements setting forth
material information concerning the underlying assets, including, where
applicable, information as to the amount and number of delinquent and
defaulted loans or receivables.
In the case of a trust that offers and sells certificates in a
registered public offering, the trustee, the servicer or the sponsor
will file periodic reports in the form and to the extent required under
the Securities Exchange Act of 1934 and current interpretations
thereof.
At or about the time distributions are made to certificateholders,
a report will be delivered to the trustee as to the status of the trust
and its assets, including underlying obligations. Such report will
typically contain information regarding the trust's assets (including
those purchased by the trust from any pre-funding account), payments
received or collected by the servicer, the amount of prepayments,
delinquencies, servicer advances, defaults and foreclosures, the amount
of any payments made pursuant to any credit support, and the amount of
compensation payable to the servicer. Such report also will be
delivered to or made available to the rating agency or agencies that
have rated the trust's certificates.
In addition, promptly after each distribution date,
certificateholders will receive a statement prepared by the servicer,
paying agent or trustee summarizing information regarding the trust and
its assets. Such statement will include information regarding the trust
and its assets, including underlying receivables. Such statement will
typically contain information regarding payments and prepayments,
delinquencies, the remaining amount of the guaranty or other credit
support and a breakdown of payments between principal and interest.
Forward Delivery Commitments
39. To date, no forward delivery commitments have been entered into
by RBC-DR in connection with the offering of any certificates, but RBC-
DR may contemplate entering into such commitments. The utility of
forward delivery commitments has been recognized with respect to
offering similar certificates backed by pools of residential mortgages,
and RBC-DR may find it desirable in the future to enter into such
commitments for the purchase of certificates.
Secondary Market Transactions
40. It is the Applicant's normal policy to attempt to make a market
for certificates for which it is lead or co-managing underwriter, and
it is the Applicant's intention to make a market for any certificates
for which the Applicant is a lead or co-managing underwriter, although
it will have no obligation to do so. At times the Applicant will
facilitate sales by investors who purchase certificates if the
Applicant has acted as agent or principal in the original private
placement of the certificates and if such investors request the
Applicant's assistance.
Retroactive Relief
41. RBC-DR represents that it has not assumed that retroactive
relief would be granted prior to the date of its application, and
therefore has not engaged in transactions related to mortgage-backed
and asset-backed securities based on such an assumption. However, RBC-
DR requests the exemptive relief granted to be retroactive to the date
of its application, and would like to rely on such retroactive relief
for transactions entered into prior to the date exemptive relief may be
granted.
Summary
42. In summary, the Applicant represents that the transactions for
which exemptive relief is requested satisfy the statutory criteria of
section 408(a) of the Act due to the following:
(a) The Issuers contain ``fixed pools'' of assets. There is little
discretion on the part of the sponsor to substitute receivables
contained in the Issuer once the Issuer has been formed;
(b) In the case where a pre-funding account is used, the
characteristics of the receivables to be transferred to the Issuer
during the pre-funding period must be substantially similar to the
characteristics of those transferred to the Issuer on the closing date
thereby giving the sponsor and/or originator little discretion over the
selection process, and compliance with this requirement will be assured
by the specificity of the characteristics and monitoring mechanisms
contemplated under the exemptive relief proposed. In addition, certain
cash accounts will be established to support the certificate interest
rate and such cash accounts will be invested in short-term,
conservative investments; the pre-funding period will be of a
reasonably short duration; a pre-funding limit will be imposed; and any
Internal Revenue Service requirements with respect to pre-funding
intended to preserve the passive income character of the Issuer will be
met. Thus, the fiduciary of the plans making the decision to invest in
securities will be fully apprised of the nature of the receivables
which will be held in the Issuer and will have sufficient information
to make a prudent investment decision;
(c) Securities for which exemptive relief is requested will have
been rated in one of the three highest rating categories (or four in
the case of Designated Transactions) by a rating agency. The rating
agency, in assigning a rating to such securities, will take into
account the fact that Issuers may hold interest rate swaps or yield
supplement agreements with notional principal amounts or, in Designated
Transactions, securities may be issued by Issuers holding residential
and home equity loans with LTV ratios in excess of 100%. Credit support
will be obtained to the extent necessary to attain the desired rating;
(d) Securities will be issued by Issuers whose assets will be
protected from the claims of the sponsor's creditors in the event of
bankruptcy or other insolvency of the sponsor, and both equity and debt
securityholders will have a beneficial or
[[Page 49321]]
security interest in the receivables held by the Issuer. In addition,
an independent trustee will represent the securityholders' interests in
dealing with other parties to the transaction; and
(e) All transactions for which RBC-DR seeks exemptive relief will
be governed by the pooling and servicing agreement, which is summarized
in the prospectus or private placement memorandum and distributed to
plan fiduciaries for their review prior to the plan's investment in
securities.
Notice to Interested Persons: RBC-DR represents that any securities
offered in reliance upon the proposed exemption prior to the date the
final exemption is published in the Federal Register shall disclose in
the offering memorandum or prospectus: (a) The availability of the
proposed exemption; (b) the right of potentially interested plan
fiduciaries to comment on the proposed exemption; and (c) information
on how an interested plan fiduciary can obtain a copy of the proposed
exemption (once it is available) from RBC-DR. Once this proposed
exemption is granted, a copy of the exemption published in the Federal
Register shall be distributed to any current or prospective plan
investor in a security offered in reliance upon the exemption upon
request of such investor. Each offering memorandum or prospectus
offering securities in reliance upon the exemption shall describe and
disclose the availability of the exemption.
Comments and requests for a hearing must be received by the
Department not later than 45 days from the date of publication of this
notice of proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 693-8546. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 11th day of August, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-20766 Filed 8-14-03; 8:45 am]
BILLING CODE 4510-29-P