42248 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

1The Affiliated Funds and the Third Party Funds

are collectively referred to herein as the Funds.

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application No. D–10590, et al.]

Proposed Exemptions; Bank of

Oklahoma (the Bank) and First

Tennessee National Corporation

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Notice of proposed exemptions.

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 request 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

request for a hearing (at least three

copies) should be sent to the Pension

and Welfare Benefits Administration,

Office of Exemption Determinations,

Room N–5649, U.S. Department of

Labor, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210. Attention:

Application No.l , stated in each

Notice of Proposed Exemption. The

applications for exemption and the

comments received will be available for

public inspection in the Public

Documents Room of the Pension and

Welfare Benefits Administration, U.S.

Department of Labor, Room N–5638,

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.

Bank of Oklahoma (the Bank) Located

in Tulsa, OK

[Application No. D–10590]

Proposed Exemption

Based on the facts and representations

set forth in the application, 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).

Section I. Covered Transactions

If the exemption is granted, the

restrictions of section 406(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 (D) of the Code, shall not apply

to the purchase or redemption of shares

by an employee benefit plan (the Plan),

in certain mutual funds that are either

affiliated with the Bank (the Affiliated

Funds) or are unaffiliated with the Bank

(the Third Party Funds),1 in connection

with the participation by the Plan in the

Bank-sponsored Foundations Program

(the Foundations Program).

In addition, the restrictions of section

406(b) of the Act and the sanctions

resulting from the application of section

4975 of the Code, by reason of section

4975(c)(1)(E) and (F) of the Code, shall

not apply to the provision, by the Bank,

of asset allocation services to an

independent fiduciary of a participating

Plan (the Primary Independent

Fiduciary) or to a participant (the

Directing Independent Fiduciary) of a

Plan that provides for participant

investment direction (the ParticipantDirected Plan), which may result in the

selection of portfolios in the

Foundations Program for the investment

of Plan assets, by the Primary

Independent Fiduciary or the Directing

Independent Fiduciary, and the receipt

of fees by the Bank and/or its affiliates.

This proposed exemption is subject to

the conditions set forth below in Section

II.

Section II. General Conditions

(a) The participation by a Plan in the

Foundations Program is approved by a

Primary Independent Fiduciary or a

Directing Independent Fiduciary, in the

case of a Participant-Directed Plan, and,

no Plan covering employees of the Bank

or any of its affiliates is eligible to

participate in the Foundations Program.

(b) As to each Plan, the total fees that

are paid to the Bank and its affiliates

constitute no more than reasonable

compensation for the services provided.

(c) With the exception of distributionrelated fees that are paid to the Bank

pursuant to Rule 12b–1 (the Rule 12b–

1 Fees) of the Investment Company Act

of 1940 (the Investment Company Act)

which are offset, no Plan pays a fee or

commission by reason of the acquisition

or redemption of shares in the Funds.

(d) The terms of each purchase or

redemption of shares in the Funds

remain at least as favorable to an

investing Plan as those obtainable in an

arm’s length transaction with an

unrelated party.

(e) The Bank provides written

documentation to each Plan’s Primary

Independent Fiduciary or Directing

Independent Fiduciary of its

recommendations, as well as on the

design and parameters with respect to

an asset allocation model (the Asset

Allocation Model) based upon objective

criteria that are uniformly applied.

(f) Any recommendation or evaluation

made by the Bank to a Primary

Independent Fiduciary or a Directing

Independent Fiduciary is implemented

only at the express direction of such

fiduciary.

(g) The Bank retains an independent

financial analyst (the Independent

Financial Analyst) to—

(1) Review the investments of Plan

assets in a Third Party Fund for

purposes of performance and suitability;

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42249

2For an annual mailing of the Termination

Advisory or in the event the Bank makes a Model

Adjustment that is outside of current parameters or

a Fund is added or substituted, the Termination

Advisory will include language similar to that

contained in Section II(k)(1) and (2). In the event

the Bank proposes an increase in its Wrap Fee, the

Termination Advisory will also include language

similar to that contained in Section II(k)(1).

However, under such circumstances, Section

II(k)(2) will be modified state that absent any

affirmative action by the Primary Independent

Fiduciary or the Directing Independent Fiduciary,

the revised Wrap Fee will be effective as of a

specified date.

(2) Review determinations by the

Bank to add a Third Party Fund or

replace an Affiliated Fund with a Third

Party Fund; and

(3) Ensure that only one Fund fits an

asset segment (the Asset Segment) such

that there is no overlap between a Third

Party Fund and an Affiliated Fund.

Further, such Independent Financial

Analyst may not derive more than 5

percent of its total annual revenues from

the Bank and/or its affiliates.

(h) The quarterly fee that is paid by

a Plan to the Bank and its affiliates for

asset allocation and related services (the

Wrap Fee) rendered to such Plan under

the Foundations Program is offset by—

(1) All investment management fees

(the Advisory Fees) that are paid to it

and/or its affiliates by the Affiliated

Funds;

(2) All non-advisory fees, including

custodial fees, Rule 12b–1 Fees or

subadministration fees (collectively, the

Administrative Fees) that are paid to the

Bank and/or its affiliates by the

Affiliated Funds; and

(3) All Administrative Fees which

include, but are not limited to, Rule

12b–1 Fees and sub-transfer agency fees,

that are paid to the Bank and/or its

affiliates by the Third Party Funds, such

that the sum of the offset and the net

Wrap Fee will always equal the

aggregate Wrap Fee, thereby making the

Bank’s selection of Affiliated Funds or

Third Party Funds for the Asset

Allocation Models a ‘‘fee-neutral’’

decision.

(i) The Plan is automatically

rebalanced on a quarterly basis (using

net asset values of the affected Funds as

of the close of business) on a preestablished date to the Asset Allocation

Model previously prescribed by such

fiduciary if authorized in writing by the

Primary Independent Fiduciary, and if

one or more Fund allocations deviates

from the Asset Allocation Model

prescribed by such fiduciary because—

(1) At least one transaction required to

rebalance the Plan among the Funds

involves a purchase or redemption of

securities valued at $100 or more; and

(2) The net asset value of the Fund

affected would be more than 5 percent

of the Plan’s investment in such Fund.

(j) The Bank may make adjustments to

the composition of the Asset Allocation

Model (the Model Adjustments)

unilaterally only within certain

authorized parameters approved by the

Primary Independent Fiduciary, or upon

the consent of the Primary Independent

Fiduciary, if the Bank proposes to

exceed the parameters.

(1) If the Model Adjustment is made

unilaterally pursuant to Section II(j)

above, the Bank may only deviate from

the Normal Position of a given Asset

Allocation Model within a specified

range, not to exceed 15 percent (above

and below) the Normal Position under

Section III(1), which is applied to the

Asset Allocation Model’s entire

allocation.

(2) With respect to a Model

Adjustment requiring independent

fiduciary consent, the Bank may not

change the asset mix outside the limits

authorized by the Primary Independent

Fiduciary unless it provides the Primary

Independent Fiduciary and the

Directing Independent Fiduciary, upon

the request of the Primary Independent

Fiduciary, 30 days’ advance written

notice of the impending change.

(k) The notice referred to above in

Section II(j) includes a termination

advisory form (the Termination

Advisory) which—

(1) Advises the Primary Independent

Fiduciary of the right to withdraw from

the Foundations Program or, in the case

of the Directing Independent Fiduciary,

of the right to transfer to a different

Asset Allocation Model without

penalty; and

(2) States that absent any affirmative

action by the Primary Independent

Fiduciary or the Directing Independent

Fiduciary, the Plan will be reallocated

within the revised Normal Positions for

the Asset Allocation Model, effective as

of a given date.

(1) The Bank provides the

Termination Advisory to the Primary

Independent Fiduciary and, if

applicable, the Directing Independent

Fiduciary, at least annually; and

provides the Termination Advisory in

all cases whenever the Bank—

(1) Makes a Model Adjustment where

fiduciary consent is needed;

(2) Adds a new Fund to an Allocation

Model;

(3) Removes an existing Fund within

an Allocation Model; or

(4) Increases its Wrap Fee. Under such

circumstances, the notice and

Termination Advisory are provided at

least 30 days prior to the

implementation of the change.2

(m) With respect to its participation in

the Foundations Program, prior to

purchasing shares in the Affiliated

Funds and the Third Party Funds, each

Primary Independent Fiduciary, and, if

applicable, each Directing Independent

Fiduciary, receives the following

written or oral disclosures from the

Bank:

(1) A brochure describing the

Foundations Program;

(2) A Foundations Program Asset

Allocation Account Application;

(3) A Foundations Program Asset

Allocation Account Purchase Order;

(4) A Foundations Program Account

Agreement (the Account Agreement)

providing detailed information on the

Foundations Program; the fee structure

of the Foundations Program; procedures

and limitations imposed on the Bank

with respect to Model Adjustments;

rebalancing of a participating Plan

investor’s account; and the Bank’s

affiliation or non-affiliation with the

Funds, including a copy of the executed

Account Agreement between the Plan

and the Bank, to the Primary

Independent Fiduciary rather than to

the Directing Independent Fiduciary;

(5) The Bank’s Form ADV—Part II

which contains a description of the

Bank’s affiliation, if any, with the

sponsors, distributors, administrators,

investment advisers, sub-advisers,

custodians and transfer agents of each

Affiliated Fund and Third Party Fund;

and

(6) Copies of the proposed and final

exemptions with respect to the

exemptive relief described herein. (In

the case of a Participant-Directed Plan,

this information may be provided

directly by the Bank to the Primary

Independent Fiduciary for distribution

to the Directing Independent

Fiduciaries.)

(n) Having acknowledged receipt of

the documents described in paragraph

(m) of Section II, the Primary

Independent Fiduciary submits a

completed Account Agreement to the

Bank and represents in writing to the

Bank that such fiduciary is—

(1) Independent of the Bank and its

affiliates;

(2) Knowledgeable with respect to the

Plan in administrative matters;

(3) Able to make an informed decision

concerning the Plan’s participation in

the Foundations Program; and

(4) Knowledgeable with respect to

funding matters related to the Plan.

(o) In addition to the initial

disclosures described above in

paragraph (m) of this Section II, prior to

investment in an Asset Allocation

Model, the Primary Independent

Fiduciary or, if applicable, the Directing

Independent Fiduciary—

42250 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

(1) Receives a written analysis from

the Bank based on the fiduciary’s

Investor Profile as well as a description

of the Asset Allocation Model

recommended by a Bank’s investment

counselor which includes a description

of the actual fee structure and the actual

basis points to be rebated to such Plan

fiduciary;

(2) Receives a prospectus for each

Affiliated Fund and Third Party Fund in

which the Plan may be invested and,

upon such fiduciary’s request, is

provided a Statement of Additional

Information which supplements the

prospectus; and

(3) Acknowledges receipt of the

foregoing documents in writing to the

Bank.

(p) With respect to their ongoing

participation in the Foundations

Program, each Primary Independent

Fiduciary and/or Directing Independent

Fiduciary receives the following

continuing disclosures from the Bank:

(1) Copies of applicable prospectuses;

(2) Written confirmations of each

purchase or redemption of shares of an

Affiliated Fund or a Third Party Fund,

including transactions implemented as a

result of a realignment of the Asset

Allocation Model’s investment mix or

from the rebalancing of a Plan’s

investments in conformity with the

selected Asset Allocation Model;

(3) Telephone quotations of such

Plan’s balance (or if relevant, individual

account balances of Directing

Independent Fiduciaries) under the

Foundations Program;

(4) Periodic, but at least quarterly,

account statements showing the Plan’s

value (or if relevant, individual account

balances of Directing Independent

Fiduciaries), a summary of purchase,

sale and exchange activity and

dividends received or reinvested and a

summary of cumulative realized gain

and/or loss;

(5) Semiannual or annual reports that

include financial statements for the

Funds as well as a description of the

fees paid to the Bank and its affiliates;

(6) At least annually, a written or oral

inquiry from the Bank to ascertain

whether the information provided on

the Investor Profile is still accurate and

to determine if such information should

be updated;

(7) A Termination Advisory provided

on an annual basis as well as at other

times noted in paragraph (1) of this

Section II; and

(8) The Bank’s investment advisory

and other agreements with any

Affiliated Fund as well as its

distribution agreement pertaining to the

Third Party Funds, upon request of the

Primary Independent Fiduciary.

(Communications received from the

Funds (e.g., prospectuses, annual

reports, quarterly reports, notices

regarding changes in Fund managers,

proxy mailings, etc.) will be distributed

to the Primary Independent Fiduciary,

who may elect to pass them through to

the Directing Independent Fiduciaries.)

(q) The Bank maintains, for a period

of six years, the records necessary to

enable the persons described in

paragraph (r) of this Section II to

determine whether the conditions of

this exemption have been met, except

that—

(1) A prohibited transaction will not

be considered to have occurred if, due

to circumstances beyond the control of

the Bank and/or its affiliates, the records

are lost or destroyed prior to the end of

the six year period; and

(2) No party in interest other than the

Bank shall be subject to the civil penalty

that may be assessed under section

502(i) of the Act, or to the taxes imposed

by section 4975(a) and (b) of the Code,

if the records are not maintained, or are

not available for examination as

required by paragraph (r) of this Section

II below.

(r)(1) Except as provided in section

(r)(2) of this paragraph and

notwithstanding any provisions of

subsections (a)(2) and (b) of section 504

of the Act, the records referred to in

paragraph (q) of this Section II are

unconditionally available at their

customary location during normal

business hours by:

(A) Any duly authorized employee or

representative of the Department, the

Internal Revenue Service or the

Securities and Exchange Commission;

(B) Any fiduciary of a participating

Plan or any duly authorized

representative of such fiduciary;

(C) Any contributing employer to any

participating Plan or any duly

authorized employee representative of

such employer; and

(D) Any participant or beneficiary of

any participating Plan, or any duly

authorized representative of such

participant or beneficiary.

(r)(2) None of the persons described

above in paragraphs (r)(1)(B)–(r)(1)(D) of

this paragraph (r) are authorized to

examine the trade secrets of the Bank or

commercial or financial information

which is privileged or confidential.

Section III. Definitions

For purposes of this proposed

exemption:

(a) The term ‘‘Bank’’ means the Bank

of Oklahoma, N.A., a subsidiary of BOK

Financial Corporation and any affiliate

of the Bank, as defined in paragraph (b)

of this Section III.

(b) An ‘‘affiliate’’ of the Bank

includes—

(1) Any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with the Bank.

(2) Any individual who is an officer,

director or partner in the Bank or a

person described in subparagraph (b)(1)

of this Section III, and

(3) Any corporation or partnership of

which the Bank or an affiliate or person

described in subparagraphs (b)(1) or

(b)(2) of this Section III, is a 10 percent

or more partner or owner.

(c) The term ‘‘control’’ means the

power to exercise a controlling

influence over the management or

policies of a person other than an

individual.

(d) The term ‘‘officer’’ means a

president, any vice president in charge

of a principal business unit, division or

function (such as sales, administration

or finance), or any other officer who

performs a policy-making function for

the entity.

(e) The term ‘‘Plan’’ refers to an

employee benefit plan which is eligible

to participate under the Foundations

Program. Such Plans are qualified under

sections 401(a) and 501(a) of the Code

and include Keogh plans (Keogh Plans);

individual retirement accounts (IRAs);

simplified employee pension plans

(SEP–IRAs); Salary Reduction

Simplified Employee Pensions

(SARSEPs), provided that the SARSEP

was established prior to January 1, 1996,

the date as of which the Code provision

authorizing such plans was repealed);

and savings incentive match plans for

employees (SIMPLEs); and, in the case

of a Participant-Directed Plan, the

individual account of a Directing

Independent Fiduciary.

(f) The term ‘‘Directing Independent

Fiduciary’’ means, as to a participating

Plan, a participant in a ParticipantDirected Plan that is authorized to direct

the investment of his or her account

balance.

(g) The ‘‘Administrative Fees’’ refer to

custodial, Rule 12b–1 Fees, and subadministration fees that are paid to the

Bank or its affiliates from or on behalf

of the Affiliated Funds on account of the

Bank’s services to the Affiliated Funds,

as well as Rule 12b–1 Fees, sub-transfer

agency fees and other fees that may be

paid to the Bank or its affiliates on

account of the investment of

participating Plans in the Third Party

Funds.

(h) The ‘‘Advisory Fees’’ refer to

investment advisory fees that are paid

by the Affiliated Funds to the Bank and

its affiliates.

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42251

(i) The term ‘‘Affiliated Fund’’ means

a portfolio of an investment company

registered under the Investment

Company Act for which the Bank or an

affiliate of the Bank acts as the

investment adviser, and may also serve

as custodian or sub-administrator.

(j) The term ‘‘Asset Segment’’ refers to

a subdivision of each asset class (the

Asset Class) into which the Asset

Allocation Model is divided (e.g.,

international equities is an Asset

Segment under the Asset Class

‘‘stocks’’). Asset Segments are

determined by the Bank with reference

to recognized investment objectives and

styles established by independent

mutual fund analysts such as

Morningstar, Inc. (Morningstar) and

Lipper Analytical Services, Inc.

(Lipper).

(k) The ‘‘Investment Management

Group’’ refers to a committee comprised

of the Bank’s senior investment

professionals.

(l) The term ‘‘Model Adjustment’’

means an adjustment to the Normal

Position of an Asset Allocation Model

(i.e., a change in the Asset Allocation

Model among the three Asset Classes,

the division of the Asset Class into

Asset Segments, and the identity of the

Funds which represent the various

Asset Segments).

(m) The ‘‘Normal Position’’ refers to

the initial allocation of each Asset

Allocation Model among the various

Asset Classes, Asset Segments and

Funds.

(n) The ‘‘Offset Fees’’ refer to the

Advisory Fees and Administrative Fees

that are paid by, or on behalf of, the

Funds to the Bank and/or its affiliates

and which are offset against the Wrap

Fee.

(o) The term ‘‘Participant-Directed

Plan’’ refers to a qualified Plan under

which participants direct the

investments of their individual

accounts.

(p) The term ‘‘Primary Independent

Fiduciary’’ refers to a plan fiduciary

within the meaning of section 3(21)(A)

of the Act who has (1) investment

discretion and authority over the Plan’s

assets and (2) is not an affiliate of the

Bank. Typically, the Primary

Independent Fiduciary will be the plan

administrator, the employer which

sponsors the Plan, an investment

committee appointed under the Plan

document or an IRA account holder.

(q) The term ‘‘Termination Advisory’’

refers to the notice advising the Primary

Independent Fiduciary or the Directing

Independent Fiduciary of the right to

withdraw from the Foundations

Program without penalty. The

Termination Advisory, which will

contain instructions on its use, will be

provided to such participants on an

annual basis, or whenever the Bank

makes a Model Adjustment that is

outside of a current Allocation Model,

in the event a new Fund is added to an

Allocation Model or an existing Fund is

removed from an Allocation Model, or

the Bank’s Wrap Fee is increased.

Depending on the circumstances

precipitating its distribution, the

Termination Advisory will include a

provision advising the Primary

Independent Fiduciary or the Directing

Independent Fiduciary that absent any

affirmative action by the Primary

Independent Fiduciary or the Directing

Independent Fiduciary, the

authorization of the Plan’s participation

in the Foundations Program will

continue, or the participating Plan will

be reallocated in accordance with the

revised Normal Position for the Asset

Allocation Model in which the Plan’s

assets are invested, or the Bank’s Wrap

Fee will be increased. The Bank will

provide the Termination Advisory to the

Primary Independent Fiduciary and/or

the Directing Independent Fiduciary at

least 30 days prior to the

implementation of the proposed change.

(r) A ‘‘Third Party Fund’’ is a portfolio

of an investment company that is

registered under the Investment

Company Act for which neither the

Bank nor any affiliate of the Bank acts

as investment adviser, custodian and/or

sub-administrator.

(s) The term ‘‘Wrap Fee’’ refers to the

Plan or account-level fee the Bank,

BOSC, Inc. (BOSC) and/or their affiliates

charge each Plan for the asset allocation,

custodial and related services under the

Foundations Program.

(t) The term ‘‘Independent Financial

Analyst’’ means an independent third

party which has entered into a written

contract with the Bank to (1) review the

investment of Plan assets in a Third

Party Fund, (2) review the Funds each

time the Bank determines to add a Third

Party Fund or replace an Affiliated

Fund with a Third Party Fund, and (3)

determine that only one Fund fits an

Asset Segment such that there is no

overlap between a Third Party Fund and

an Affiliated Fund. The Independent

Financial Analyst may not derive more

than 5 percent of its total annual

revenues from the Bank or its affiliates,

including its fee for serving as the

Independent Financial Analyst.

As for minimum credentials, the

Independent Financial Analyst will be a

Chartered Financial Analyst and will be

employed by a firm which has at least

a regional presence in the investment

products and services industry. In

addition, the individual assigned the

duties of the Independent Financial

Analyst must alone, or with his or her

employer, have a certain minimum

number of years experience in the

investment products and services

industry and must not be affiliated with

the Bank, BOSC or BISYS Fund

Services, Inc. (BISYS). Should the Bank

replace the Independent Financial

Analyst, that entity must meet the same

requirements applicable to the current

Independent Financial Analyst. In

addition, the Bank will be required to

provide the Department with advance

written notification of the change in

Independent Financial Analysts and the

qualifications of the successor. Unless

the Department objects to the change,

the Foundations Program will operate

with the new Independent Financial

Analyst.

Summary of Facts and Representations

Description of the Parties

1. The parties to the transactions

discussed herein are described as

follows:

(a) The Bank is a national bank

headquartered in Tulsa, Oklahoma and

a wholly owned subsidiary of BOK

Financial Corporation, an Oklahoma

corporation. The Bank maintains 60

branch banks in the Oklahoma City and

Tulsa, Oklahoma metropolitan areas. It

is the largest financial institution

headquartered in Oklahoma and

provides a full array of commercial

banking and retail banking services

while its non-bank subsidiaries engage

in various bank-related services,

including mortgage banking and

providing credit life, accident and

health insurance on certain loans

originated by its subsidiaries. The Bank

also offers a variety of trust and

investment services for both corporate

and individual customers. For corporate

clients, these services include

custodianship, trusteeship,

management, administration and

recordkeeping of pension plans, profit

sharing plans (including 401(k) plans)

and master trusts.

In addition, the Bank serves as

custodian of IRAs, SEP–IRAs, SARSEPs

and SIMPLE Plans and it sponsors nonstandardized prototype plans. Further,

the Bank and its subsidiaries provide

investment advisory services to trust

customers and mutual funds and they

manage collective investment funds. As

of December 31, 1999, the Bank and its

affiliates had over $8.1 billion in assets

under management.

The Bank serves as each Affiliated

Fund’s investment adviser. Subject to

the general supervision of the Affiliated

Funds’ Board of Trustees (the Trustees)

42252 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

and in accordance with the investment

objectives and restrictions of each

Affiliated Fund, the Bank manages the

Affiliated Funds, makes decisions with

respect thereto, places orders for all

purchases and sales of portfolio

securities, and maintains each Affiliated

Fund’s records relating to such

purchases. Neither the Bank nor any

affiliate serves as the named distributor

for any Fund.

(b) BOSC is a wholly owned

subsidiary of the Bank and a full-service

broker-dealer and investment adviser

registered with the SEC and the

National Association of Securities

Dealers (NASD). The Bank utilizes

members of BOSC’s sales force who

have appropriate securities licenses to

market the Foundations Program.

However, BOSC will not perform any

brokerage transactions on behalf of the

Funds.

(c) BISYS and its wholly owned

affiliate, BISYS Fund Services Ohio, Inc.

(BISYS Ohio) are not affiliated with the

Bank. BISYS is the administrator and

distributor of each Affiliated Fund.

BISYS Ohio, a registered transfer agent,

serves as the transfer agent and performs

fund accounting for the Affiliated

Funds. For its administrative services,

BISYS may receive, from the Affiliated

Funds, an annualized fee of up to 0.20

percent of each Affiliated Fund’s

average daily net assets. Under each

Affiliated Fund’s Distribution and

Shareholder Services Plan (the

Distribution Plan), BISYS receives Rule

12b–1 Fees on a monthly basis. The

current maximum annualized Rule 12b–

1 Fees paid to BISYS is 0.25 percent of

the average daily net assets of each

Affiliated Fund. For its transfer agency

and fund accounting services, BISYS

Ohio may receive annual fees of up to

0.05 percent of each Affiliated Fund’s

average daily net assets.

(d) CoreLink Financial, Inc. (CoreLink)

is an affiliate of BISYS. It is a full

service broker-dealer and investment

adviser registered with the SEC and the

NASD. It is the clearing broker for all

Foundations Program transactions and

maintains custody of all of the securities

held under the Foundations Program.

(e) AMR Investments of Fort Worth,

Texas, has been retained by the Bank to

serve as the Independent Financial

Analyst for the Foundations Program.

AMR Investments is a wholly owned

subsidiary of AMR Corporation, the

parent company of American Airlines,

Inc. Incorporated in 1986, AMR

Investments is directly responsible for

the investment management and

oversight of AMR Corporation’s defined

benefit and defined contribution plans,

as well as fixed income investments.

AMR Investments also provides

investment advisory services to

institutional and retail clients and acts

as manager of the American

AAdvantage Funds, a family of

diversified mutual funds. Further, AMR

Investments offers customized fixed

income portfolio management services.

As a multibillion dollar asset

management firm, AMR Investments has

clients that include defined benefit

plans, defined contribution plans,

foundations, endowments, corporations

and other institutional investors.

AMR Investments is not affiliated

with the Bank, BOSC or BISYS. For

services rendered to the Bank as the

Independent Financial Analyst, AMR

Investments may not derive more than

5 percent of its total annual revenues

from the Bank and/or its affiliates,

including its services as the

Independent Financial Analyst.

(f) The Plans that are eligible to

participate in the Foundations Program

will consist of employee benefit plans

that are qualified under sections 401(a)

and 501(a) of the Code. The Plans will

include Keogh Plans, IRAs, SEP–IRAs,

SARSEPs (provided that the SARSEP

was established prior to January 1, 1996,

the date as of which the Code provision

authorizing such plans was repealed)

and SIMPLE plans as defined under

401(k)(11)(A) of the Code. The Bank

may serve as an eligible Plan’s trustee,

custodian, recordkeeper or prototype

sponsor. However, no Plan in which

employees of the Bank or any of its

affiliates participate will be eligible to

invest in the Foundations Program.

The Funds

2. The Affiliated Funds consist of

portfolios of the American Performance

Funds, a diversified, open-end

management investment company

registered under the Investment

Company Act. The Funds were

organized as a Massachusetts business

trust and began active operations in

August 1990. Although the Affiliated

Funds currently consist of ten

separately-managed portfolios, it is

represented that additional portfolios

may be added in the future. Initially,

eight Affiliated Fund portfolios will be

available to investors under the

Foundations Program.

Overall management and supervision

of each Affiliated Fund rests with such

Fund’s Board of Trustees. Individual

Trustees may be removed by the Board

of Trustees or by the shareholders. The

Trustees manage the Affiliated Funds in

accordance with Massachusetts law

governing business trusts. There are

currently four Trustees, three of whom

are not ‘‘interested persons.’’ The

Trustees elect the officers of the

Affiliated Funds who supervise such

Funds’ day-to-day operations. The

members of the Board of Trustees

receive fees and are reimbursed for their

expenses in connection with each

meeting of the Board of Trustees they

attend, except that no Trustee who is an

officer or employee of the Bank, any

sub-adviser or BISYS receives any

compensation from the Affiliated Fund

for acting as a Trustee. The Affiliated

Funds’ officers receive no compensation

from the Funds for performing the

duties of their offices.

The Bank, in its capacity as

investment adviser, and BISYS, in its

capacity as administrator, bear all

expenses incurred in connection with

the performance of their duties, other

than the cost of securities (including

brokerage commissions) purchased for

the Affiliated Funds. Such expenses

may include, but are not limited to,

taxes, interest, brokerage fees and

commissions, fees and travel expenses

for the Trustees of the Fund, SEC fees,

state securities qualification fees, and

the costs of preparing and printing

prospectuses for regulatory purposes

and for distribution to current

shareholders.

3. The Third Party Funds are

portfolios of diversified, open-end

management investment companies

registered under the Investment

Company Act. They currently consist of

the Federated Tax-Free Instruments, the

Federated GNMA Trust, the Federated

Bond Fund, Franklin Insured Tax-Free

Income Fund, Federated Equity Income

Fund, the Neuberger Berman Genesis

Fund and the Templeton Foreign Fund.

No Third Party Fund’s sponsor,

administrator, distributor, investment

adviser or sub-adviser is affiliated with

the Bank.

The Proposed Transactions

4. The Foundations Program is

designed to make no-load Affiliated

Funds and Third Party Funds available

to an eligible Plan, thereby affording the

Plan the opportunity to diversify its

investments. The Foundations Program

will also make professional asset

allocation management available to a

smaller Plan which may not have the

benefit of such services. Moreover, by

participating in the Foundations

Program, a Primary Independent

Fiduciary or a Directing Independent

Fiduciary will receive a single,

consolidated statement and pay a single

asset management fee. Finally, all

dealings between a Plan participating in

the Foundations Program, the Funds

and the Bank will remain on a basis

which is at least as favorable to the Plan

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42253

3Because of the regularly scheduled rebalancing

of each Plan investor’s account, the $1,000

threshold for contributions will not apply each year

to new employer or employee contributions.

4The Department is not providing, nor have the

Applicants requested relief from the provisions of

section 404(c) of the Act with respect to the Bank’s

temporary holding of contributions by a ParticipantDirected Plan in the American Performance U.S.

Treasury Fund.

as such dealings are with other

shareholders of the Funds holding the

same classes of shares as the Plan.

Accordingly, the Bank and BOSC

(together, the Applicants) request an

administrative exemption from the

Department in order to implement the

Foundations Program for Plan investors.

If granted, the exemption will provide

relief from section 406(a) of the Act in

order to permit the purchase or

redemption of shares in the Affiliated

Funds and the Third Party Funds by a

Plan, in connection with the Plan’s

participation in the Foundations

Program. In addition, the exemption

will provide relief from section 406(b) of

the Act to allow the Bank to provide

asset allocation services to a Primary

Independent Fiduciary or to a Directing

Independent Fiduciary of a ParticipantDirected Plan, which may result in the

selection of portfolios by the Primary

Independent Fiduciary or the Directing

Independent Fiduciary in the

Foundations Program for the investment

of Plan assets and the receipt of fees by

the Bank and/or its affiliates.

The Applicants are concerned that the

Bank’s fiduciary activities under the

Foundations Program (e.g.,

recommending an Asset Allocation

Model, making a Model Adjustment or

rebalancing a participating Plan’s

account) will cause the Plan to pay

additional fees (i.e., Advisory Fees and

Administrative Fees) to the Bank or an

affiliate of the Bank or cause the Bank

or a Bank affiliate to receive

consideration from a third party in

connection with a transaction involving

the Plan. The Applicants are concerned

that the combination of services the

Bank will provide under the

Foundations Program, particularly,

recommending an Asset Allocation

Model, making Model Adjustments and

rebalancing participating Plan accounts,

may be deemed to constitute prohibited

acts of self-dealing in violation of

section 406(b)(1) of the Act. Therefore,

the Applicants request exemptive relief

from the Department for the transactions

that are described above.

Operation of the Foundations Program

5. An eligible Plan’s Primary

Independent Fiduciary may decide to

enroll a Plan in the Foundations

Program. The minimum investment

required to establish an account in the

Foundations Program is $10,000. In the

case of a Participant-Directed Plan, the

minimum applies to each account in the

participating Plan. From time to time,

however, the Bank may lower or waive

the minimum investment amount.

At any time, a Primary Independent

Fiduciary or a Directing Independent

Fiduciary may add or withdraw assets

of a Plan to or from the Foundations

Program (subject to a $100 minimum

redemption and purchase requirement

per participating Plan which will

continue to apply after the first year). In

the case of a Participant-Directed Plan,

the $100 limit will apply to each

account in the Plan and the

contributions will be held in the

American Performance U.S. Treasury

Fund, an Affiliated Fund, until such

amounts reach $1,000,3 at which time

the contributions will be liquidated and

the proceeds invested pursuant to the

appropriate Asset Allocation Model.4

The $100 limit will not apply if the

participating Plan is completely

liquidated (e.g., the participant

terminates employment with the plan

sponsor).

6. Each participating Plan’s Primary

Independent Fiduciary or Directing

Independent Fiduciary will complete an

Investor Profile and submit it to an

investment counselor employed by the

Bank or an affiliate who will interact

with the Plan investor. The Investor

Profile is a written questionnaire

designed by BISYS and the Bank to

assess such fiduciary’s risk tolerance

and financial objectives as they apply to

the participating Plan. In the case of a

single-participant Plan such as an IRA,

the Bank will distribute the Investor

Profile and other materials directly to

the Primary Independent Fiduciary. In

the case of a Participant-Directed Plan,

the Bank will provide Investor Profiles

and other information on the

Foundations Program, at the Primary

Independent Fiduciary’s discretion,

either to the Primary Independent

Fiduciary for distribution to the

Directing Independent Fiduciary or,

directly to the Directing Independent

Fiduciary. If requested by a Primary

Independent Fiduciary, the Bank may

also provide additional information or

documentation that is provided to such

Primary Independent Fiduciary to the

Directing Independent Fiduciaries.

The responses to the Investor Profile

will be analyzed by investment

counselors, employed by the Bank or an

affiliate, utilizing software developed

and maintained by BISYS. Applying

objective criteria to the results of the

analysis, the Bank will recommend a

particular Asset Allocation Model

which is appropriate for the

participating Plan. The Asset Allocation

Model will also describe the fee

structure to be applied and the actual

number of basis points to be rebated to

the Plan investor and will use a

spreadsheet to show how the rebate is

determined.

In conjunction with the

recommendation, the Bank will provide

each Primary Independent Fiduciary or

Directing Independent Fiduciary with

written materials explaining (a) market

risk, (b) what to consider when

assessing one’s own risk tolerance and

investment objectives, (c) historical risk

and return characteristics of various

Asset Classes and Asset Segments, (d)

the advantage of diversifying to reduce

market risk, and (e) historical risk and

return characteristics of various

strategically-allocated portfolios. The

Bank, through the investment counselor,

may also describe other Asset

Allocation Models that are available to

the Plan and provide additional

educational materials to the Primary

Independent Fiduciary or the Directing

Independent Fiduciary.

Before participating in the

Foundations Program, each Primary

Independent Fiduciary or Directing

Independent Fiduciary will also be

shown the historical performance of the

recommended Asset Allocation Model,

including the number of years in which

it has produced a negative return, the

average loss in each such year, the

average annual return, and the

performance during the Model’s five

best and worst years. The Primary

Independent Fiduciary or the Directing

Independent Fiduciary may then accept

the Bank’s recommendation or invest

the Plan in another Asset Allocation

Model. The Plan will not be permitted

to invest under the Foundations

Program until the Primary Independent

Fiduciary or the Directing Independent

Fiduciary affirmatively directs the Bank

to invest Plan assets under a particular

Asset Allocation Model.

At any time, a Primary Independent

Fiduciary or a Directing Independent

Fiduciary may submit a new Investor

Profile or choose a different Asset

Allocation Model. At least annually, the

Bank will ask each Primary Independent

Fiduciary or Directing Independent

Fiduciary, in writing, whether any

information included on the Investor

Profile has changed. The Bank will

analyze and respond to a new Investor

Profile in the same manner that it

responds to the original Investor Profile.

7. Currently, the Bank has developed

five Asset Allocation Models. They are

the Capital Preservation Model, the

42254 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

5The Bank will use the classification services

provided by Morningstar and Lipper unless

circumstances beyond its control require that the

Bank select another independent, established

mutual fund analyst.

6As discussed in Representation 11, the

Investment Management Group will select a Third

Party Fund to fill an Asset Segment only when (a)

an Affiliated Fund representing that Asset Segment

does not exist or (b) an Affiliated Fund representing

the Asset Segment exists but it is not an

‘‘equivalent’’ to the Third Party Fund. To be

equivalent to a Third Party Fund, an Affiliated

Fund must have been publicly offering shares for

at least one year. The total return performance for

the Affiliated Fund must be equal to or exceed the

total return performance of the Third Party Fund for

either the most recent one year reporting period or

the annualized three, five or ten year reporting

periods. Further, the total expense ratio for the

Affiliated Fund, determined in accordance with

SEC rules for performance, must not be higher than

the relevant Third Party Fund. In addition, as noted

above, the Bank will determine which Fund fits

within an Asset Segment based upon criteria

developed by Morningstar and Lipper as to what

type of Fund should fill that Asset Segment. As

discussed in Representation 13, the Independent

Financial Analyst, using Morningstar or Lipper

classification criteria, will compare the Third Party

Funds with the Affiliated Funds.

7 In this regard, once the Normal Position is

adjusted, the revised Normal Position will be

applied to the entire Plan rather than only to

amounts contributed to the Plan after the effective

date of the adjustment. For example, assume that

a Plan has invested $100,000 in Asset Allocation

Model X, which is equally divided between Funds

A and B. Because the Plan has been rebalanced, it

has almost equal amounts invested in Funds A and

B, despite their uneven earnings. When Asset

Allocation Model X is adjusted to provide for a 55

percent investment in Fund A and a 45 percent

allocation to Fund B, the entire $100,000 in the

plan will be invested, accordingly—i.e., $55,000 in

Fund A and $45,000 in Fund B. Future

contributions to the Plan will be allocated in a

similar manner.

Income Model, the Growth & Income

Model, the Growth Model and the

Aggressive Growth Model. In addition

to the present Asset Allocation Models,

the Bank proposes to add more Asset

Allocation Models to the Foundations

Program in the future.

Each Asset Allocation Model will

allocate a participating Plan’s assets

among three major Asset Classes: cash

equivalents, bonds and stocks. For

example, the Bank’s Capital

Preservation Model is invested in Asset

Classes in the following percentages:

Cash Equivalents (15 percent), Bonds

(60 percent) and Stocks (25 percent).

Each Asset Class will be further

allocated into one or more Asset

Segments, each of which represents a

class of investment that the Bank

believes is necessary to achieve the

proper mix of risk and return in an

Asset Class. To this end, the Bank will

use a current list of mutual fund

investment objectives and investment

styles developed by Morningstar and

Lipper, independent mutual fund

analysts to determine the appropriate

Asset Segments for a particular Asset

Class.5 The Bank will utilize

Morningstar to classify equity Asset

Segments and Lipper to classify fixedincome Asset Segments (including

money market funds which Morningstar

does not classify). For example, the

Stock Asset Class under the Bank’s

Capital Preservation Model will include

investments in three Funds (the

Templeton Foreign Fund, the American

Performance Equity Fund and the

American Performance Growth Equity

Fund) representing three Asset

Segments (international stocks, incomeproducing stocks and growth equity

stocks), respectively.

The Bank’s Investment Management

Group, which is comprised of the

Bank’s senior investment professionals,

will determine the allocation of each

Asset Allocation Model among the

major Asset Classes, as well as the

allocation of the major Asset Classes

among the Asset Segments. In effect, the

Investment Management Group will

follow the classification systems

devised by Morningstar and/or Lipper

in order to fill particular Affiliated

Funds or Third Party Funds within the

given Asset Segments.

Model Adjustments

8. The Bank’s Investment

Management Group creates and

monitors the composition of the Asset

Allocation Models and reviews each

Model’s composition at least monthly.

As noted in Representation 7, the

Investment Management Group also

determines the Asset Allocation Model’s

division among the three Asset Classes,

the division of each Asset Class into

Asset Segments and the allocation of

each Asset Segment among the

Affiliated Funds and the Third Party

Funds.6 The breakdown among the

Asset Classes and the Funds which

comprise those classes when a

participating Plan is first invested

pursuant to the Asset Allocation Model

is the Model’s ‘‘Normal Position.’’ The

Investment Management Group may

adjust the Normal Position periodically

as dictated by changing economic and

market conditions. There are two types

of Model Adjustments: (a) Those that

the Bank may make unilaterally and (b)

those that require the consent of the

Primary Plan fiduciary. Any deviation

from the Normal Position will apply to

the Plan assets invested pursuant to the

Asset Allocation Model both prior to

and after the deviation (i.e., both old

and new money).7

A Model Adjustment does not include

the substitution of a Fund but is deemed

necessary to effect a change to an

Allocation Model due to market

conditions. The Bank anticipates that

Funds will be substituted only under

extraordinary circumstances (see

Representation 14) whereby advance

notice will be given to the Primary

Independent Fiduciary to effect the

change. Accordingly, a Model

Adjustment and a Fund substitution are

treated as a separate process by the

Bank.

With respect to unilateral Model

Adjustments, the Account Agreement

entered into by each Primary

Independent Fiduciary will authorize

the Bank to deviate from the Normal

Position of a given Asset Allocation

Model within a specified range, not

exceeding 15 percent above or below the

Normal Position. The Model

Adjustment will be made for all clients

having the same Asset Allocation

Model. The percentage will be applied

to the Model’s entire allocation, so the

adjusted stock position of, for example,

the Capital Preservation Model (the

Normal Position of which has 25

percent invested in stocks), could range

from 10 percent to 40 percent. The

specified range may be higher for a

deviation from the Asset Allocation

Model’s cash position which will be

governed by the Account Agreement.

Any change to an Asset Class will be

separately allocated among the Asset

Segments.

A corresponding decrease in an Asset

Class must also fall within the

authorized deviation parameters.

Further, the original Normal Position

will remain the standard for

determining whether future Model

Adjustments fall within the acceptable

range.

9. The Bank may not change the

Normal Position (i.e., deviate more than

the range specified in the Account

Agreement) without providing the

Primary Independent Fiduciary of each

participating Plan that is invested

pursuant to the affected Asset

Allocation Model with a written notice

of the impending change at least 30 days

in advance of its effective change. If

requested by the Primary Independent

Fiduciary of a Participant-Directed Plan,

the Bank will provide this notice to each

Directing Independent Fiduciary. The

30 day notice period is intended to give

the Primary Independent Fiduciary or

the Directing Independent Fiduciary

time to withdraw from the Foundations

Program if he or she elects not to have

the change made. The notice will

include a Termination Advisory which

will advise the Primary Independent

Fiduciary or the Directing Independent

Fiduciary (a) of his or her right to

withdraw from the Foundations

Program without penalty and (b) that

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42255

8As noted previously, assuming there are 75

Small Cap International Funds within the universe

of Third Party Funds, the Independent Financial

Analyst will examine all of the relevant Funds

using the Morningstar or Lipper classification

systems.

absent affirmative action by the Primary

or Directing Independent Fiduciary, the

Plan will be reallocated in accordance

with the revised Normal Positions for

the Asset Allocation Model, effective as

of a given date.

If the Bank makes a Model

Adjustment outside of the specified

limits, the new allocation percentages

will become the revised Normal

Position for the Asset Allocation Model.

The Account Agreement will then

authorize the Bank to again deviate

within the specified ranges and will

require the 30 day notice and

Termination Advisory described above

for a shift outside the revised Normal

Position.

Rebalancing

10. After a participating Plan is

invested in an Asset Allocation Model,

varying performance results among the

Funds that comprise the Asset

Allocation Model will eventually cause

a Plan to fail to meet the Normal

Position set forth in the applicable Asset

Allocation Model. Therefore, prior to

the end of each calendar quarter, the

Bank will review each participating

Plan to determine whether its allocation

among the Funds will be materially out

of line with the parameters prescribed

by the Asset Allocation Model. The

Bank will apply the net asset value of

the affected Funds as of the end of each

calendar quarter. A Plan is materially

out of line with the Asset Allocation

Model parameters if at least one

transaction required to rebalance the

participating Plan among the Funds (a)

would involve a purchase or sale of

securities valued at $100 or more, or (b)

the net asset value of the Fund affected

would represent more than 5 percent of

the Plan’s investment in such Fund. If

a participating Plan is rebalanced, the

Bank will buy and sell Fund shares from

the distributor at net asset value, as of

the close of business on a preestablished date within 5 business days

prior to the end of the calendar quarter,

in the amounts necessary to bring the

participating Plan back into conformity

with the appropriate Asset Allocation

Model at the Asset Segment level. There

will be no cross-trading of securities

between the Funds. Neither the Bank

nor its affiliates will receive

commissions from such sales and the

participating Plans will not be charged

a redemption fee.

The Account Agreement will disclose

the circumstances under which a

participating Plan will be rebalanced

and the date on which the necessary

trades will occur. It is represented that

rebalancing will not involve the exercise

of any investment discretion by the

Bank.

The Primary Independent Fiduciary

or the Directing Independent Fiduciary

will not be given the option of not

having their account in the Plan

rebalanced because this, according to

the Bank, will undermine the Asset

Allocation Model concept. As noted

herein, each Primary Independent

Fiduciary or Directing Independent

Fiduciary will, however, have the

option of selecting another Asset

Allocation Model or withdrawing from

the Foundations Program.

Fund Monitoring

11. The Bank’s Investment

Management Group will select and

periodically review the performance

and continued suitability of the

Affiliated and Third Party Funds that

are included within each Asset

Allocation Model. The Investment

Management Group will select an

Affiliated Fund to fill an Asset Segment

when there is an appropriate Affiliated

Fund but will select Third Party Funds

when (a) an Affiliated Fund

representing that Asset Segment does

not exist or (b) an Affiliated Fund

representing the Asset Segment exists

but it is not an ‘‘equivalent’’ of the Third

Party Fund. As noted above, an

Affiliated Fund is deemed the

equivalent of a Third Party Fund if (a)

the Affiliated Fund has been publicly

offering shares for at least one year, (b)

total return performance of the

Affiliated Fund is equal to or exceeds

the total return performance of the

Third Party Fund for either the most

recent one year reporting period or the

annualized three, five or ten year

reporting periods, and (c) the total

expense ratio, determined in accordance

with SEC rules for performance, is not

higher than the relevant Third Party

Fund.8

12. To review the selection by the

Investment Management Group of a

Third Party Fund to fill an Asset

Segment, the Bank will retain the

Independent Financial Analyst. As

stated previously, the Independent

Financial Analyst may not derive more

than 5 percent of its total annual

revenues from the Bank or its affiliates,

including its fee for serving as the

Independent Financial Analyst. As for

minimum credentials, the Independent

Financial Analyst must be a Chartered

Financial Analyst and employed by a

firm which has at least a regional

presence in the investment products

and services industry. In addition, the

individual assigned the duties of the

Independent Financial Analyst must

alone, or with his or her employer, have

a certain minimum number of years

experience in the investment products

and services industry and must not be

affiliated with the Bank, BOSC or

BISYS.

Should the Bank replace the

Independent Financial Analyst, that

entity must meet the same requirements

applicable to the current Independent

Financial Analyst. Under such

circumstances, the Bank will be

required to inform the Department 60

days in advance of the change. In

addition, the Bank will also be required

to describe the qualifications of the

successor. Unless the Department

objects to the change within 60 days of

notification, the Foundations Program

will continue to operate with the new

Independent Financial Analyst.

13. On an annual basis, the

Independent Financial Analyst will

determine whether the use of a Third

Party Fund during the previous year has

satisfied the selection criteria set forth

in Representation 11. (To recap, no

Affiliated Fund is in existence and if in

existence, the Affiliated Fund is not

equivalent to the Third Party Fund.) The

Independent Financial Analyst will also

determine that the Third Party Fund

considered by the Bank represents the

correct Asset Segment based upon

Morningstar or Lipper classifications. If

the Independent Financial Analyst

determines that a Third Party Fund has

been used under circumstances which

do not satisfy these criteria, an

appropriate Affiliated Fund will be

substituted after appropriate notice (i.e.,

the Termination Advisory) is given to

the Primary Independent Fiduciary or

the Directing Independent Fiduciary, if

applicable. (See Representation 14.)

Additionally, the Independent

Financial Analyst will review the Funds

each time the Bank determines to add a

Third Party Fund or replace an

Affiliated Fund with a Third Party

Fund. In this regard, the Independent

Financial Analyst will be required to

certify that the proposed change

satisfies the ‘‘in existence’’ and

‘‘equivalence’’ criteria set forth above in

Representation 11 before the effective

date of the change.

Further, the Independent Financial

Analyst will be required to determine

that for an Asset Segment there is no

overlap between a Third Party Fund and

an Affiliated Fund. Specifically, the

Independent Financial Analyst will

determine (a) that the array of Third

42256 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

9 It should be noted that Advisory Fees may also

be paid by the Affiliated Funds to unrelated subadvisers who may be retained by the Bank in the

future to perform investment management and/or

advisory services to Plans investing under the

Foundations Program. These sub-advisory fees are

not applied to offset the Plan’s legal obligation to

the Bank and should be considered by the

appropriate Plan fiduciary in evaluating the

appropriateness of the Foundations Program.

10The fact that certain transactions and fee

arrangements are the subject of an administrative

exemption does not relieve the fiduciaries of the

Plans from the general fiduciary responsibility

provisions of section 404 of the Act. Thus, the

Department cautions Primary Independent

Fiduciaries of Plans investing in the Funds that

they have an ongoing duty under section 404 of the

Act to monitor the services provided to the Plans

to assure that the services remain appropriate and

that the fees paid by the Plans for such services are

reasonable in relation to the value of the services

provided. In considering whether to enter into the

arrangement for the provision of asset allocation

services, the Department emphasizes that it expects

the Primary Independent Fiduciary to fully

understand the operation of the Foundations

Program and the compensation paid thereunder,

following disclosure by the Bank of all relevant

information pertaining to the Program.

11Under each Affiliated Fund’s Distribution Plan,

the Fund pays BISYS Rule 12b–1 Fees on a monthly

basis [see Representation 1(c)] in order to provide

distribution assistance to, or compensate financial

intermediaries, broker-dealers or similar entities

(including the Bank and affiliates or subsidiaries of

BISYS and/or the Bank) for providing shareholder

services.

Party and Affiliated Funds does not

include two or more Funds which are in

the same classification under both the

Morningstar and Lipper classification

systems; and (b) that no Third Party

Fund which is to be added is in the

same Asset Class as an existing

Affiliated Fund under both the

Morningstar and Lipper classification

systems.

14. If the Investment Management

Group determines that an Affiliated

Fund or a Third Party Fund should be

replaced with another Fund, the Bank

will give written notice to the Primary

Independent Fiduciary of each

participating Plan which is invested in

the affected Asset Allocation Model at

least 30 days in advance of the effective

date of the Fund change. If requested by

the Primary Independent Fiduciary, the

Bank will also provide this notice to

each Directing Independent Fiduciary.

The notice will also include a

Termination Advisory that will advise

the Primary Independent Fiduciary of

the right to withdraw from the

Foundations Program or allow the

Directing Independent Fiduciary to

transfer to a different Asset Allocation

Model without penalty.

Fee Structure

15. As to each investing Plan, the total

fees that are paid to the Bank and its

affiliates will constitute no more than

reasonable compensation for the

services provided to the participating

Plans. In this regard, the Bank and its

affiliates will receive four types of fees:

(a) Advisory Fees from the Affiliated

Funds,9 (b) Non-Advisory Fees from the

Affiliated Funds (i.e., Administrative

Fees), (c) Administrative Fees from the

Third Party Funds, and (d) the Wrap Fee

paid by each participating Plan at the

Plan-level. All fees received from

sources other than the participating Plan

or the Plan’s sponsor will be applied to

offset the Plan’s legal obligation to the

Bank and its affiliates. Under no

circumstances will such fees increase

the compensation received by the Bank

or its affiliates.10

(a) Advisory Fees. The annualized

Advisory Fees of the Affiliated Funds,

which range from 0.40 percent to 0.69

percent, are calculated daily and paid

monthly on the Affiliated Fund’s

average daily net assets. However, the

Bank may, from time to time, waive all

or a portion of the Advisory Fee. Each

fee arrangement between the Bank and

an Affiliated Fund must be approved by

the Board of Trustees of the Affiliated

Fund, including a majority of the

Trustees who are not ‘‘interested

persons.’’

(b) Administrative Fees from the

Affiliated Funds and BISYS. The Bank

is compensated for acting as custodian

to the Affiliated Funds. For its custodial

services, the Bank currently receives an

annual fee of 0.03 percent of the average

daily net assets of each of the Affiliated

Funds.

In addition, the Bank may receive

Administrative Fees from BISYS in the

form of annualized Rule 12b–1 Fees,

pursuant to each Affiliated Fund’s

Distribution Plan. Such Rule 12b–1 Fees

will not exceed 0.25 percent of the

average daily net assets of each

Affiliated Fund.11

Further, BISYS currently retains the

Bank as sub-administrator to the

Affiliated Funds. BISYS presently pays

the Bank an annualized fee of 0.05

percent of each Affiliated Fund’s daily

net assets.

(c) Administrative Fees from the Third

Party Funds. The Third Party Funds

may pay Administrative Fees such as

Rule 12b–1 Fees or similar fees to the

Bank or its affiliates for shareholder

services (e.g., fund recordkeeping,

accounting in connection with a

participating Plan’s purchase or

redemption of shares of the Third Party

Fund, processing purchase and

redemption transactions involving the

Plans and providing mutual fund

enrollment material to Primary or

Directing Independent Fiduciaries). The

annualized Administrative Fees range

from 0.08 percent to 0.50 percent.

(d) The Plan-Level Wrap Fee. For their

asset allocation, custodial and related

services, the Bank, BOSC, and/or their

affiliates will charge each participating

Plan an annual investment fee (i.e., the

Wrap Fee). If the Plan’s average daily

value (including amounts invested in

either the Third Party Funds or

Affiliated Funds) is less than $25,000,

the Wrap Fee will equal 1.80 percent of

$25,000, unless the minimum

investment amount is lowered, in which

case the Wrap Fee will equal 1.80

percent of the minimum investment. For

balances greater than the minimum

investment, the fee will be calculated as

follows: 1.80 percent on $1–$99,999;

1.55 percent on $100,000–$249,999; and

1.45 percent on any balance above

$250,000. Breakpoints will be calculated

on a per-participating Plan basis rather

than on each account in that Plan.

From time to time, the Bank may

increase or reduce the Wrap Fee. In the

event of a Wrap Fee increase, the Bank

will notify the Primary Independent

Fiduciary or, if applicable, the Directing

Independent Fiduciary, of the

impending increase at least 30 days

prior to its effective date of the change.

The written notification will include a

Termination Advisory and remind the

Primary Independent Fiduciary of the

impending increase at least 30 days

prior to its effective date. The written

notification will include a Termination

Advisory which will (a) advise the

Primary Independent Fiduciary or the

Directing Independent Fiduciary of the

right to withdraw from the Foundations

Program without penalty; and (b) state

that absent any affirmative action by the

Primary Independent Fiduciary or the

Directing Independent Fiduciary, the

new Wrap Fee will be effective no

earlier than 30 days after the receipt of

the notice and the Termination

Advisory.

The Wrap Fee is assessed quarterly in

arrears on the Plan’s average daily net

asset value during the quarter. The

Wrap Fee will be deducted directly from

the Plan.

Fund Fees and Offset

16. As noted in Representation 15, the

Bank and its affiliates may receive,

either directly or indirectly, various fees

from the Affiliated Funds and the Third

Party Funds which will be fully

disclosed to investors in applicable

prospectuses. The Bank proposes to

offset all Advisory Fees, Administrative

Fees and Rule 12b–1 Fees that are paid

to it and its affiliates with respect to a

Plan’s investment in a Fund

(collectively, the Offset Fees), from the

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42257

12 It is represented that Funds are liquidated to

pay fees in the following order: American

Performance U.S. Treasury Fund, American

Performance Intermediate Bond Fund, American

Performance Bond Fund, Federated Bond Fund,

Federated GNMA Trust Fund, Federated Equity

Income Fund, American Performance Equity Fund,

Templeton Foreign Fund, Neuberger and Berman

Genesis Asset Fund and the American Performance

Aggressive Growth Fund.

Because each Asset Allocation Model, other than

the Aggressive Growth Model, includes an

investment in a money market fund, the Bank

anticipates that almost all of the Wrap Fee will be

taken from the American Performance Treasury

Money Market Fund. An Account’s entire holding

in a particular Fund will be liquidated before any

portion of the next Fund in the hierarchy is

liquidated. If the liquidation is more than $1,000,

the Account automatically will be rebalanced. If the

liquidation is for $100 to $1,000, the Account will

be rebalanced at the next quarter’s end. If the

liquidation is for less than $100, the Account will

not be rebalanced on account of the fee payment,

although it may be rebalanced in the regular course

of the Foundations Program.

quarterly Wrap Fee charged to that Plan.

The Bank believes that the offset will

eliminate any conflict of interest which

may exist as a result of the fact that an

investment in certain Funds would

generate higher overall fees for the Bank

and its affiliates, and will also eliminate

any indirect benefit that the Bank may

gain by including Funds that pay higher

Advisory or Administrative Fees in the

Asset Allocation Models.

The Bank will deduct the Offset Fees

as follows. At the end of each quarter,

the Bank will calculate the revenues

that it received during the quarter in the

form of Offset Fees on a pro rata basis

for each Plan invested in the

Foundations Program. These figures will

be a percentage of the average daily net

value of participating Plan assets in

each Affiliated and Third Party Fund.

The Bank will reduce the Wrap Fee

charged to each Plan for that quarter by

that Plan’s allocable portion of the

Offset Fees for the Asset Allocation

Model in which the Plan’s assets were

invested during the quarter. Thus, the

sum of the Wrap Fee which the Bank

and its affiliates actually receive with

respect to each Plan (following the

offset) and the Offset Fees will always

equal the total Wrap Fee to which the

Primary Independent Fiduciary agreed

to in the Account Agreement and the

selection of Affiliated or Third Party

Funds will always be revenue-neutral.

17. The Bank has provided the

following example to demonstrate how

the Offset Fee mechanism will work:

Mr. Smith meets with a Bank investment

counselor on April 3, 2000. After going

through the education, profiling and

recommendation process, he decides to

invest his IRA through the Foundations

Program. Mr. Smith accepts the Bank’s

recommendation that, based on the results of

his Investor Profile, the Growth and Income

Model is the appropriate vehicle for the IRA.

So, on April 3, 2000, Mr. Smith invests

$47,928.76 in that Asset Allocation Model.

This initial investment is allocated as

follows:

Fund Allocation

(percent) Dollar amount Price Shares

American Performance Treasury Money Market ............................................. 5 $2,396.44 $1.00 2,396.440

American Performance Short-Term Income Fund .......................................... 10 4,792.88 10.02 478.331

American Performance Intermediate Bond Fund ............................................ 5 2,396.44 10.36 231.317

American Performance Bond Fund ................................................................. 5 2,396.44 9.53 251.463

Federated GNMA Fund ................................................................................... 10 4,792.88 11.32 423.399

Federated Bond Fund ...................................................................................... 10 4,792.88 10.05 476.903

Federated Equity Income Fund ....................................................................... 9 4,313.59 19.21 224.549

American Performance Equity Fund ................................................................ 29 13,899.34 17.96 773.905

American Performance Growth Equity Fund ................................................... 9 4,313.57 12.12 355.905

Templeton Foreign Fund ................................................................................. 3 1,437.86 11.10 129.537

Neuberger & Berman Genesis Assets Fund ................................................... 5 2,396.44 14.33 167.232

Total .......................................................................................................... 100 47,928.76 ........................ ........................

Wrap Fee

Three business days prior to the end of the

calendar quarter (i.e., June 28, 2000), the

Bank takes the following steps to calculate

the fee charged to Mr. Smith’s account for the

second quarter of 2000:

• The Bank calculates the average balance

of Mr. Smith’s account during the quarter as

$48,124.44.

• The annual Wrap Fee on accounts of up

to $99,000 is 1.80 percent. Therefore, the

quarterly fee is 45 basis points or 0.45

percent of the average daily balance during

the quarter. Mr. Smith’s quarterly Wrap Fee

is $216.56 ($48,124.44 × 0.45%). This

amount is deducted from the account based

on the Fund/fee hierarchy. 12 The Fund/fee

hierarchy determines which position(s) will

be liquidated to pay fees. Because Mr. Smith

has enough assets in the American

Performance Treasury Money Market Fund to

pay the fee, a liquidation of $216.56 is posted

to this Fund.

Offset Fees

• The Bank prepares a spreadsheet

detailing the annualized compensation it

received from the Affiliated Funds and the

Third Party Fund during the quarter. For

example,

Fund Allocation

(percent)

Basis points

received

American Performance Treasury Money Market .................................................................................................... 5 2

American Performance Short-Term Income Fund .................................................................................................. 10 1

American Performance Intermediate Bond Fund .................................................................................................... 5 3

American Performance Bond Fund ......................................................................................................................... 5 3

Federated GNMA Fund ........................................................................................................................................... 10 3

Federated Bond Fund .............................................................................................................................................. 10 3

Federated Equity Income Fund ............................................................................................................................... 9 2

American Performance Equity Fund ....................................................................................................................... 29 24

American Performance Growth Equity Fund ........................................................................................................... 9 7

Templeton Foreign Fund ......................................................................................................................................... 3 1

Neuberger & Berman Genesis Assets Fund ........................................................................................................... 5 3

Total .................................................................................................................................................................. 100 52

42258 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

13For each Fund represented in the foregoing

Asset Allocation Model, the Bank will determine

the total number of basis points received on an

annual basis from all fee sources within that Fund.

As noted above, these fees include Rule 12b-1 Fees,

Advisory Fees and Administrative Fees. For

example, for the American Performance Equity

Fund, the total annual basis points received is 83.

The Bank will then multiply this amount (83) by

the percentage of the Fund contained in the Asset

Allocation Model. In this Asset Allocation Model,

29 percent of the investor’s money is allocated to

the American Performance Equity Fund.

Accordingly, under the Bank’s fee-offset

arrangement, 29 percent of 83 basis points (or 24

basis points) will be rebated to Mr. Smith’s account.

The Bank represents that this method of

allocation will be repeated for all Funds shown in

this particular Asset Allocation Model. The total

rebated amounts attributable to each Fund will be

added together to arrive at the total number of basis

points that will be rebated to investors in this Asset

Allocation Model. Accordingly, Mr. Smith and

other investors in this Asset Allocation Model, will

be rebated 52 basis points on an annual basis.

In addition, Mr. Smith and other investors will

receive full disclosure from the Bank regarding the

fees and the fee-offset arrangement, including the

actual number of basis points to be rebated under

an applicable Allocation Model. To show how the

rebate is calculated, a spreadsheet will be utilized.

Finally, an investor will see rebated amounts in

their performance statements. (See also

Representations 6 and 18.)

• The rebate to be credited to Mr. Smith’s

account is calculated by multiplying his

average daily balance ($48,124.44) by the

basis points received (52) and then dividing

the result by 4. The rebate ($62.56)

[($48,124.44 × 0.52%/4)] is credited to the

American Performance Treasury Money

Market Fund. 13

Disclosures

18. Aside from the Investor Profile

described in Representation 6, Primary

Independent Fiduciaries and Directing

Independent Fiduciaries will receive

several types of disclosures: (a) Initial

disclosures which are made to the

Primary Independent Fiduciary and, if

applicable, the Directing Independent

Fiduciary before a Plan is enrolled

under the Foundations Program; (b)

subsequent disclosures which are made

exclusively to the Primary Independent

Fiduciary; (c) specific disclosures which

are made to the Primary Independent

Fiduciary or the Directing Independent

Fiduciary; and (d) continuing

disclosures that are made to the Primary

Independent Fiduciary or the Directing

Independent Fiduciary throughout the

time that the participating Plan is

enrolled under the Foundations

Program.

(a) Initial Disclosures for the Primary

Independent Fiduciary or the Directing

Independent Fiduciary. Before a Plan’s

assets are invested under the

Foundations Program, the Primary

Independent Fiduciary or, if applicable,

the Directing Independent Fiduciary,

will receive a brochure describing the

Foundations Program, a Foundations

Asset Allocation Account Application, a

Foundations Asset Allocation Purchase

Order, and a Foundations Program

Account Agreement. The Account

Agreement will provide detailed

information on the Foundations

Program, including the way in which

fees are calculated and charged, the

procedure for and limitations on the

Bank’s ability to make Model

Adjustments and its rebalancing of a

participating Plan, and the procedure to

be followed in the event that the

Primary or Directing Independent

Fiduciary objects to a Model

Adjustment. In addition, the Bank will

disclose, through the Form ADV-Part II,

its affiliation or non-affiliation with the

Funds to the Primary Independent

Fiduciary prior to such fiduciary’s

enrolling an eligible Plan in the

Program. Further, the Bank will provide

to the Primary Independent Fiduciary

the executed Account Agreement and

copies of the proposed exemption and

the grant notice. Assuming the Bank

provides copies of the proposed

exemption and the grant notice directly

to the Primary Independent Fiduciary,

such disclosures may be distributed by

the Primary Independent Fiduciary to

the Directing Independent Fiduciaries.

To participate in the Foundations

Program, the Primary Independent

Fiduciary will submit a completed

Account Agreement to the Bank. In

addition, the Primary Independent

Fiduciary will be required to represent

in writing that such fiduciary is (1)

independent of the Bank and its

affiliates; (2) knowledgeable with

respect to the Plan in administrative

matters; (3) able to make an informed

decision concerning the participating

Plan’s participation in the Foundations

Program; and (4) knowledgeable with

respect to funding matters related to the

Plan.

Once the Plan is enrolled in the

Foundations Program, the Primary

Independent Fiduciary or, if applicable,

the Directing Independent Fiduciary,

will complete an Investor Profile and

submit it to an investment counselor in

the manner described herein in

Representation 6.

(b) Subsequent Disclosures

Exclusively for the Primary Independent

Fiduciary. In addition to the initial

disclosures described above in

Representation 18(a), the Bank will

provide each Primary Independent

Fiduciary with the following materials

and/or oral disclosures: (1) A copy of

the executed Account Agreement

between the Plan and the Bank; and (2)

a description of the Bank’s affiliation, if

any, with the sponsors, distributors,

administrators, investment advisers,

sub-advisers, custodians and transfer

agents of each Affiliated and Third Party

Fund. In addition, the Primary

Independent Fiduciary will

acknowledge in writing that he or she

has received copies of the

aforementioned documents prior to

investing in the Foundations Program.

(c) Specific Disclosures for the

Primary Independent Fiduciary or the

Directing Independent Fiduciary. The

Bank will provide each Primary

Independent Fiduciary or Directing

Independent Fiduciary with the

following materials and/or oral

disclosures prior to investing in an

Asset Allocation Model: (1) a written

analysis based on such fiduciary’s

Investor Profile, (2) a description of the

Asset Allocation Model recommended

by the Bank’s investment counselor,

which includes a description of the

actual fee structure and the actual

number of basis points that will be

rebated to such Plan fiduciary; (3) a

prospectus for each Affiliated Fund and

Third Party Fund in which the Plan may

be invested, showing, among other

things, the internal fees for the Fund;

and (4) upon the request of the Primary

Independent Fiduciary or the Directing

Independent Fiduciary, a Statement of

Additional Information which

supplements the prospectus. The

Primary Independent Fiduciary or the

Directing Independent Fiduciary will

also acknowledge in writing to the Bank

that he or she has received copies of the

aforementioned documents prior to the

Plan’s investment in an Asset Allocation

Model.

(d) Continuing Disclosures for the

Primary Independent Fiduciary or the

Directing Independent Fiduciary. In

addition to the disclosures described

above, the Bank will provide each

Primary Independent Fiduciary and

Directing Independent Fiduciary with

the following continuing disclosures: (1)

Copies of applicable prospectuses; (2)

written confirmation of each purchase

and redemption of shares of an

Affiliated Fund or a Third Party Fund,

including transactions implemented as a

result of a realignment of the Asset

Allocation Model’s investment mix or

from the rebalancing of a participating

Plan’s investments in conformity with

the selected Asset Allocation Model; (3)

telephone quotations of the Plan’s

balance under the Foundations Program;

(4) periodic, but at least quarterly,

account statements showing the Plan’s

value, a summary of purchase, sale and

exchange activity and dividends

received or reinvested, a summary of

cumulative realized gain and/or loss,

and rebated amounts; (5) semiannual or

annual reports that include financial

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42259

statements for the Funds, as well as a

description of the fees that are paid by

the Funds to the Bank and its affiliates;

(6) at least annually, a written or oral

inquiry from the Bank to ascertain

whether information provided on the

Investor Profile is still accurate and to

determine if such information should be

updated; (7) an annual Termination

Advisory; and (8) the Bank’s investment

advisory and other agreements with any

Affiliated Fund as well as its

distribution agreement pertaining to the

Third Party Funds, upon request.

Communications received from the

Funds will be distributed to the Primary

Independent Fiduciary, who may elect

to pass this information through to

Directing Independent Fiduciaries.

Finally, for a period of six years, the

Bank will maintain records necessary to

enable the Department, Plan fiduciaries,

participants and others to determine

whether the conditions of the requested

exemption have been met.

More Steering Concerns

19. The Applicants state that the

Asset Allocation Models used in the

Foundations Program were designed to

meet very specific risk tolerances and

investment objectives developed by

Morningstar and Lipper. The Applicants

note that each Asset Segment in an

Asset Allocation Model performs a role

in addressing those tolerances and

objectives. In this regard, the Applicants

explain that each Asset Segment is

represented by only one Fund—an

Affiliated Fund or a Third Party Fund.

Therefore, the Applicants state that the

Bank cannot steer assets within an Asset

Allocation Model to a Third Party Fund

rather than an Affiliated Fund

representing the same Asset Segment.

20. In summary, the Applicants

represent that the proposed transactions

will satisfy the statutory criteria for an

administrative exemption under section

408(a) of the Act because:

(a) The investment of a Plan’s assets

under the Foundations Program will be

made by a Primary Independent

Fiduciary or a Directing Independent

Fiduciary who is independent of the

Bank and its affiliates such that the Plan

fiduciary will maintain complete

discretion with respect to participating

under the Foundations Program.

(b) No Plan will pay a fee or

commission by reason of the acquisition

or redemption of shares of the Funds.

(c) As to each Plan, the total fees that

are paid to the Bank and its affiliates

will constitute no more than reasonable

compensation for the services provided.

(d) Prior to investing under the

Foundations Program, each Primary

Independent Fiduciary or Directing

Independent Fiduciary will receive

offering materials and disclosures from

the Bank which set forth all material

facts concerning the purpose, fee

structure, rebate arrangement, operation,

rebalancing, risks and participation in

such Program.

(e) The Bank will provide written

documentation to a Primary

Independent Fiduciary or a Directing

Independent Fiduciary of its

recommendations based upon objective

criteria that will be uniformly applied.

(f) The quarterly Wrap Fee that is paid

by a Plan to the Bank for asset allocation

and related services rendered to such

Plan under the Portfolio Advisor

Program will be offset by—(1) All

Advisory Fees received by the Bank

and/or its affiliates from the Affiliated

Funds; (2) all Administrative Fees that

are received by the Bank from the

Affiliated Funds; and (3) all

Administrative Fees that are paid by the

Third Party Funds to the Bank and/or its

affiliates, such that the sum of the Wrap

Fee and the Offset Fees will always

equal the total Wrap Fee and the

selection of Affiliated or Third Party

Funds will always be revenue-neutral.

(g) No Plan assets will be invested

according to a Model Adjustment

without the consent of the Primary

Independent Fiduciary if the Model

Adjustment is outside the range

specified in the Account Agreement.

(h) The periodic rebalancing of a Plan

investor’s account will not involve an

exercise of discretionary management or

control over the Plan by the Bank.

(i) The Bank will retain the

Independent Financial Analyst to (1)

review the investment of Plan assets in

a Third Party Fund to ensure adequate

performance and suitability, (2) review

the Funds each time the Bank

determines to add a Third Party Fund or

replace an Affiliated Fund with a Third

Party Fund; and (3) ensure that there is

no overlap between the Funds.

(j) Although the Primary Independent

Fiduciary or the Directing Independent

Fiduciary may withdraw from the

Foundations Program at any time, any

authorizations made by such Plan

investors with respect to increases in

the Wrap Fee, Model Adjustments that

are outside of an Asset Allocation

Model, the addition or substitution of a

Fund, will be terminable at will and

without penalty to the Plan.

(k) Each Primary Independent

Fiduciary or Directing Independent

Fiduciary will receive ongoing

disclosures from the Bank regarding the

continued participation of the Plan in

the Foundations Program.

(l) All dealings between a Plan, the

Funds and the Bank will remain on a

basis which is at least as favorable to the

Plan as such dealings are with other

shareholders of the Funds holding the

same classes of shares as the Plan.

Notice to Interested Persons

The Applicants represent that because

potentially interested participants and

beneficiaries of eligible Plans which

might choose to participate in the

Foundations Program cannot be

identified at this time, the only practical

means of notifying such participants

and beneficiaries of this proposed

exemption is by publication of the

notice of pendency in the Federal

Register. Therefore, comments and

requests for a hearing must be received

by the Department no later than 30 days

from the date of the publication of this

notice of proposed exemption in the

Federal Register.

For Further Information Contact: Ms.

Jan D. Broady of the Department,

telephone (202) 219–8881. (This is not

a toll-free number.)

First Tennessee National Corporation

Located in Memphis, Tennessee

[Application No. D–10898]

Proposed Exemption

I. Transactions

A. The restrictions of sections 406(a)

and 407(a) of the Act and the taxes

imposed by section 4975(a) and (b) of

the Code by reason of section

4975(c)(1)(A) through (D) of the Code

shall not apply to the following

transactions involving trusts and

certificates evidencing interests therein:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

the sponsor or underwriter and an

employee benefit plan when the

sponsor, servicer, trustee or insurer of a

trust, the underwriter of the certificates

representing an interest in the trust, or

an obligor is a party in interest with

respect to such plan;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates; and

(3) The continued holding of

certificates acquired by a plan pursuant

to subsection I.A.(1) or (2).

Notwithstanding the foregoing,

section I.A. does not provide an

exemption from the restrictions of

sections 406(a)(1)(E), 406(a)(2) and 407

for the acquisition or holding of a

certificate on behalf of an Excluded Plan

by any person who has discretionary

authority or renders investment advice

42260 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

14Section I.A. provides no relief from sections

406(a)(1)(E), 406(a)(2) and 407 for any person

rendering investment advice to an Excluded Plan

within the meaning of section 3(21)(A)(ii) and

regulation 29 CFR 2510.3–21(c). 15For purposes of this proposed exemption, each

plan participating in a commingled fund (such as

a bank collective trust fund or insurance company

pooled separate account) shall be considered to

own the same proportionate undivided interest in

each asset of the commingled fund as its

proportionate interest in the total assets of the

commingled fund as calculated on the most recent

preceding valuation date of the fund.

16 In the case of a private placement

memorandum, such memorandum must contain

substantially the same information that would be

disclosed in a prospectus if the offering of the

certificates were made in a registered public

offering under the Securities Act of 1933. In the

Department’s view, the private placement

memorandum must contain sufficient information

to permit plan fiduciaries to make informed

investment decisions.

with respect to the assets of that

Excluded Plan.14

B. The restrictions of sections

406(b)(1) and 406(b)(2) of the Act, and

the taxes imposed by section 4975(a)

and (b) of the Code by reason of section

4975(c)(1)(E) of the Code, shall not

apply to:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

the sponsor or underwriter and a plan

when the person who has discretionary

authority or renders investment advice

with respect to the investment of plan

assets in the certificates is (a) an obligor

with respect to 5 percent or less of the

fair market value of obligations or

receivables contained in the trust, or (b)

an affiliate of a person described in (a);

if:

(i) The plan is not an Excluded Plan;

(ii) Solely in the case of an acquisition

of certificates in connection with the

initial issuance of the certificates, at

least 50 percent of each class of

certificates in which plans have

invested is acquired by persons

independent of the members of the

Restricted Group and at least 50 percent

of the aggregate interest in the trust is

acquired by persons independent of the

Restricted Group;

(iii) A plan’s investment in each class

of certificates does not exceed 25

percent of all of the certificates of that

class outstanding at the time of the

acquisition; and

(iv) Immediately after the acquisition

of the certificates, no more than 25

percent of the assets of a plan with

respect to which the person has

discretionary authority or renders

investment advice are invested in

certificates representing an interest in a

trust containing assets sold or serviced

by the same entity.15 For purposes of

this paragraph B.(1)(iv) only, an entity

will not be considered to service assets

contained in a trust if it is merely a

subservicer of that trust;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates, provided that the conditions

set forth in paragraphs B.(1)(i), (iii) and

(iv) are met; and

(3) The continued holding of

certificates acquired by a plan pursuant

to subsection I.B.(1) or (2).

C. The restrictions of sections 406(a),

406(b) and 407(a) of the Act, and the

taxes imposed by section 4975(a) and (b)

of the Code by reason of section 4975(c)

of the Code, shall not apply to

transactions in connection with the

servicing, management and operation of

a trust, provided:

(1) Such transactions are carried out

in accordance with the terms of a

binding pooling and servicing

arrangement; and

(2) The pooling and servicing

agreement is provided to, or described

in all material respects in, the

prospectus or private placement

memorandum provided to investing

plans before they purchase certificates

issued by the trust.16

Notwithstanding the foregoing,

section I.C. does not provide an

exemption from the restrictions of

section 406(b) of the Act, or from the

taxes imposed by reason of section

4975(c) of the Code, for the receipt of a

fee by a servicer of the trust from a

person other than the trustee or sponsor,

unless such fee constitutes a ‘‘qualified

administrative fee’’ as defined in section

III.S.

D. The restrictions of sections 406(a)

and 407(a) of the Act, and the taxes

imposed by sections 4975(a) and (b) of

the Code by reason of sections

4975(c)(1)(A) through (D) of the Code,

shall not apply to any transactions to

which those restrictions or taxes would

otherwise apply merely because a

person is deemed to be a party in

interest or disqualified person

(including a fiduciary) with respect to a

plan by virtue of providing services to

the plan (or by virtue of having a

relationship to such service provider

described in section 3(14)(F), (G), (H) or

(I) of the Act or section 4975(e)(2)(F),

(G), (H) or (I) of the Code), solely

because of the plan’s ownership of

certificates.

II. General Conditions

A. The relief provided under Part I is

available only if the following

conditions are met:

(1) The acquisition of certificates by a

plan is on terms (including the

certificate price) that are at least as

favorable to the plan as they would be

in an arm’s-length transaction with an

unrelated party;

(2) The rights and interests evidenced

by the certificates are not subordinated

to the rights and interests evidenced by

other certificates of the same trust;

(3) The certificates acquired by the

plan have received a rating from a rating

agency (as defined in section III.W.) at

the time of such acquisition that is in

one of the three highest generic rating

categories;

(4) The trustee is not an affiliate of

any other member of the Restricted

Group. However, the trustee shall not be

considered to be an affiliate of a servicer

solely because the trustee has succeeded

to the rights and responsibilities of the

servicer pursuant to the terms of a

pooling and servicing agreement

providing for such succession upon the

occurrence of one or more events of

default by the servicer;

(5) The sum of all payments made to

and retained by the underwriters in

connection with the distribution or

placement of certificates represents not

more than reasonable compensation for

underwriting or placing the certificates;

the sum of all payments made to and

retained by the sponsor pursuant to the

assignment of obligations (or interests

therein) to the trust represents not more

than the fair market value of such

obligations (or interests); and the sum of

all payments made to and retained by

the servicer represents not more than

reasonable compensation for the

servicer’s services under the pooling

and servicing agreement and

reimbursement of the servicer’s

reasonable expenses in connection

therewith;

(6) The plan investing in such

certificates is an ‘‘accredited investor’’

as defined in Rule 501(a)(1) of

Regulation D of the Securities and

Exchange Commission under the

Securities Act of 1933; and

(7) In the event that the obligations

used to fund a trust have not all been

transferred to the trust on the closing

date, additional obligations as specified

in subsection III.B.(1) may be transferred

to the trust during the pre-funding

period (as defined in section III.BB.) in

exchange for amounts credited to the

pre-funding account (as defined in

section III.Z.), provided that:

(a) The pre-funding limit (as defined

in section III.AA.) is not exceeded;

(b) All such additional obligations

meet the same terms and conditions for

eligibility as those of the original

obligations used to create the trust

corpus (as described in the prospectus

or private placement memorandum and/

or pooling and servicing agreement for

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42261

such certificates), which terms and

conditions have been approved by a

rating agency. Notwithstanding the

foregoing, the terms and conditions for

determining the eligibility of an

obligation may be changed if such

changes receive prior approval either by

a majority of the outstanding

certificateholders or by a rating agency;

(c) The transfer of such additional

obligations to the trust during the prefunding period does not result in the

certificates receiving a lower credit

rating from a rating agency upon

termination of the pre-funding period

than the rating that was obtained at the

time of the initial issuance of the

certificates by the trust;

(d) The weighted average annual

percentage interest rate (the average

interest rate) for all of the obligations in

the trust at the end of the pre-funding

period will not be more than 100 basis

points lower than the average interest

rate for the obligations which were

transferred to the trust on the closing

date;

(e) In order to ensure that the

characteristics of the receivables

actually acquired during the prefunding period are substantially similar

to those which were acquired as of the

closing date, the characteristics of the

additional obligations will be either

monitored by a credit support provider

or other insurance provider which is

independent of the sponsor, or an

independent accountant retained by the

sponsor will provide the sponsor with a

letter (with copies provided to the rating

agency, the underwriter and the

trustees) stating whether or not the

characteristics of the additional

obligations conform to the

characteristics of such obligations

described in the prospectus, private

placement memorandum and/or pooling

and servicing agreement. In preparing

such letter, the independent accountant

will use the same type of procedures as

were applicable to the obligations which

were transferred as of the closing date;

(f) The pre-funding period shall be

described in the prospectus or private

placement memorandum provided to

investing plans; and

(g) The trustee of the trust (or any

agent with which the trustee contracts

to provide trust services) will be a

substantial financial institution or trust

company experienced in trust activities

and familiar with its duties,

responsibilities and liabilities as a

fiduciary under the Act. The trustee, as

the legal owner of the obligations in the

trust, will enforce all the rights created

in favor of certificateholders of such

trust, including employee benefit plans

subject to the Act.

B. Neither any underwriter, sponsor,

trustee, servicer, insurer, nor any

obligor, unless it or any of its affiliates

has discretionary authority or renders

investment advice with respect to the

plan assets used by a plan to acquire

certificates, shall be denied the relief

provided under Part I, if the provision

of subsection II.A.(6) above is not

satisfied with respect to acquisition or

holding by a plan of such certificates,

provided that (1) such condition is

disclosed in the prospectus or private

placement memorandum; and (2) in the

case of a private placement of

certificates, the trustee obtains a

representation from each initial

purchaser which is a plan that it is in

compliance with such condition, and

obtains a covenant from each initial

purchaser to the effect that, so long as

such initial purchaser (or any transferee

of such initial purchaser’s certificates) is

required to obtain from its transferee a

representation regarding compliance

with the Securities Act of 1933, any

such transferees will be required to

make a written representation regarding

compliance with the condition set forth

in subsection II.A.(6) above.

III. Definitions

For purposes of this proposed

exemption:

A. ‘‘Certificate’’ means:

(1) A certificate—

(a) That represents a beneficial

ownership interest in the assets of a

trust; and

(b) That entitles the holder to passthrough payments of principal, interest,

and/or other payments made with

respect to the assets of such trust; or

(2) A certificate denominated as a

debt instrument—

(a) that represents an interest in a Real

Estate Mortgage Investment Conduit

(REMIC) or a Financial Asset

Securitization Investment Trust (FASIT)

within the meaning of section 860D(a)

or section 860L, respectively, of the

Internal Revenue Code of 1986; and

(b) That is issued by, and is an

obligation of, a trust; with respect to

certificates defined in (1) and (2) above

for which FTNC or any of its affiliates

is either (i) the sole underwriter or the

manager or co-manager of the

underwriting syndicate, or (ii) a selling

or placement agent.

For purposes of this proposed

exemption, references to ‘‘certificates

representing an interest in a trust’’

include certificates denominated as debt

which are issued by a trust.

B. ‘‘Trust’’ means an investment pool,

the corpus of which is held in trust and

consists solely of:

(1)(a) Secured consumer receivables

that bear interest or are purchased at a

discount (including, but not limited to,

home equity loans and obligations

secured by shares issued by a

cooperative housing association); and/or

(b) Secured credit instruments that

bear interest or are purchased at a

discount in transactions by or between

business entities (including, but not

limited to, qualified equipment notes

secured by leases, as defined in section

III.T); and/or

(c) Obligations that bear interest or are

purchased at a discount and which are

secured by single-family residential,

multi-family residential and commercial

real property (including obligations

secured by leasehold interests on

commercial real property); and/or

(d) Obligations that bear interest or

are purchased at a discount and which

are secured by motor vehicles or

equipment, or qualified motor vehicle

leases (as defined in section III.U); and/

or

(e) ‘‘Guaranteed governmental

mortgage pool certificates,’’ as defined

in 29 CFR 2510.3–101(i)(2); and/or

(f) Fractional undivided interests in

any of the obligations described in

clauses (a)–(e) of this section B.(1);

(2) Property which had secured any of

the obligations described in subsection

B.(1);

(3)(a) Undistributed cash or temporary

investments made therewith maturing

no later than the next date on which

distributions are to made to

certificateholders; and/or

(b) Cash or investments made

therewith which are credited to an

account to provide payments to

certificateholders pursuant to any yield

supplement agreement or similar yield

maintenance arrangement to

supplement the interest rates otherwise

payable on obligations described in

subsection III.B.(1) held in the trust,

provided that such arrangements do not

involve swap agreements or other

notional principal contracts; and/or

(c) Cash transferred to the trust on the

closing date and permitted investments

made therewith which:

(i) Are credited to a pre-funding

account established to purchase

additional obligations with respect to

which the conditions set forth in clauses

(a)–(g) of subsection II.A.(7) are met

and/or;

(ii) Are credited to a capitalized

interest account (as defined in section

III.X.); and

(iii) Are held in the trust for a period

ending no later than the first

distribution date to certificateholders

occurring after the end of the prefunding period.

42262 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

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; and

(4) rights of the trustee under the

pooling and servicing agreement, and

rights under any insurance policies,

third-party guarantees, contracts of

suretyship, yield supplement

agreements described in clause (b) of

subsection III.B.(3) and other credit

support arrangements with respect to

any obligations described in subsection

III.B.(1).

Notwithstanding the foregoing, the

term ‘‘trust’’ does not include any

investment pool unless: (i) the

investment pool consists only of assets

of the type described in clauses (a)

through (f) of subsection III.B.(1) which

have been included in other investment

pools, (ii) certificates evidencing

interests in such other investment pools

have been rated in one of the three

highest generic rating categories by a

rating agency for at least one year prior

to the plan’s acquisition of certificates

pursuant to this proposed exemption,

and (iii) certificates evidencing interests

in such other investment pools have

been purchased by investors other than

plans for at least one year prior to the

plan’s acquisition of certificates

pursuant to this proposed exemption.

C. ‘‘Underwriter’’ means:

(1) First Tennessee National Bank (the

Bank) or First Tennessee Securities

Corporation (FTSC);

(2) Any person directly or indirectly,

through one or more intermediaries,

controlling, controlled by or under

common control with FTNC; or

(3) Any member of an underwriting

syndicate or selling group of which

FTNC or a person described in (2) is a

manager or co-manager with respect to

the certificates.

D. ‘‘Sponsor’’ means the entity that

organizes a trust by depositing

obligations therein in exchange for

certificates.

E. ‘‘Master Servicer’’ means the entity

that is a party to the pooling and

servicing agreement relating to trust

assets and is fully responsible for

servicing, directly or through

subservicers, the assets of the trust.

F. ‘‘Subservicer’’ means an entity

which, under the supervision of and on

behalf of the master servicer, services

obligations contained in the trust, but is

not a party to the pooling and servicing

agreement.

G. ‘‘Servicer’’ means any entity which

services obligations contained in the

trust, including the master servicer and

any subservicer.

H. ‘‘Trustee’’ means the trustee of the

trust, and in the case of certificates

which are denominated as debt

instruments, also means the trustee of

the indenture trust.

I. ‘‘Insurer’’ means the insurer or

guarantor of, or provider of other credit

support for, a trust. Notwithstanding the

foregoing, a person is not an insurer

solely because it holds securities

representing an interest in a trust which

are of a class subordinated to certificates

representing an interest in the same

trust.

J. ‘‘Obligor’’ means any person, other

than the insurer, that is obligated to

make payments with respect to any

obligation or receivable included in the

trust. Where a trust contains qualified

motor vehicle leases or qualified

equipment notes secured by leases,

‘‘obligor’’ shall also include any owner

of property subject to any lease included

in the trust, or subject to any lease

securing an obligation included in the

trust.

K. ‘‘Excluded Plan’’ means any plan

with respect to which any member of

the Restricted Group is a ‘‘plan sponsor’’

within the meaning of section 3(16)(B)

of the Act.

L. ‘‘Restricted Group’’ with respect to

a class of certificates means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

(6) Any obligor with respect to

obligations or receivables included in

the trust constituting more than 5

percent of the aggregate unamortized

principal balance of the assets in the

trust, determined on the date of the

initial issuance of certificates by the

trust; or

(7) Any affiliate of a person described

in (1)–(6) above.

M. ‘‘Affiliate’’ of another person

includes:

(1) Any person directly or indirectly,

through one or more intermediaries,

controlling, controlled by, or under

common control with such other

person;

(2) Any officer, director, partner,

employee, relative (as defined in section

3(15) of the Act), a brother, a sister, or

a spouse of a brother or sister of such

other person; and

(3) Any corporation or partnership of

which such other person is an officer,

director or partner.

N. ‘‘Control’’ means the power to

exercise a controlling influence over the

management or policies of a person

other than an individual.

O. A person will be ‘‘independent’’ of

another person only if:

(1) Such person is not an affiliate of

that other person; and

(2) The other person, or an affiliate

thereof, is not a fiduciary who has

investment management authority or

renders investment advice with respect

to any assets of such person.

P. ‘‘Sale’’ includes the entrance into a

forward delivery commitment (as

defined in section Q below), provided:

(1) The terms of the forward delivery

commitment (including any fee paid to

the investing plan) are no less favorable

to the plan than they would be in an

arm’s-length transaction with an

unrelated party;

(2) The prospectus or private

placement memorandum is provided to

an investing plan prior to the time the

plan enters into the forward delivery

commitment; and

(3) At the time of the delivery, all

conditions of this proposed exemption

(if granted) applicable to sales are met.

Q. ‘‘Forward delivery commitment’’

means a contract for the purchase or

sale of one or more certificates to be

delivered at an agreed future settlement

date. The term includes both mandatory

contracts (which contemplate obligatory

delivery and acceptance of the

certificates) and optional contracts

(which give one party the right but not

the obligation to deliver certificates to,

or demand delivery of certificates from,

the other party).

R. ‘‘Reasonable compensation’’ has

the same meaning as that term is

defined in 29 CFR 2550.408c–2.

S. ‘‘Qualified Administrative Fee’’

means a fee which meets the following

criteria:

(1) The fee is triggered by an act or

failure to act by the obligor other than

the normal timely payment of amounts

owing in respect of the obligations;

(2) The servicer may not charge the

fee absent the act or failure to act

referred to in (1);

(3) The ability to charge the fee, the

circumstances in which the fee may be

charged, and an explanation of how the

fee is calculated are set forth in the

pooling and servicing agreement; and

(4) The amount paid to investors in

the trust will not be reduced by the

amount of any such fee waived by the

servicer.

T. ‘‘Qualified Equipment Note

Secured By A Lease’’ means an

equipment note:

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42263

17The Department notes that PTE 83–1 [48 FR

895, January 7, 1983], a class exemption for

mortgage pool investment trusts, would generally

apply to trusts containing single-family residential

mortgages, provided that the applicable conditions

of PTE 83–1 are met. FTNC requests relief for

single-family residential mortgages in this

exemption because it would prefer one exemption

for all trusts of similar structure. However, FTNC

has stated that it may still avail itself of the

exemptive relief provided by PTE 83–1.

18 Guaranteed governmental mortgage pool

certificates are mortgage-backed securities with

respect to which interest and principal payable is

guaranteed by the Government National Mortgage

Association (GNMA), the Federal Home Loan

Mortgage Corporation (FHLMC), or the Federal

National Mortgage Association (FNMA). The

Department’s regulation relating to the definition of

‘‘plan assets’’ (29 CFR 2510.3–101(i)) provides that

where a plan acquires a guaranteed governmental

mortgage pool certificate, the plan’s assets include

the certificate and all of its rights with respect to

such certificate under applicable law, but do not,

solely by reason of the plan’s holding of such

certificate, include any of the mortgages underlying

such certificate. The applicant is requesting

exemptive relief for trusts containing guaranteed

governmental mortgage pool certificates because the

certificates in the trusts may be plan assets.

19Trust assets may also include obligations that

are secured by leasehold interests on residential

real property. See PTE 90–32 involving PrudentialBache Securities, Inc. (55 FR 23147, June 6, 1990

at 23150).

(1) Which is secured by equipment

which is leased;

(2) Which is secured by the obligation

of the lessee to pay rent under the

equipment lease; and

(3) With respect to which the trust’s

security interest in the equipment is at

least as protective of the rights of the

trust as would be the case if the

equipment note were secured only by

the equipment and not the lease.

U. ‘‘Qualified Motor Vehicle Lease’’

means a lease of a motor vehicle where:

(1) The trust owns or holds a security

interest in the lease;

(2) The trust owns or holds a security

interest in the leased motor vehicle; and

(3) The trust’s security interest in the

leased motor vehicle is at least as

protective of the trust’s rights as would

be the case if the trust consisted of

motor vehicle installment loan

contracts.

V. ‘‘Pooling and Servicing

Agreement’’ means the agreement or

agreements among a sponsor, a servicer

and the trustee establishing a trust. In

the case of certificates which are

denominated as debt instruments,

‘‘Pooling and Servicing Agreement’’ also

includes the indenture entered into by

the trustee of the trust issuing such

certificates and the indenture trustee.

W. ‘‘Rating Agency’’ means Standard

& Poor’s Structured Rating Group

(S&P’s), Moody’s Investors Service, Inc.

(Moody’s), Duff & Phelps Credit Rating

Co. (D & P) or Fitch IBCA, Inc. (Fitch),

or their successors.

X. ‘‘Capitalized Interest Account’’

means a trust account: (i) which is

established to compensate

certificateholders for shortfalls, if any,

between investment earnings on the prefunding account and the pass-through

rate payable under the certificates; and

(ii) which meets the requirements of

clause (c) of subsection III.B.(3).

Y. ‘‘Closing Date’’ means the date the

trust is formed, the certificates are first

issued and the trust’s assets (other than

those additional obligations which are

to be funded from the pre-funding

account pursuant to subsection II.A.(7))

are transferred to the trust.

Z. ‘‘Pre-Funding Account’’ means a

trust account: (i) which is established to

purchase additional obligations, which

obligations meet the conditions set forth

in clauses (a)–(g) of subsection II.A.(7);

and (ii) which meets the requirements of

clause (c) of subsection III.B.(3).

AA. ‘‘Pre-Funding Limit’’ means a

percentage or ratio of the amount

allocated to the pre-funding account, as

compared to the total principal amount

of the certificates being offered which is

less than or equal to 25 percent.

BB. ‘‘Pre-Funding Period’’ means the

period commencing on the closing date

and ending no later than the earliest to

occur of: (i) the date the amount on

deposit in the pre-funding account is

less than the minimum dollar amount

specified in the pooling and servicing

agreement; (ii) the date on which an

event of default occurs under the

pooling and servicing agreement; or (iii)

the date which is the later of three

months or 90 days after the closing date.

CC. ‘‘FTNC’’ means First Tennessee

National Corporation, a Tennessee

corporation, and its affiliates.

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 (see 60 FR

at 35932).

Summary of Facts and Representations

1. FTNC, a Tennessee corporation, is

a Memphis, Tennessee based bank

holding company, which has assets of

over $18 billion and through its

subsidiaries, including the Bank,

operates 419 branches in various cities

in Tennessee, Arkansas and Mississippi.

FTNC also owns and operates

subsidiaries that engage in trust,

brokerage, investment management,

mortgage banking and consumer

finance, including First Tennessee ABS,

Inc.

FTSC is a subsidiary of the Bank. On

April 12, 1999, the Office of the

Controller of the Currency (OCC)

granted approval for the Bank to

establish FTSC as a wholly-owned

subsidiary of the Bank. The OCC

approval permitted FTSC to engage in

certain securities activities which are

permissible for national banks to engage

in directly, and also to underwrite and

deal in municipal revenue bonds. On

January 28, 2000, the OCC granted

approval for FTSC to expand its

activities in underwriting and dealing

activities with respect to all types of

debt and equity securities other than

interests in open-end investment

companies. On March 13, 2000, the OCC

approved a certification and notice filed

by the Bank for FTSC to become a

‘‘financial subsidiary’’ as permitted by

the Gramm-Leach-Bliley Act (G–L–B

Act) and OCC regulation. As a financial

subsidiary, FTSC may conduct

securities activities which are

permissible for the Bank to engage in

directly as well as securities activities

which the G–L–B Act has defined as

‘‘financial in nature,’’ such as

underwriting, dealing in, and making a

market in, all types of securities,

including interests in open-end

investment companies.

Trust Assets

2. FTNC 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; 17 (2) motor vehicle

receivable investment trusts; (3)

consumer or commercial receivables

investment trusts; and (4) guaranteed

governmental mortgage pool certificate

investment trusts.18

3. Commercial mortgage investment

trusts may include mortgages on ground

leases of real property. Commercial mort

gages are frequently secured by ground

leases on the underlying property,

rather than by fee simple interests. The

separation of the fee simple interest and

the ground lease interest is generally

done for tax reasons. Properly

structured, the pledge of the ground

lease to secure a mortgage provides a

lender with the same level of security as

would be provided by a pledge of the

related fee simple interest. The terms of

the ground leases pledged to secure

leasehold mortgages will in all cases be

at least ten years longer than the term

of such mortgages.19

Trust Structure

4. Each trust is established under a

pooling and servicing agreement

42264 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

20The Department is of the view that the term

‘‘trust’’ includes a trust: (a) the assets of which,

although all specifically identified by the sponsor

or the originator as of the closing date, are not all

transferred to the trust on the closing date for

administrative or other reasons but will be

transferred to the trust shortly after the closing date,

or (b) with respect to which certificates are not

purchased by plans until after the end of the prefunding period at which time all receivables are

contained in the trust.

21 It is the Department’s view that the definition

of ‘‘trust’’ contained in section III.B. includes a twotier structure under which certificates issued by the

first trust, which contains a pool of receivables

described above, are transferred to a second trust

which issues securities that are sold to plans.

However, the Department is of the further view that,

since the exemption provides relief for the direct or

indirect acquisition or disposition of certificates

that are not subordinated, no relief would be

available if the certificates held by the second trust

were subordinated to the rights and interests

evidenced by other certificates issued by the first

trust.

22 It is the view of the Department that section

III.B.(4) includes within the definition of the term

‘‘trust’’ rights under any yield supplement or

similar arrangement which obligates the sponsor or

master servicer, or another party specified in the

relevant pooling and servicing agreement, to

supplement the interest rates otherwise payable on

the obligations described in section III.B.(1), in

accordance with the terms of a yield supplement

arrangement described in the pooling and servicing

agreement, provided that such arrangements do not

involve swap agreements or other notional

principal contracts.

23 It is the Department’s understanding that where

a plan invests in REMIC ‘‘residual’’ interest

certificates to which this exemption applies, some

of the income received by the plan as a result of

such investment may be considered unrelated

business taxable income to the plan, which is

subject to income tax under the Code. The

Department emphasizes that the prudence

requirement of section 404(a)(l)(B) of the Act would

require plan fiduciaries to carefully consider this

and other tax consequences prior to causing plan

assets to be invested in certificates pursuant to this

proposed exemption. 24 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 investment in such subordinated

certificates.

between a sponsor, a servicer and a

trustee.20 The sponsor or servicer of a

trust selects assets to be included in the

trust.21 These 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.22

Typically, on or prior to the closing

date, the sponsor acquires legal title to

all assets selected for the trust,

establishes the trust and designates an

independent entity as trustee. On the

closing date, the sponsor conveys to the

trust legal title to the assets, and the

trustee issues certificates representing

fractional undivided interests in the

trust assets. Typically, all receivables to

be held in the trust are transferred as of

the closing date, but in some

transactions, as described more fully

below, a limited percentage of the

receivables to be held in the trust may

be transferred during a limited period of

time following the closing date, through

the use of a pre-funding account.

FTNC, alone or together with other

broker-dealers, acts as underwriter or

placement agent with respect to the sale

of the certificates. All of the public

offerings of certificates presently

contemplated are to be underwritten by

FTNC on a firm commitment basis. In

addition, FTNC anticipates that it may

privately place certificates on both a

firm commitment and an agency basis.

FTNC may also act as the lead

underwriter for a syndicate of securities

underwriters.

Certificateholders will be entitled to

receive distributions 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. These distributions

will be made monthly, quarterly, semiannually, or at such other intervals and

dates as specified in the related

prospectus or private placement

memorandum.

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

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 semi-annually,

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.

5. Some of the certificates will be

multi-class certificates. FTNC requests

exemptive relief for two types of multiclass certificates: ‘‘strip’’ certificates and

‘‘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.23

‘‘Fast-pay/slow-pay’’ 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 passthrough 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. In neither case will the rights of

a plan purchasing a certificate be

subordinated to the rights of another

certificateholder in the event of default

on any of the underlying obligations. In

particular, 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.24

6. 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 short time after the

issuance of trust certificates (within 120

days, except in the case of obligations

having an original term of 30 years, in

which case the period will not exceed

two years). Any receivable so

substituted is required to have

characteristics substantially similar to

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42265

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.

In some cases the trust will be

maintained as a Financial Asset

Securitization Investment Trust

(‘‘FASIT’’), a statutory entity created by

the Small Business Job Protection Act of

1996, adding sections 860H, 860J, 860K

and 860L to the Code. In general, a

FASIT is designed to facilitate the

securitization of debt obligations, such

as credit card receivables, home equity

loans, and auto loans, and thus, allows

certain features such as revolving pools

of assets, trusts containing unsecured

receivables and certain hedging types of

investments. A FASIT is not a taxable

entity and debt instruments issued by

such trusts, which might otherwise be

recharacterized as equity, will be treated

as debt in the hands of the holder for tax

purposes. However, a trust which is the

subject of the proposed exemption will

be maintained as a FASIT only where

the assets held by the FASIT will be

comprised of secured debt; revolving

pools of assets or hedging investments

will not be allowed unless specifically

authorized by the exemption, if granted,

so that a trust maintained as a FASIT

will be maintained as an essentially

passive entity.

Trust Structure With Pre-Funding

Account

Pre-Funding Accounts:

7. As described briefly above, some

transactions may be structured using a

pre-funding account or a capitalized

interest account. If pre-funding is used,

cash sufficient to purchase the

receivables to be transferred after the

closing date will be transferred to the

trust by the sponsor or originator on the

closing date. During the pre-funding

period, such cash and temporary

investments, if any, made therewith will

be held in a pre-funding account and

used to purchase the additional

receivables, the characteristics of which

will be substantially similar to the

characteristics of the receivables

transferred to the trust on the closing

date. 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 or (iii) the date which is the

later of three months or ninety (90) days

after the closing date. Certain specificity

and monitoring requirements described

below will be met and will be disclosed

in the pooling and servicing agreement

and/or the prospectus or private

placement memorandum.

For transactions involving a trust

using pre-funding, on the closing date,

a portion of the offering proceeds will

be allocated to the pre-funding account

generally in an amount equal to the

excess of (i) the principal amount of

certificates being issued over (ii) the

principal balance of the receivables

being transferred to the trust on such

closing date. In certain transactions, the

aggregate principal balance of the

receivables intended to be transferred to

the trust may be larger than the total

principal balance of the certificates

being issued. In these cases, the cash

deposited in the pre-funding account

will equal the excess of the principal

balance of the total receivables intended

to be transferred to the trust over the

principal balance of the receivables

being transferred on the closing date.

On the closing date, the sponsor

transfers the assets to the trust in

exchange for the certificates. The

certificates are then sold to an

underwriter for cash or to the

certificateholders directly if the

certificates are sold through a placement

agent. The cash received by the sponsor

from the certificateholders (or the

underwriter) from the sale of the

certificates issued by the trust in excess

of the purchase price for the receivables

and certain other trust expenses, such as

underwriting or placement agent fees

and legal and accounting fees,

constitutes the cash to be deposited in

the pre-funding account. Such funds are

either held in the trust and accounted

for separately, or are held in a sub-trust.

In either event, these funds are not part

of assets of the sponsor.

Generally, the receivables are

transferred at par value, unless the

interest rate payable on the receivables

is not sufficient to service both the

interest rates to be paid on the

certificates and the transaction fees (i.e.,

servicing fees, trustee fees and fees to

credit support providers). In such cases,

the receivables are sold to the trust at a

discount, based on an objective, written,

mechanical formula which is set forth in

the pooling and servicing agreement and

agreed upon in advance between the

sponsor, the rating agency and any

credit support provider or other insurer.

The proceeds payable to the sponsor

from the sale of the receivables

transferred to the trust may also be

reduced to the extent they are used to

pay transaction costs (which typically

include underwriting or placement

agent fees and legal and accounting

fees). In addition, in certain cases, the

sponsor may be required by the rating

agencies or credit support providers to

set up trust reserve accounts to protect

the certificateholders against credit

losses.

The pre-funding account of any trust

will be limited so that the percentage or

ratio of the amount allocated to the prefunding account, as compared to the

total principal amount of the certificates

being offered (the pre-funding limit)

will not exceed 25%. The pre-funding

limit (which may be expressed as a ratio

or as a stated percentage or a

combination thereof) will be specified

in the prospectus or the private

placement memorandum.

Any amounts paid out of the prefunding account are used solely to

purchase receivables and to support the

certificate pass-through rate (as

explained below). Amounts used to

support the pass-through rate are

payable only from investment earnings

and are not payable from principal.

However, in the event that, after all of

the requisite receivables have been

transferred into the trust, any funds

remain in the pre-funding account, such

funds will be paid to the

certificateholders as principal

prepayments. Upon termination of the

trust, if no receivables remain in the

trust and all amounts payable to

certificateholders have been distributed,

any amounts remaining in the trust

would be returned to the sponsor.

A dramatic change in interest rates on

the receivables held in a trust using a

pre-funding account would be handled

as follows. If the receivables (other than

those with adjustable or variable rates)

had already been originated prior to the

closing date, no action would be

required as the fluctuations in the

market interest rates would not affect

the receivables transferred to the trust

after the closing date. In contrast, if

interest rates fall after the closing date,

loans originated after the closing date

will tend to be originated at lower rates,

with the possible result that the

receivables will not support the

certificate pass-through rate. In such

situations, the sponsor could sell the

receivables into the trust at a discount,

and more receivables would be used to

fund the trust in order to support the

pass-through rate. In a situation where

interest rates drop dramatically and the

sponsor is unable to provide sufficient

receivables at the requisite interest rates,

the pool of receivables would be closed.

In this latter event, under the terms of

the pooling and servicing agreement, the

certificateholders would receive a

42266 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

repayment of principal from the unused

cash held in the pre-funding account. In

transactions where the certificate passthrough rates are variable or adjustable,

the effects of market interest rate

fluctuations are mitigated. In no event

will fluctuations in interest rates

payable on the receivable affect the

pass-through rate for fixed rate

certificates.

The cash deposited into the trust and

allocated to the pre-funding account is

invested in certain permitted

investments (see below), which may be

commingled with other accounts of the

trust. The allocation of investment

earnings to each trust account is made

periodically as earned in proportion to

each account’s allocable share of the

investment returns. As pre-funding

account investment earnings are

required to be used to support (to the

extent authorized in the particular

transaction) the pass-through amounts

payable to the certificateholders with

respect to a periodic distribution date,

the trustee is necessarily required to

make periodic, separate allocations of

the trust’s earning to each trust account,

thus ensuring that all allocable

commingled investment earnings are

properly credited to the pre-funding

account on a timely basis.

The Capitalized Interest Account:

8. In certain transactions where a prefunding account is used, the sponsor

and/or originator may also transfer to

the trust additional cash on the closing

date, which is deposited in a capitalized

interest account and used during the

pre-funding period to compensate the

certificateholders for any shortfall

between the investment earnings on the

pre-funding account and the passthrough interest rate payable under the

certificates.

The capitalized interest account is

needed in certain transactions since the

certificates are supported by the

receivables and the earnings on the prefunding account, and it is unlikely that

the investment earnings on the prefunding account will equal the interest

rates on the certificates (although such

investment earnings will be available to

pay interest on the certificates). The

capitalized interest account funds are

paid out periodically to the

certificateholders as needed on

distribution dates to support the passthrough rate.

In addition, a portion of such funds

may be returned to the sponsor from

time to time as the receivables are

transferred into the trust and the need

for the capitalized interest account

diminishes. Any amounts held in the

capitalized interest account generally

will be returned to the sponsor and/or

originator either at the end of the prefunding 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 passthrough rate and the fees of the trust.

Such excess is sufficient to make up any

shortfall resulting from the pre-funding

account earning less than the certificate

pass-through rate. In certain of these

transactions, this occurs because the

aggregate principal amount of

receivables exceeds the aggregate

principal amount of certificates.

Pre-Funding Account and Capitalized

Interest Account Payments and

Investments:

9. Pending the acquisition of

additional receivables during the prefunding period, it is expected that

amounts in the pre-funding account and

the capitalized interest account will be

invested in certain permitted

investments or will be held uninvested.

Pursuant to the pooling and servicing

agreement, all permitted investments

must mature prior to the date the actual

funds are needed. The permitted types

of investments in the pre-funding

account and capitalized interest account

are investments which are either: (i)

Direct obligations of, or obligations fully

guaranteed as to timely payment of

principal and interest by, the United

States or any agency or instrumentality

thereof, provided that such obligations

are backed by the full faith and credit

of the United States or (ii) have been

rated (or the obligor has been rated) in

one of the three highest generic rating

categories by 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 preestablished 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:

10. 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) 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;

(ii) The transfer to the trust of the

receivables acquired during the prefunding period will not result in the

certificates receiving a lower credit

rating from the rating agency upon

termination of the pre-funding period

than the rating that was obtained at the

time of the initial issuance of the

certificates by the trust;

(iii) The weighted average annual

percentage interest rate (the average

interest rate) for all of the obligations in

the trust at the end of the pre-funding

period will not be more than 100 basis

points lower than the average interest

rate for the obligations which were

transferred to the trust on the closing

date;

(iv) The trustee of the trust (or any

agency with which the trustee contracts

to provide trust services) will be a

substantial financial institution or trust

company experienced in trust activities

and familiar with its duties,

responsibilities, and liabilities as a

fiduciary under the Act. The trustee, as

the legal owner of the obligations in the

trust, will enforce all the rights created

in favor of certificateholders of such

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42267

trust, including employee benefit plans

subject to the Act.

In order to ensure that the

characteristics of the receivables

actually acquired during the prefunding period are substantially similar

to receivables that were acquired as of

the closing date, the characteristics of

the additional obligations subsequently

acquired will be either: (i) Monitored by

a credit support provider or other

insurance provider which is

independent of the sponsor; or (ii) an

independent accountant retained by the

sponsor will provide the sponsor with a

letter (with copies provided to the rating

agency, FTNC and the trustee) stating

whether or not the characteristics of the

additional obligations acquired after the

closing date conform to the

characteristics of such obligations

described in the prospectus, private

placement memorandum and/or pooling

and servicing agreement. In preparing

such letter, the independent accountant

will use the same type of procedures as

were applicable to the obligations which

were transferred as of the closing date.

Each prospectus, private placement

memorandum and/or pooling and

servicing agreement will set forth the

terms and conditions for eligibility of

the receivables to be included in the

trust as of the related closing date, as

well as those to be acquired during the

pre-funding period, which terms and

conditions will have been agreed to by

the rating agencies which are rating the

applicable certificates as of the closing

date. Also included among these

conditions is the requirement that the

trustee be given prior notice of the

receivables to be transferred, along with

such information concerning those

receivables as may be requested. Each

prospectus or private placement

memorandum will describe the amount

to be deposited in, and the mechanics

of, the pre-funding account and will

describe the pre-funding period for the

trust.

Parties to Transactions

11. The originator of a receivable is

the entity that initially lends money to

a borrower (obligor), such as a home

owner 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 businesses, including finance

companies for whom such origination

constitutes the bulk of their operations,

financial institutions for whom such

origination constitutes a substantial part

of their operations, and any kind of

manufacturer, merchant, or service

enterprise for whom such origination is

an incidental part of its operations. Each

trust may contain assets of one or more

originators. The originator of the

receivables may also function as the

trust sponsor or servicer. The originator

may be an affiliate of FTNC.

12. 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.

13. The trustee of a trust is the legal

owner of the obligations in the trust.

The trustee is also a party to or

beneficiary of all the documents and

instruments deposited in the trust, and

as such is responsible for enforcing all

the rights created thereby in favor of

certificateholders.

The trustee will be an independent

entity, and therefore will be unrelated to

FTNC, the trust sponsor, the servicer or

any other member of the Restricted

Group (as defined in section III.L.).

FTNC represents that the trustee will be

a substantial financial institution or

trust company experienced in trust

activities. The trustee receives a fee for

its services, which will be paid by the

servicer or sponsor or out of the trust

assets. The method of compensating the

trustee which is specified in the pooling

and servicing agreement will be

disclosed in the prospectus or private

placement memorandum relating to the

offering of the certificates.

14. 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.

Receivables of the type suitable for

inclusion in a trust invariably are

serviced with the assistance of a

computer. After the sale, the servicer

keeps the sold receivables on the

computer system in order to continue

monitoring the accounts. Although the

records relating to sold receivables are

kept in the same master file as

receivables retained by the originator,

the sold receivables are flagged as

having been sold. To protect the

investor’s interest, the servicer

ordinarily covenants that this ‘‘sold

flag’’ will be included in all records

relating to the sold receivables,

including the master file, archives, tape

extracts and printouts.

The sold flags are invisible to the

obligor and do not affect the manner in

which the servicer performs the billing,

posting and collection procedures

related to the sold receivables. However,

the servicer uses the sold flag to identify

the receivables for the purpose of

reporting all activity on those

receivables after their sale to investors.

Depending on the type of receivable

and the details of the servicer’s

computer system, in some cases the

servicer’s internal reports can be

adapted for investor reporting with little

or no modification. In other cases, the

servicer may have to perform special

calculations to fulfill the investor

reporting responsibilities. These

calculations can be performed on the

servicer’s main computer, or on a small

computer with data supplied by the

main system. In all cases, the numbers

produced for the investors are

reconciled to the servicer’s books and

reviewed by public accountants.

The underwriter (i.e., FTNC, its

affiliate, or a member of an underwriting

syndicate or selling group of which

FTNC or its affiliate is a manager or comanager) will be a registered brokerdealer that acts as underwriter or

placement agent with respect to the sale

of the certificates. Public offerings of

certificates are generally made on a firm

commitment basis. Private placement of

certificates may be made on a firm

commitment or agency basis. It is

anticipated that the lead and comanaging underwriters will make a

market in certificates offered to the

public.

In some cases, the originator and

servicer of receivables to be included in

a trust and the sponsor of the trust

(although they may themselves be

related) will be unrelated to FTNC. In

42268 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

25The pass-through rate on certificates

representing interests in trusts holding leases is

determined by breaking down lease payments into

‘‘principal’’ and ‘‘interest’’ components based on an

implicit interest rate.

other cases, however, affiliates of FTNC

may originate or service receivables

included in a trust or may sponsor a

trust.

Certificate Price, Pass-Through Rate and

Fees

15. In some cases, the sponsor will

obtain the receivables from various

originators pursuant to existing

contracts with such originators under

which the sponsor continually buys

receivables. In other cases, the sponsor

will purchase the receivables at fair

market value from the originator or a

third party pursuant to a purchase and

sale agreement related to the specific

offering of certificates. In other cases,

the sponsor will originate the

receivables itself.

As compensation for the receivables

transferred to the trust, the sponsor

receives certificates representing the

entire beneficial interest in the trust, or

the cash proceeds of the sale of such

certificates. If the sponsor receives

certificates from the trust, the sponsor

sells all or a portion of these certificates

for cash to investors or securities

underwriters.

16. The price of the certificates, both

in the initial offering and in the

secondary market, is affected by market

forces, including investor demand, the

pass-through interest rate on the

certificates in relation to the rate

payable on investments of similar types

and quality, expectations as to the effect

on yield resulting from prepayment of

underlying receivables, and

expectations as to the likelihood of

timely payment.

The pass-through rate for certificates

is equal to the interest rate on

receivables included in the trust minus

a specified servicing fee.25 This rate is

generally determined by the same

market forces that determine the price of

a certificate. The price of a certificate

and its pass-through, or coupon, rate

together determine the yield to

investors. If an investor purchases a

certificate at less than par, that discount

augments the stated pass-through rate;

conversely, a certificate purchased at a

premium yields less than the stated

coupon.

17. As compensation for performing

its servicing duties, the servicer (who

may also be the sponsor or an affiliate

thereof, and receive fees for acting in

that capacity) will retain the difference

between payments received on the

receivables in the trust and payments

payable (at the pass-through rate) to

certificateholders, except that in some

cases a portion of the payments on

receivables may be paid to a third party,

such as a fee paid to a provider of credit

support. The servicer may receive

additional compensation by having the

use of the amounts paid on the

receivables between the time they are

received by the servicer and the time

they are due to the trust (which time is

set forth in the pooling and servicing

agreement). The servicer typically will

be required to pay the administrative

expenses of servicing the trust,

including in some cases the trustee’s

fee, out of its servicing compensation.

The servicer is also compensated to

the extent it may provide credit

enhancement to the trust or otherwise

arrange to obtain credit support from

another party. This ‘‘credit support fee’’

may be aggregated with other servicing

fees, and is either paid out of the

interest income received on the

receivables in excess of the pass-through

rate or paid in a lump sum at the time

the trust is established.

18. 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.

19. Payments on receivables may be

made by obligors to the servicer at

various times during the period

preceding any date on which passthrough 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 passthrough 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.

20. The underwriter will receive a fee

in connection with the securities

underwriting or private placement of

certificates. In a firm commitment

underwriting, this fee would consist of

the difference between what the

underwriter receives for the certificates

that it distributes and what it pays the

sponsor for those certificates. In a

private placement, the fee normally

takes the form of an agency commission

paid by the sponsor. In a best efforts

underwriting in which the underwriter

would sell certificates in a public

offering on an agency basis, the

underwriter would receive an agency

commission rather than a fee based on

the difference between the price at

which the certificates are sold to the

public and what it pays the sponsor. In

some private placements, the

underwriter may buy certificates as

principal, in which case its

compensation would be the difference

between what it receives for the

certificates that it sells and what it pays

the sponsor for these certificates.

Purchase of Receivables by the Servicer

21. The applicant represents that as

the principal amount of the receivables

in a trust is reduced by payments, the

cost of administering the trust generally

increases, making the servicing of the

trust prohibitively expensive at some

point. Consequently, the pooling and

servicing agreement generally provides

that the servicer may purchase the

receivables remaining in the trust when

the aggregate unpaid balance payable on

the receivables is reduced to a specified

percentage (usually 5 to 10 percent) of

the initial aggregate unpaid balance.

The purchase price of a receivable is

specified in the pooling and servicing

agreement and will be at least equal to:

(1) the unpaid principal balance on the

receivable plus accrued interest, less

any unreimbursed advances of principal

made by the servicer; or (2) the greater

of (a) the amount in (1) or (b) the fair

market value of such obligations in the

case of a REMIC, or the fair market value

of the receivables in the case of a trust

that is not a REMIC.

Certificate Ratings

22. The certificates will have received

one of the three highest ratings available

from a rating agency. Insurance or other

credit support (such as surety bonds,

letters of credit, guarantees, or

overcollateralization) will be obtained

by the trust sponsor to the extent

necessary for the certificates to attain

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42269

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.

Provision of Credit Support

23. In some cases, the master servicer,

or an affiliate of the master servicer,

may provide credit support to the trust

(i.e. act as an insurer). In these cases, the

master servicer, in its capacity as

servicer, will first advance funds to the

full extent that it determines that such

advances will be recoverable (a) out of

late payments by the obligors, (b) from

the credit support provider (which may

be the master servicer or an affiliate

thereof) or, (c) in the case of a trust that

issues subordinated certificates, from

amounts otherwise distributable to

holders of subordinated certificates, and

the master servicer will advance such

funds in a timely manner. When the

servicer is the provider of the credit

support and provides its own funds to

cover defaulted payments, it will do so

either on the initiative of the trustee, or

on its own initiative on behalf of the

trustee, but in either event it will

provide such funds to cover payments

to the full extent of its obligations under

the credit support mechanism. In some

cases, however, the master servicer may

not be obligated to advance funds but

instead would be called upon to provide

funds to cover defaulted payments to

the full extent of its obligations as

insurer. Moreover, a master servicer

typically can recover advances either

from the provider of credit support or

from future payments on the affected

assets.

If the master servicer fails to advance

funds, fails to call upon the credit

support mechanism to provide funds to

cover delinquent payments, or

otherwise fails in its duties, the trustee

would be required and would be able to

enforce the certificateholders’ rights, as

both a party to the pooling and servicing

agreement and the owner of the trust

estate, including rights under the credit

support mechanism. Therefore, the

trustee, who is independent of the

servicer, will have the ultimate right to

enforce the credit support arrangement.

When a master servicer advances

funds, the amount so advanced is

recoverable by the master servicer out of

future payments on receivables held by

the trust to the extent not covered by

credit support. However, where the

master servicer provides credit support

to the trust, there are protections in

place to guard against a delay in calling

upon the credit support to take

advantage of the fact that the credit

support declines proportionally with

the decrease in the principal amount of

the obligations in the trust as payments

on receivables are passed through to

investors. These safeguards include:

(a) There is often a disincentive to

postponing credit losses because the

sooner repossession or foreclosure

activities are commenced, the more

value that can be realized on the

security for the obligation;

(b) The master servicer has servicing

guidelines which include a general

policy as to the allowable delinquency

period after which an obligation

ordinarily will be deemed uncollectible.

The pooling and servicing agreement

will require the master servicer to

follow its normal servicing guidelines

and will set forth the master servicer’s

general policy as to the period of time

after which delinquent obligations

ordinarily will be considered

uncollectible;

(c) As frequently as payments are due

on the receivables included in the trust

(monthly, quarterly or semi-annually, as

set forth in the pooling and servicing

agreement), the master servicer is

required to report to the independent

trustee the amount of all past-due

payments and the amount of all servicer

advances, along with other current

information as to collections on the

receivables and draws upon the credit

support. Further, the master servicer is

required to deliver to the trustee

annually a certificate of an executive

officer of the master servicer stating that

a review of the servicing activities has

been made under such officer’s

supervision, and either stating that the

master servicer has fulfilled all of its

obligations under the pooling and

servicing agreement or, if the master

servicer has defaulted under any of its

obligations, specifying any such default.

The master servicer’s reports are

reviewed at least annually by

independent accountants to ensure that

the master servicer is following its

normal servicing standards and that the

master servicer’s reports conform to the

master servicer’s internal accounting

records. The results of the independent

accountants’ review are delivered to the

trustee; and

(d) The credit support has a ‘‘floor’’

dollar amount that protects investors

against the possibility that a large

number of credit losses might occur

towards the end of the life of the trust,

whether due to servicer advances or any

other cause. Once the floor amount has

been reached, the servicer lacks an

incentive to postpone the recognition of

credit losses because the credit support

amount thereafter is subject to reduction

only for actual draws. From the time

that the floor amount is effective until

the end of the life of the trust, there are

no proportionate reductions in the

credit support amount caused by

reductions in the pool principal

balance. Indeed, since the floor is a

fixed dollar amount, the amount of

credit support ordinarily increases as a

percentage of the pool principal balance

during the period that the floor is in

effect.

Disclosure

24. In connection with the original

issuance of certificates, the prospectus

or private placement memorandum will

be furnished to investing plans. The

prospectus or private placement

memorandum will contain information

material to a fiduciary’s decision to

invest in the certificates, including:

(a) Information concerning the

payment terms of the certificates, the

rating of the certificates, and any

material risk factors with respect to the

certificates;

(b) A description of the trust as a legal

entity and a description of how the trust

was formed by the seller/servicer or

other sponsor of the transaction;

(c) Identification of the independent

trustee for the trust;

(d) A description of the receivables

contained in the trust, including the

types of receivables, the diversification

of the receivables, their principal terms,

and their material legal aspects;

(e) A description of the sponsor and

servicer;

(f) A description of the pooling and

servicing agreement, including a

description of the seller’s principal

representations and warranties as to the

trust assets, including the terms and

conditions for eligibility of any

receivables transferred during the prefunding period and the trustee’s remedy

for any breach thereof; a description of

the procedures for collection of

payments on receivables and for making

distributions to investors, and a

description of the accounts into which

such payments are deposited and from

which such distributions are made; a

description of permitted investments for

any pre-funding account or capitalized

interest account; identification of the

servicing compensation and any fees for

credit enhancement that are deducted

from payments on receivables before

distributions are made to investors; a

description of periodic statements

provided to the trustee, and provided to

or made available to investors by the

trustee; and a description of the events

that constitute events of default under

the pooling and servicing contract and

a description of the trustee’s and the

investors’ remedies incident thereto;

42270 Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices

(g) A description of the credit support;

(h) A general discussion of the

principal federal income tax

consequences of the purchase,

ownership and disposition of the passthrough securities by a typical investor;

(i) A description of the underwriters’

plan for distributing the pass-through

securities to investors;

(j) Information about the scope and

nature of the secondary market, if any,

for the certificates; and

(k) A statement as to the duration of

any pre-funding period and the prefunding limit for the trust.

25. 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.

26. In the case of a trust that offers

and sells certificates in a registered

public offering, the trustee, the servicer

or the sponsor will file such periodic

reports as may be required to be filed

under the Securities Exchange Act of

1934. Although some trusts that offer

certificates in a public offering will file

quarterly reports on Form 10–Q and

Annual Reports on Form 10–K, many

trusts obtain, by application to the SEC,

a complete exemption from the

requirement to file quarterly reports on

Form 10–Q and a modification of the

disclosure requirements for annual

reports on Form 10–K. If such an

exemption is obtained, these trusts

normally would continue to have the

obligation to file current reports on

Form 8–K to report material

developments concerning the trust and

the certificates and copies of the

statements sent to certificateholders.

While the SEC’s interpretation of the

periodic reporting requirements is

subject to change, periodic reports

concerning a trust will be filed to the

extent required under the Securities

Exchange Act of 1934.

27. 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 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

28. FTNC may contemplate entering

into forward delivery commitments in

connection with the offering of passthrough certificates. The utility of

forward delivery commitments has been

recognized with respect to offering

similar certificates backed by pools of

residential mortgages, and FTNC may

find it desirable in the future to enter

into such commitments for the purchase

of certificates.

Secondary Market Transactions

29. FTNC may attempt to make a

market for securities for which it is lead

or co-managing underwriter, although it

is under no obligation to do so. At

times, FTNC will facilitate sales by

investors who purchase certificates if

FTNC has acted as agent or principal in

the original private placement of the

certificates and if such investors request

FTNC’s assistance.

Summary

30. 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 trusts contain ‘‘fixed pools’’ of

assets. There is little discretion on the

part of the trust sponsor to substitute

receivables contained in the trust once

the trust has been formed;

(b) In the case where a pre-funding

account is used, the characteristics of

the receivables to be transferred to the

trust during the pre-funding period will

be substantially similar to the

characteristics of those transferred to the

trust on the closing date, thereby giving

the sponsor and/or originator little

discretion over the selection process,

and compliance with this requirement

will be assured by the specificity of the

characteristics and the monitoring

mechanisms contemplated under the

proposed exemption. In addition,

certain cash accounts will be

established to support the certificate

pass-through rate and such cash

accounts will be invested in short-term,

conservative investments; the prefunding period will be of a reasonably

short duration; a pre-funding limit will

be imposed; and any Internal Revenue

Service requirements with respect to

pre-funding intended to preserve the

passive income character of the trust

will be met. The fiduciary of the plans

making the decision to invest in

certificates is thus fully apprised of the

nature of the receivables which will be

held in the trust and has sufficient

information to make a prudent

investment decision.

(c) Certificates in which plans invest

will have been rated in one of the three

highest rating categories by a rating

agency. Credit support will be obtained

to the extent necessary to attain the

desired rating;

(d) All transactions for which FTNC

seeks exemptive relief will be governed

by the pooling and servicing agreement,

which is made available to plan

fiduciaries for their review prior to the

plan’s investment in certificates;

(e) Exemptive relief from sections

406(b) and 407 for sales to plans is

substantially limited; and

(f) FTNC anticipates that it will make

a secondary market in certificates

(although it is under no obligation to do

so).

Notice to Interested Persons

The applicant represents that because

those potentially interested participants

and beneficiaries cannot all be

identified, the only practical means of

notifying such participants and

beneficiaries of this proposed

exemption is by the publication of this

notice in the Federal Register.

Comments and requests for a hearing

must be received by the Department not

later than 30 days from the date of

publication of this notice of proposed

exemption in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr.

J. Martin Jara of the Department,

telephone (202) 219–8881. (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

Federal Register / Vol. 65, No. 131 / Friday, July 7, 2000 / Notices 42271

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 30th day of

June, 2000.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

Department of Labor.

[FR Doc. 00–17065 Filed 7–6–00; 8:45 am]

BILLING CODE 4510–29–P