4038 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

1Section 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).

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application No. D–10304, et al.]

Proposed Exemptions; MBNA America

Bank, National Association (MBNA)

AGENCY: Pension and Welfare Benefits

Administration, Labor.

ACTION: Notice of Proposed Exemptions.

SUMMARY: This document contains

notices of pendency before the

Department of Labor (the Department) of

proposed exemptions from certain of the

prohibited transaction restrictions of the

Employee Retirement Income Security

Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing

Requests

Unless otherwise stated in the Notice

of Proposed Exemption, all interested

persons are invited to submit written

comments, and with respect to

exemptions involving the fiduciary

prohibitions of section 406(b) of the Act,

requests for hearing within 45 days from

the date of publication of this Federal

Register Notice. Comments and requests

for a hearing should state: (1) The name,

address, and telephone number of the

person making the comment or request,

and (2) the nature of the person’s

interest in the exemption and the

manner in which the person would be

adversely affected by the exemption. A

request for a hearing must also state the

issues to be addressed and include a

general description of the evidence to be

presented at the hearing.

ADDRESSES: All written comments and

request for a hearing (at least three

copies) should be sent to the Pension

and Welfare Benefits Administration,

Office of Exemption Determinations,

Room N–5649, U.S. Department of

Labor, 200 Constitution Avenue, NW.,

Washington, DC 20210. Attention:

Application No. stated in each Notice of

Proposed Exemption. The applications

for exemption and the comments

received will be available for public

inspection in the Public Documents

Room of Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–5507, 200 Constitution

Avenue, NW., Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions

will be provided to all interested

persons in the manner agreed upon by

the applicant and the Department

within 15 days of the date of publication

in the Federal Register. Such notice

shall include a copy of the notice of

proposed exemption as published in the

Federal Register and shall inform

interested persons of their right to

comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The

proposed exemptions were requested in

applications filed pursuant to section

408(a) of the Act and/or section

4975(c)(2) of the Code, and in

accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR

32836, 32847, August 10, 1990).

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978 (43 FR 47713, October 17, 1978)

transferred the authority of the Secretary

of the Treasury to issue exemptions of

the type requested to the Secretary of

Labor. Therefore, these notices of

proposed exemption are issued solely

by the Department.

The applications contain

representations with regard to the

proposed exemptions which are

summarized below. Interested persons

are referred to the applications on file

with the Department for a complete

statement of the facts and

representations.

MBNA America Bank, National Association

(MBNA), Located in Newark, Delaware,

(Application No. D–10304)

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

and section 4975(c)(2) of the Code and

in accordance with the procedures set

forth in 29 CFR part 2570, subpart B (55

FR 32836, 32847, August 10, 1990).

Section I—Transactions

A. Effective as of the date this

proposed exemption is granted, the

restrictions of sections 406(a) and 407(a)

of the Act and the taxes imposed by

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

reason of section 4975(c)(1)(A) through

(D) of the Code, shall not apply to the

following transactions involving trusts

and certificates evidencing interests

therein:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

the trust, the sponsor or an underwriter

and an employee benefit plan subject to

the Act or section 4975 of the Code (a

plan) when the sponsor, servicer, trustee

or insurer of a trust, the underwriter of

the certificates representing an interest

in the trust, or an obligor is a party in

interest with respect to such plan;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates; and

(3) The continued holding of

certificates acquired by a plan pursuant

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

Notwithstanding the foregoing,

Section I.A. does not provide an

exemption from the restrictions of

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

for the acquisition or holding of a

certificate on behalf of an Excluded

Plan, as defined in Section III.K. below,

by any person who has discretionary

authority or renders investment advice

with respect to the assets of the

Excluded Plan that are invested in

certificates.1

B. Effective as of the date this

proposed exemption is granted, the

restrictions of sections 406(b)(1) and

406(b)(2) of the Act and the taxes

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

the Code, by reason of section

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

apply to:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

the trust, the sponsor or an underwriter

and a plan when the person who has

discretionary authority or renders

investment advice with respect to the

investment of plan assets in the

certificates is (a) an obligor with respect

to receivables contained in the trust

constituting 0.5 percent or less of the

fair market value of the obligations or

receivables contained in the aggregate

undivided interest in the trust allocated

to the certificates of the relevant series,

or (b) an affiliate of a person described

in (a); if

(i) The plan is not an Excluded Plan;

(ii) Solely in the case of an acquisition

of certificates in connection with the

initial issuance of the certificates, at

least 50 percent of each class of

certificates in which plans have

invested is acquired by persons

independent of the members of the

Restricted Group, as defined in Section

III.L., and at least 50 percent of the

aggregate undivided interest in the trust

allocated to the certificates of a series is

acquired by persons independent of the

Restricted Group;

(iii) A plan’s investment in each class

of certificates of a series does not exceed

25 percent of all of the certificates of

that class outstanding at the time of the

acquisition;

(iv) Immediately after the acquisition

of the certificates, no more than 25

percent of the assets of a plan with
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4039

2For 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.

3 In the case of a private placement memorandum,

such memorandum must contain substantially the

same information that would be disclosed in a

prospectus if the offering of the certificates were

made in a registered public offering under the

Securities Act of 1933. In the Department’s view,

the private placement memorandum must contain

sufficient information to permit plan fiduciaries to

make informed investment decisions. For purposes

of this proposed exemption, all references to

‘‘prospectus’’ include any related supplement

thereto, and any documents incorporated by

reference therein, pursuant to which certificates are

offered to investors.

respect to which the person has

discretionary authority or renders

investment advice is invested in

certificates representing the aggregate

undivided interest in a trust allocated to

the certificates of a series and

containing receivables sold or serviced

by the same entity; 2 and

(v) Immediately after the acquisition

of the certificates, not more than 25

percent of the assets of a plan with

respect to which the person has

discretionary authority or renders

investment advice is invested in

certificates representing an interest in

the trust, or trusts containing

receivables sold or serviced by the same

entity. For purposes of paragraphs

B.(1)(iv) and B.(1)(v) only, an entity

shall not be considered to service

receivables contained in a trust if it is

merely a subservicer of that trust;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates, provided that conditions set

forth in Section I. B.(1)(i), (iii) through

(v) are met; and

(3) The continued holding of

certificates acquired by a plan pursuant

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

C. Effective as of the date that the

proposed exemption is granted, the

restrictions of sections 406(a), 406(b)

and 407(a) of the Act and the taxes

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

the Code, by reason of section 4975(c)

of the Code, shall not apply to

transactions in connection with the

servicing, management and operation of

a trust, including reassigning

receivables to the sponsor, removing

from the trust receivables in accounts

previously designated to the trust,

changing the underlying terms of

accounts designated to the trust, adding

new receivables to the trust, designating

new accounts to the trust, the retention

of a retained interest by the sponsor in

the receivables, the exercise of the right

to cause the commencement of

amortization of the principal amount of

the certificates, or the use of any eligible

swap transactions, provided that:

(1) Such transactions are carried out

in accordance with the terms of a

binding pooling and servicing

agreement;

(2) The pooling and servicing

agreement is provided to, or described

in all material respects in the prospectus

or private placement memorandum

provided to, investing plans before they

purchase certificates issued by the

trust; 3

(3) The addition of new receivables or

designation of new accounts, or the

removal of receivables in previouslydesignated accounts, meets the terms

and conditions for such additions,

designations or removals as are

described in the prospectus or private

placement memorandum of such

certificates, which terms and conditions

have been approved by Standard &

Poor’s Ratings Services, Moody’s

Investors Service, Inc., Duff & Phelps

Credit Rating Co., or Fitch Investors

Service, L.P., or their successors

(collectively, the Rating Agencies), and

does not result in the certificates

receiving a lower credit rating from the

Rating Agencies than the then current

rating of the certificates; and

(4) The series of which the certificates

are a part will be subject to an

‘‘Economic Pay Out Event’’ (as defined

in Section III.X.), which is set forth in

the pooling and servicing agreement and

described in the prospectus or private

placement memorandum associated

with the series, the occurrence of which

will cause any revolving period,

scheduled amortization period or

scheduled accumulation period

applicable to the certificates to end, and

principal collections to be applied to

monthly payments of principal to, or the

accumulation of principal for the benefit

of, the certificateholders of such series

until the earlier of payment in full of the

outstanding principal amount of the

certificates of such series or the series

termination date specified in the

prospectus or private placement

memorandum.

Notwithstanding the foregoing,

Section I.C. does not provide an

exemption from the restrictions of

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

taxes imposed under section 4975(a)

and (b) of the Code, by reason of section

4975(c)(1)(E) or (F) of the Code, for the

receipt of a fee by the servicer of the

trust, in connection with the servicing

of the receivables and the operation of

the trust, from a person other than the

trustee or sponsor, unless such fee

constitutes a ‘‘qualified administrative

fee’’ as defined in Section III.U. below.

D. Effective as of the date that the

proposed exemption is granted, the

restrictions of sections 406(a) and 407(a)

of the Act and the taxes imposed by

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

reason of sections 4975(c)(1)(A) through

(D) of the Code, shall not apply to any

transaction to which those restrictions

or taxes would otherwise apply merely

because a person is deemed to be a party

in interest or disqualified person

(including a fiduciary) with respect to a

plan by virtue of providing services to

the plan (or by virtue of having a

relationship to such service provider as

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

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

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

because of the plan’s ownership of

certificates.

Section II—General Conditions

A. The relief provided under Section

I is available only if the following

conditions are met:

(1) The acquisition of certificates by a

plan is on terms (including the

certificate price) that are at least as

favorable to the plan as such terms

would be in an arm’s-length transaction

with an unrelated party;

(2) The rights and interests evidenced

by the certificates are not subordinated

to the rights and interests evidenced by

other certificates of the same trust;

(3) The certificates acquired by the

plan have received a rating at the time

of such acquisition that is either: (i) in

one of the two highest generic rating

categories from any one of the Rating

Agencies; or (ii) for certificates with a

duration of one year or less, the highest

short-term generic rating category from

any one of the Rating Agencies;

provided that, notwithstanding such

ratings, this exemption (if granted) shall

apply to a particular class of certificates

only if such class (an Exempt Class) is

part of a series in which credit support

is provided to the Exempt Class through

a senior-subordinated series structure or

other form of third-party credit support

which, at a minimum, represents five (5)

percent of the outstanding principal

balance of certificates issued for the

Exempt Class, so that an investor in the

Exempt Class will not bear the initial

risk of loss;

(4) The trustee is not an affiliate of

any other member of the Restricted

Group. However, the trustee shall not be

considered to be an affiliate of a servicer

solely because the trustee has succeeded

to the rights and responsibilities of the

servicer pursuant to the terms of a
4040 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

pooling and servicing agreement

providing for such succession upon the

occurrence of one or more events of

default by the servicer;

(5) The sum of all payments made to

and retained by the underwriters in

connection with the distribution or

placement of certificates represents not

more than reasonable compensation for

underwriting or placing the certificates;

the consideration received by the

sponsor as a consequence of the

assignment of receivables (or interests

therein) to the trust, to the extent

allocable to the series of certificates

purchased by a plan, represents not

more than the fair market value of such

receivables (or interests); and the sum of

all payments made to and retained by

the servicer, to the extent allocable to

the series of certificates purchased by a

plan, represents not more than

reasonable compensation for the

servicer’s services under the pooling

and servicing agreement and

reimbursement of the servicer’s

reasonable expenses in connection

therewith;

(6) The plan investing in such

certificates is an ‘‘accredited investor’’

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

Regulation D of the Securities and

Exchange Commission (SEC) under the

Securities Act of 1933;

(7) The trustee of the trust is a

substantial financial institution or trust

company experienced in trust activities

and is familiar with its duties,

responsibilities, and liabilities as a

fiduciary under the Act (i.e. ERISA).

The trustee, as the legal owner of, or

holder of a perfected security interest in,

the receivables in the trust, enforces all

the rights created in favor of

certificateholders of such trust,

including plans;

(8) Prior to the issuance by the trust

of any new series, confirmation is

received from the Rating Agencies that

such issuance will not result in the

reduction or withdrawal of the then

current rating of the certificates held by

any plan pursuant to this exemption;

(9) To protect against fraud,

chargebacks or other dilution of the

receivables in the trust, the pooling and

servicing agreement and the Rating

Agencies require the sponsor to

maintain a seller interest of not less than

2 percent of the principal balance of the

receivables contained in the trust;

(10) Each receivable added to a trust

is an eligible receivable, based on

criteria of the relevant Rating

Agency(ies) and as specified in the

pooling and servicing agreement. The

pooling and servicing agreement

requires that any change in the terms of

the cardholder agreements must be

made applicable to the comparable

segment of accounts owned or serviced

by the sponsor which are part of the

same program or have the same or

substantially similar characteristics;

(11) The pooling and servicing

agreement limits the number of the

sponsor’s newly originated accounts to

be designated to the trust, unless the

Rating Agencies otherwise consent in

writing, to the following: (i) With

respect to any three-month period, 15

percent of the number of existing

accounts designated to the trust as of the

first day of such period, and (ii) with

respect to any twelve-month period, 20

percent of the number of existing

accounts designated to the trust as of the

first day of such twelve-month period;

(12) The pooling and servicing

agreement requires the sponsor to

deliver an opinion of counsel semiannually confirming the validity and

perfection of each transfer of newly

originated accounts to the trust if such

opinion is not delivered with respect to

each interim addition;

(13) The pooling and servicing

agreement requires the sponsor and the

trustee to receive confirmation from a

Rating Agency that no Ratings Effect (i)

will result from a proposed transfer of

newly originated accounts to the trust,

or (ii) will have resulted from the

transfer of all newly originated accounts

added to the trust during the preceding

three-month period (beginning at

quarterly intervals specified in the

pooling and servicing agreement and

ending in the calendar month prior to

the date such confirmation is issued),

provided that a Rating Agency

confirmation shall not be required

under clause (ii) for any three-month

period in which any additions of newly

originated accounts occurred only after

receipt of prior Rating Agency

confirmation pursuant to clause (i);

(14) If a particular series of certificates

held by any plan involves a Ratings

Dependent or Non-Ratings Dependent

Swap entered into by the trust, then

each particular swap transaction

relating to such certificates:

(a) Shall be an Eligible Swap;

(b) Shall be with an Eligible Swap

Counterparty;

(c) In the case of a Ratings Dependent

Swap, shall include as an early payout

event, as specified in the pooling and

servicing agreement, the withdrawal or

reduction by any Rating Agency of the

swap counterparty’s credit rating below

a level specified by the Rating Agency

where the servicer (as agent for the

trustee) has failed, for a specified period

after such rating withdrawal or

reduction, to meet its obligation under

the pooling and servicing agreement to:

(i) Obtain a replacement swap

agreement with an Eligible Swap

Counterparty which is acceptable to the

Rating Agency and the terms of which

are substantially the same as the current

swap agreement (at which time the

earlier swap agreement shall terminate);

or

(ii) Cause the swap counterparty to

establish any collateralization or other

arrangement satisfactory to the Rating

Agency such that the then current rating

by the Rating Agency of the particular

series of certificates will not be

withdrawn or reduced;

(d) In the case of a Non-Ratings

Dependent Swap, shall provide that, if

the credit rating of the swap

counterparty is withdrawn or reduced

below the lowest level specified in

Section III.II. hereof, the servicer, as

agent for the trustee, shall within a

specified period after such rating

withdrawal or reduction:

(i) Obtain a replacement swap

agreement with an Eligible Swap

Counterparty, the terms of which are

substantially the same as the current

swap agreement (at which time the

earlier swap agreement shall terminate);

or

(ii) Cause the swap counterparty to

post collateral with the trustee of the

trust in an amount equal to all payments

owed by the counterparty if the swap

transaction were terminated; or

(iii) Terminate the swap agreement in

accordance with its terms; and

(e) Shall not require the trust to make

any termination payments to the swap

counterparty (other than a currently

scheduled payment under the swap

agreement) except from ‘‘Excess Finance

Charge Collections’’ (as defined below

in Section III.LL.) or other amounts that

would otherwise be payable to the

servicer or the seller; and

(15) Any series of certificates, to

which one or more swap agreements

entered into by the trust applies, may be

acquired or held in reliance upon this

proposed exemption only by Qualified

Plan Investors.

B. Neither any underwriter, sponsor,

trustee, servicer, insurer, nor any

obligor, unless it or any of its affiliates

has discretionary authority or renders

investment advice with respect to the

plan assets used by a plan to acquire

certificates, shall be denied the relief

provided under Section I, if the

provision in Section II.A.(6) above is not

satisfied for the acquisition or holding

by a plan of such certificates, provided

that:

(1) Such condition is disclosed in the

prospectus or private placement

memorandum; and
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4041

4The Department notes that no relief would be

available under the exemption if the participation

interests held by the trust were subordinated to the

rights and interests evidenced by other

participation interests in the same pool of

receivables.

5MBNA states that it is possible for credit card

receivables to be secured by bank account balances

or security interests in merchandise purchased with

credit cards. Thus, the proposed exemption should

permit foreclosed property to be an eligible trust

asset.

6 In a series involving an accumulation period (as

defined in Section III.Z.), a yield supplement

agreement may be used by the Trust to make up the

difference between (i) the reinvestment yield on

permitted investments, and (ii) the interest rate on

the certificates of that series.

7For a listing of Underwriter Exemptions, see the

description provided in the text of the operative

language of Prohibited Transaction Exemption

(PTE) 97–34 (62 FR 39021, July 21, 1997).

(2) In the case of a private placement

of certificates, the trustee obtains a

representation from each initial

purchaser which is a plan that it is in

compliance with such condition, and

obtains a covenant from each initial

purchaser to the effect that, so long as

such initial purchaser (or any transferee

of such initial purchaser’s certificates) is

required to obtain from its transferee a

representation regarding compliance

with the Securities Act of 1933, any

such transferees shall be required to

make a written representation regarding

compliance with the condition set forth

in Section II.A.(6).

Section III—Definitions

For purposes of this proposed

exemption:

A. Certificate means a certificate:

(1) That (i) represents a beneficial

ownership interest in the assets of a

trust and entitles the holder to payments

denominated as principal, interest and/

or other payments made as described in

the applicable prospectus or private

placement memorandum and in

accordance with the pooling and

servicing agreement in connection with

the assets of such trust, to the extent

allocable to the series of certificates

purchased by a plan, either currently or

after a revolving period during which

principal payments on assets of the trust

are reinvested in new assets, or (ii) is

denominated as a debt instrument that

represents a regular interest in a

financial asset securitization investment

trust (FASIT), within the meaning of

section 860L(a) of the Code, and is

issued by and is an obligation of the

trust.

For purposes of this proposed

exemption, references to ‘‘certificates

representing an interest in a trust’’

include certificates denominated as debt

which are issued by a trust; and

(2) With respect to which (a) MBNA

or any of its affiliates is the sponsor, and

(b) MBNA, any of its affiliates, or an

‘‘underwriter’’ (as defined in Section

III.C.) is the sole underwriter or the

manager or co-manager of the

underwriting syndicate or a selling or

placement agent.

B. Trust means an investment pool,

the corpus of which is held in trust and

consists solely of:

(1) Either

(a) Receivables (as defined in Section

III.V.); or

(b) Participations in a pool of

receivables (as defined in Section III.V.)

where such beneficial ownership

interests are not subordinated to any

other interest in the same pool of

receivables; 4

(2) Property which has secured any of

the assets described in Section III.B.(1); 5

(3) Undistributed cash or permitted

investments made therewith maturing

no later than the next date on which

distributions are to be made to

certificate holders, except during a

Revolving Period (as defined herein)

when permitted investments are made

until such cash can be reinvested in

additional receivables described in

paragraph (a) of this Section III.B.(1);

(4) Rights of the trustee under the

pooling and servicing agreement, and

rights under any cash collateral

accounts, insurance policies, third-party

guarantees, contracts of suretyship and

other credit support arrangements for

any certificates, swap transactions, or

under any yield supplement

agreements,6 yield maintenance

agreements or similar arrangements; and

(5) Rights to receive interchange fees

received by the sponsor as partial

compensation for the sponsor’s taking

credit risk, absorbing fraud losses and

funding receivables for a limited period

prior to initial billing with respect to

accounts designated to the trust.

Notwithstanding the foregoing, the

term trust does not include any

investment pool unless: (i) the

investment pool consists only of

receivables of the type which have been

included in other investment pools; (ii)

certificates evidencing interests in such

other investment pools have been rated

in one of the two highest generic rating

categories by at least one of the Rating

Agencies for at least one year prior to

the plan’s acquisition of certificates

pursuant to this exemption; and (iii)

certificates evidencing an interest in

such other investment pools have been

purchased by investors other than plans

for at least one year prior to the plan’s

acquisition of certificates pursuant to

this exemption.

C. Underwriter means an entity which

has received from the Department an

individual prohibited transaction

exemption which provides relief for the

operation of asset pool investment trusts

that issue asset-backed pass-through

securities to plans that is similar in

format and substance to this proposed

exemption (each, an Underwriter

Exemption); 7 any person directly or

indirectly, through one or more

intermediaries, controlling, controlled

by or under common control with such

entity; and any member of an

underwriting syndicate or selling group

of which such firm or affiliated person

described above is a manager or comanager with respect to the certificates.

D. Sponsor means MBNA, or an

affiliate of MBNA that organizes a trust

by transferring credit card receivables or

interests therein to the trust in exchange

for certificates.

E. Master Servicer means MBNA or an

affiliate that is a party to the pooling

and servicing agreement relating to trust

receivables and is fully responsible for

servicing, directly or through

subservicers, the receivables in the trust

pursuant to the pooling and servicing

agreement.

F. Subservicer means MBNA or an

affiliate of MBNA, or an entity

unaffiliated with MBNA which, under

the supervision of and on behalf of the

master servicer, services receivables

contained in the trust, but is not a party

to the pooling and servicing agreement.

G. Servicer means MBNA or an

affiliate which services receivables

contained in the trust, including the

master servicer and any subservicer or

their successors pursuant to the pooling

and servicing agreement.

H. Trustee means an entity which is

independent of MBNA and its affiliates

and is the trustee of the trust. In the case

of certificates which are denominated as

debt instruments, ‘‘trustee’’ also means

the trustee of the indenture trust.

I. Insurer means the insurer or

guarantor of, provider of other credit

support for, or other contractual

counterparty of, a trust.

Notwithstanding the foregoing, a swap

counterparty is not an insurer, and a

person is not an insurer solely because

it holds securities representing an

interest in a trust which are of a class

subordinated to certificates representing

an interest in the same trust.

J. Obligor means any person, other

than the insurer, that is obligated to

make payments with respect to any

receivable included in the trust.

K. Excluded Plan means any plan

with respect to which any member of
4042 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

the Restricted Group is a ‘‘plan sponsor’’

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

of the Act.

L. Restricted Group with respect to a

class of certificates means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

(6) Each swap counterparty;

(7) Any obligor with respect to

receivables contained in the trust

constituting more than 0.5 percent of

the fair market value of the aggregate

undivided interest in the trust allocated

to the certificates of a series, determined

on the date of the initial issuance of

such series of certificates by the trust; or

(8) Any affiliate of a person described

in Section III.L.(1)–(7).

M. Affiliate of another person

includes:

(1) Any person directly or indirectly,

through one or more intermediaries,

controlling, controlled by, or under

common control with such other

person;

(2) Any officer, director, partner,

employee, relative (as defined in section

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

a spouse of a brother or sister of such

other person; and

(3) Any corporation or partnership of

which such other person is an officer,

director or partner.

N. Control means the power to

exercise a controlling influence over the

management or policies of a person

other than an individual.

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

another person only if:

(1) Such person is not an affiliate of

that other person; and

(2) The other person, or an affiliate

thereof, is not a fiduciary who has

investment management authority or

renders investment advice with respect

to any assets of such person.

P. Sale includes the entrance into a

forward delivery commitment (as

defined in Section III.Q. below),

provided that:

(1) The terms of the forward delivery

commitment (including any fee paid to

the investing plan) are no less favorable

to the plan than they would be in an

arm’s length transaction with an

unrelated party;

(2) The prospectus or private

placement memorandum is provided to

an investing plan prior to the time the

plan enters into the forward delivery

commitment; and

(3) At the time of the delivery, all

conditions of this exemption applicable

to sales are met.

Q. Forward Delivery Commitment

means a contract for the purchase or

sale of one or more certificates to be

delivered at an agreed future settlement

date. The term includes both mandatory

contracts (which contemplate obligatory

delivery and acceptance of the

certificates) and optional contracts

(which give one party the right but not

the obligation to deliver certificates to,

or demand delivery of certificates from,

the other party).

R. Reasonable Compensation has the

same meaning as that term is defined in

29 CFR section 2550.408c–2.

S. Pooling and Servicing Agreement

means the agreement or agreements

among a sponsor, a servicer and the

trustee establishing a trust and any

supplement thereto pertaining to a

particular series of certificates. In the

case of certificates which are

denominated as debt instruments,

‘‘pooling and servicing agreement’’ also

includes the indenture entered into by

the trustee of the trust issuing such

certificates and the indenture trustee.

T. Series means an issuance of a class

or various classes of certificates by the

trust all on the same date pursuant to

the same pooling and servicing

agreement, and any supplement thereto

and restrictions therein.

U. Qualified Administrative Fee

means a fee which meets the following

criteria:

(1) The fee is triggered by an act or

failure to act by the obligor other than

the normal timely payment of amounts

owing with respect to the receivables;

(2) The servicer may not charge the

fee absent the act or failure to act

referred to in (1);

(3) The ability to charge the fee, the

circumstances in which the fee may be

charged, and an explanation of how the

fee is calculated are set forth in the

pooling and servicing agreement or

described in all material respects in the

prospectus or private placement

memorandum provided to the plan

before it purchases certificates issued by

the trust; and

(4) The amount paid to investors in

the trust is not reduced by the amount

of any such fee waived by the servicer.

V. Receivables means secured or

unsecured obligations of credit card

holders which have arisen or arise in

Accounts designated to a trust. Such

obligations represent amounts charged

by cardholders for merchandise and

services and amounts advanced as cash

advances, as well as periodic finance

charges, annual membership fees, cash

advance fees, late charges on amounts

charged for merchandise and services

and certain other fees (such as bad

check fees, cash advance fees, and other

fees specified in the cardholder

agreements) designated by card issuers

(other than a qualified administrative

fee as defined in Section III.U.).

W. Accounts are revolving credit card

accounts serviced by MBNA or an

affiliate, which were originated or

purchased by MBNA or an affiliate, and

are designated to a trust such that

receivables arising in such accounts

become assets of the trust.

X. Revolving Period means a period of

time, as specified in the pooling and

servicing agreement, during which

principal collections allocated to a

series are reinvested in newly generated

receivables arising in the accounts.

Y. Amortization Period means a

period of time specified in the pooling

and servicing agreement during which a

portion of the principal collections

allocated to a series will commence to

be paid to the certificateholders of such

series in installments.

Z. Accumulation Period means a

period of time specified in the pooling

and servicing agreement during which a

portion of the principal collections

allocated to a series will be deposited in

an account to be distributed to

certificateholders in a lump sum on the

expected maturity date.

AA. Pay Out Event means any of the

events specified in the pooling and

servicing agreement or supplement

thereto that results (in some instances

without further affirmative action by

any party) in the early commencement

of either an amortization period or an

accumulation period, including (1) the

failure of the sponsor or the servicer,

whichever is subject to the relevant

obligation under the pooling and

servicing agreement, (i) to make any

payment or deposit required under the

pooling and servicing agreement within

five (5) business days after such

payment or deposit was required to be

made, or (ii) to observe or perform any

of its other covenants or agreements set

forth in the pooling and servicing

agreement, which failure has a material

adverse effect on holders of investor

certificates of the relevant series and

continues unremedied for 60 days; (2) a

breach of any representation or warranty

made by the sponsor or the servicer in

the pooling and servicing agreement

that continues to be incorrect in any

material respect for 60 days; (3) the

occurrence of certain bankruptcy events

relating to the sponsor or the servicer;

(4) the failure by the sponsor to convey

to the trust additional receivables to

maintain the minimum seller interest

that is required by the pooling and

servicing agreement and the Rating

Agencies; (5) if a class of investor

certificates is in an Accumulation

Period, the amount on deposit in the

accumulation account in any month is
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4043

8 PTE 84–14 provides a class exemption for

transactions between a party in interest with respect

to an employee benefit plan and an investment fund

(including either a single customer or pooled

separate account) in which the plan has an interest,

and which is managed by a QPAM, provided

certain conditions are met. QPAMs (e.g. banks,

insurance companies, registered investment

advisers with total client assets under management

in excess of $50 million) are considered to be

experienced investment managers for plan investors

that are aware of their fiduciary duties under

ERISA.

9PTE 96–23 permits various transactions

involving employee benefit plans whose assets are

managed by an INHAM, an entity which is

generally a subsidiary of an employer sponsoring

the plan which is a registered investment adviser

with management and control of total assets

attributable to plans maintained by the employer

and its affiliates which are in excess of $50 million.

less than the amount required to be on

deposit therein; (6) the failure to pay in

full amounts owing to investors on the

expected maturity date; and (7) the

Economic Pay Out Event.

BB. An Economic Pay Out Event

occurs automatically when the portfolio

yield for any series of certificates,

averaged over three consecutive months

(or such other period approved by one

of the Rating Agencies) is less than the

base rate of the series averaged over the

same period. Portfolio yield for a series

of certificates for any period is equal to

the sum of the finance charge

collections and other amounts treated as

finance charge collections less total

defaults for the series divided by the

outstanding principal balance of the

investor certificates of the series, or

such other measure approved by one of

the Rating Agencies. The base rate for a

series of certificates for any period is the

sum of (i) amounts payable to

certificateholders of the series with

respect to interest, (ii) servicing fees

allocable to the series payable to the

servicer, and (iii) any credit

enhancement fee allocable to the series

payable to a third party credit enhancer,

divided by the outstanding principal

balance of the investor certificates of the

series, or such other measure approved

by one of the Rating Agencies.

CC. CCA or Cash Collateral Account

means that certain account established

in the name of the trustee that serves as

credit enhancement with respect to the

investor certificates and holds cash and/

or permitted investments (as defined

below in Section III.KK.) which conform

to applicable provisions of the pooling

and servicing agreement.

DD. Group means a group of any

number of series offered by the trust that

share finance charge and/or principal

collections in the manner described in

the applicable prospectus or private

placement memorandum.

EE. Ratings Effect means the

reduction or withdrawal by a Rating

Agency of its then current rating of the

certificates held by any plan pursuant to

this proposed exemption.

FF. Principal Receivables Discount

means, with respect to any account

designated by the sponsor, the portion

of the related principal receivables that

represents a discount from the face

value thereof and that is treated under

the pooling and servicing agreement as

finance charge receivables.

GG. Ratings Dependent Swap means

an interest rate swap, or (if purchased

by or on behalf of the trust) an interest

rate cap contract, that is part of the

structure of a series of certificates where

the rating assigned by the Rating Agency

to any series of certificates held by any

plan is dependent on the terms and

conditions of the swap and the rating of

the swap counterparty, and if such

certificate rating is not dependent on the

existence of the swap and rating of the

swap counterparty, such swap or cap

shall be referred to as a ‘‘Non-Ratings

Dependent Swap’’. With respect to a

Non-Ratings Dependent Swap, each

Rating Agency rating the certificates

must confirm, as of the date of issuance

of the certificates by the trust, that

entering into an Eligible Swap with

such counterparty will not affect the

rating of the certificates.

HH. Eligible Swap means a Ratings

Dependent or Non-Ratings Dependent

Swap:

(1) Which is denominated in U.S.

Dollars;

(2) Pursuant to which the trust pays

or receives, on or immediately prior to

the respective payment or distribution

date for the series of certificates, a fixed

rate of interest, or a floating rate of

interest based on a publicly available

index (e.g. LIBOR or the U.S. Federal

Reserve’s Cost of Funds Index (COFI)),

with the trust receiving such payments

on at least a quarterly basis and

obligated to make separate payments no

more frequently than the swap

counterparty, with all simultaneous

payments being netted;

(3) Which has a notional amount that

does not exceed either (i) the certificate

balance of the class of certificates to

which the swap relates, or (ii) the

portion of the certificate balance of such

class represented by receivables;

(4) Which is not leveraged (i.e.

payments are based on the applicable

notional amount, the day count

fractions, the fixed or floating rates

designated in subparagraph (2) above,

and the difference between the products

thereof, calculated on a one to one ratio

and not on a multiplier of such

difference);

(5) Which has a final termination date

that is the earlier of the date on which

the trust terminates or the related class

of certificates is fully repaid; and

(6) Which does not incorporate any

provision which could cause a

unilateral alteration in any provision

described in subparagraphs (1) through

(4) above without the consent of the

trustee.

II. Eligible Swap Counterparty means

a bank or other financial institution

which has a rating, at the date of

issuance of the certificates by the trust,

which is in one of the three highest

long-term credit rating categories, or one

of the two highest short-term credit

rating categories, utilized by at least one

of the Rating Agencies rating the

certificates; provided that, if a swap

counterparty is relying on its short-term

rating to establish eligibility hereunder,

such counterparty must either have a

long-term rating in one of the three

highest long-term rating categories or

not have a long-term rating from the

applicable Rating Agency, and provided

further that if the series of certificates

with which the swap is associated has

a final maturity date of more than one

year from the date of issuance of the

certificates, and such swap is a Ratings

Dependent Swap, the swap counterparty

is required by the terms of the swap

agreement to establish any

collateralization or other arrangement

satisfactory to the Rating Agencies in

the event of a ratings downgrade of the

swap counterparty.

JJ. Qualified Plan Investor means a

plan investor or group of plan investors

on whose behalf the decision to

purchase certificates is made by an

appropriate independent fiduciary that

is qualified to analyze and understand

the terms and conditions of any swap

transaction used by the trust and the

effect such swap would have upon the

credit ratings of the certificates. For

purposes of the proposed exemption,

such a fiduciary is either:

(1) a ‘‘qualified professional asset

manager’’ (QPAM),8 as defined under

Part V(a) of PTE 84–14 (49 FR 9494,

9506, March 13, 1984);

(2) an ‘‘in-house asset manager’’

(INHAM),9 as defined under Part IV(a)

of PTE 96–23 (61 FR 15975, 15982,

April 10, 1996); or

(3) A plan fiduciary with total assets

under management of at least $100

million at the time of the acquisition of

such certificates.

KK. Permitted Investments means

investments that either (i) are direct

obligations of, or obligations fully

guaranteed as to timely payment of

principal and interest by, the United

States or any agency or instrumentality

thereof, provided that such obligation is

backed by the full faith and credit of the
4044 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

10As noted in Section I.C.(3) above, these rating

agencies are: (i) Standard & Poors Ratings Services,

a division of McGraw-Hill Companies Inc.; (ii)

Moody’s Investors Service, Inc.; (iii) Duff & Phelps

Credit Rating Co.; and (iv) Fitch Investors Service,

L.P., or their successors (collectively, the Rating

Agencies).

United States, or (ii) have been rated (or

the obligor thereof has been rated) in

one of the three highest generic rating

categories by a Rating Agency; are

described in the pooling and servicing

agreement; and are permitted by the

relevant Rating Agency(ies).

LL. Excess Finance Charge Collections

means, as of any day funds are

distributed from the trust, the amount

by which the finance charge collections

allocated to certificates of a series

exceed the amount necessary to pay

certificate interest, servicing fees and

expenses, to satisfy cardholder defaults

or charge-offs, and to reinstate credit

support.

The Department notes that this

proposed exemption, if granted, will be

included within the meaning of the term

‘‘Underwriter Exemption’’ as it is

defined in Section V(h) of the Grant of

the Class Exemption for Certain

Transactions Involving Insurance

Company General Accounts, which was

published in the Federal Register on

July 12, 1995 (see PTE 95–60, 60 FR

35925).

Summary of Facts and Representations

1. The applicant is MBNA America

Bank, National Association (i.e. MBNA),

a national banking association located

in Wilmington, Delaware. MBNA

conducts nationwide consumer lending

programs principally comprised of

credit card related activities. MBNA is

a wholly-owned subsidiary of MBNA

Corporation, a bank holding company

organized under the laws of Maryland

in 1990.

2. The transactions for which an

exemption is requested are investments

by employee benefit plans in certain

certificates (Certificates) representing

the right to receive principal and

interest payments from the assets of

various Trusts which hold credit card

receivables. Each Trust will issue, from

time to time, a particular series of

Certificates (i.e. a Series) which will be

secured by the Trust’s assets. A Series

may include one or more classes of

Certificates, some of which may be

subordinate to others. However, only

senior certificates issued by such Trusts,

which meet the restrictive criteria

designed to ensure investor safety

discussed herein would be eligible for

the exemptive relief to be provided

under this proposed exemption.

The Trusts

3. Each Trust is created under a

Pooling and Servicing Agreement (PSA)

between MBNA, as Seller and Servicer,

and an independent and unaffiliated

Trustee. Upon creation of a Trust, the

Seller transfers to the Trust a pool of

interest-bearing credit card receivables

which are selected under strict criteria

approved by one or more of certain

nationally recognized rating agencies,10

from the portfolio of revolving credit

card accounts owned by MBNA. The

PSA establishes the general parameters

for the Trust, such as the requirements

for eligible receivables to be transferred

to the Trust, the manner of transferring

and administering and servicing the

receivables, Seller representations and

covenants as to receivable eligibility,

Servicer and Trustee duties and

eligibility, and other matters.

The applicant represents that any

Trust that issues a class of Certificates

to be covered by the proposed

exemption would include the following

investor safeguards:

(a) Restricted selection of receivables;

(b) Periodic reporting and monitoring

of accounts;

(c) Minimum receivable requirements;

(d) Restrictions regarding addition

and removal of accounts;

(e) Servicer eligibility requirements;

(f) Servicer daily reports, duties and

public accounting firm review;

(g) Trustee eligibility and duties;

(h) Restrictions on investments;

(i) Protection from the consequences

of unplanned events; and

(j) Limited discretion.

These investor safeguards are

discussed in the following paragraphs.

4. Restricted Selection of Receivables.

In order for a receivable to be eligible for

transfer to the Trust, either on the initial

closing date or on any subsequent date,

it must have arisen under an eligible

account. An eligible account is one that

is in existence and owned by and

maintained with MBNA (as of the initial

selection date or, with respect to

additional accounts, as of the relevant

addition date), and is payable in U.S.

dollars. In addition, an eligible account

must have a United States address for its

obligor, must not have been classified as

counterfeit, canceled, fraudulent, stolen

or lost, and must not have been charged

off by MBNA under its customary and

usual charge-off procedures. The

eligible receivable must have been

created in compliance with applicable

law. All consents, licenses and other

approvals necessary for the creation of

the receivable and the execution of the

credit card agreement must have been

obtained and be in full force and effect,

and MBNA must have good title to the

receivable, free and clear of liens.

Finally, an eligible receivable must

constitute the legal valid and binding

payment obligation of the obligor, and

constitute an ‘‘account’’ under Article 9

of the Uniform Commercial Code (the

‘‘UCC’’), as in effect in the State of

Delaware, so as to grant the Trust a first

priority security interest in the event of

bankruptcy. Once the pool of eligible

accounts has been identified, accounts

are selected at random for the transfer

of their receivables to the Trust so as to

provide a combination of receivables

that is representative of the entire pool

of eligible receivables.

MBNA represents and warrants that

the receivables transferred to the Trust,

and the accounts related to those

receivables, meet the above-described

standards for eligible receivables and

accounts, and that no selection

procedures adverse to the

Certificateholders have been employed

in selecting accounts. These restrictions

on account selection are in place to

prevent the concentration of high risk

accounts. Each relevant Rating Agency

requires that all of these safeguards be

in place before a superior rating is

given.

5. Periodic Reporting and Monitoring

of Accounts. In connection with the

transfer of the receivables to the Trust,

MBNA must record and file a UCC

financing statement (including any

continuation statements, when

applicable) in order to perfect the

assignment of the receivables, and must

deliver a file-stamped copy of such

financing or continuation statement to

the Trustee. MBNA must also indicate

in its computer system file of credit card

accounts the receivables transferred to

the Trust by identifying the accounts

with a unique designation, as described

in the PSA. MBNA must deliver a

complete list of all accounts in the Trust

to the Trustee on or prior to the initial

closing date and thereafter on a periodic

basis as required by the PSA.

The Trustee is able to continually

monitor the Trust’s assets by reviewing

the monthly reports regarding pool

performance which are prepared for the

Trustee and investors by MBNA, as

Servicer. In addition, MBNA provides

the Trustee with a complete list of

accounts on a periodic basis, as required

by the PSA. Each relevant Rating

Agency requires significant monitoring

procedures for the servicing of

receivables to ensure investor safety

before a superior rating is granted.

6. Minimum Receivable

Requirements. The aggregate principal

amount of the receivables held by the

Trust must be at least equal to the sum

of the principal amount of the
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4045

Certificates (prior to the commencement

of any related amortization or

accumulation) for all Series then

outstanding (other than a Series which

is backed in full by accumulated cash or

permitted investments (see Paragraph 11

below)). If, on the last business day of

any month, the aggregate amount of

principal receivables is less than the

required minimum, MBNA must

designate additional accounts (or may

convey participations in other credit

card receivable pools sponsored by

MBNA) to be transferred to the Trust so

that the aggregate principal receivables

will meet the minimum requirement.

Interests in the assets of each Trust

are allocated among the Certificate

holders of each Series and the Seller

(i.e., MBNA). The interest in the Trust

assets allocated to the Seller is referred

to as the ‘‘Seller Interest.’’ To protect

against fraud, chargebacks or other

dilution of receivables in the Trust, the

PSA and the Rating Agencies will

require MBNA, as the Trust’s sponsor,

to maintain a seller interest of not less

than 2 percent of the principal balance

of the receivables contained in the Trust

(referred to as the ‘‘Minimum Seller

Interest’’). If, during any period of 30

consecutive days, the Seller Interest

averages less than the Minimum Seller

Interest, MBNA must designate

additional accounts (or participations in

other MBNA credit card receivable

pools) to be transferred by MBNA to the

Trust in order to satisfy the minimum

requirement. When account payments

exceed account purchases, the total pool

of receivables in the relevant Trust

contracts. As a result, the Seller Interest

declines, thus providing a buffer to

prevent a decline in the principal

balance of the Certificates prior to the

scheduled payment of principal. Thus,

when the receivable balances in the

accounts that secure the Certificates

decline, the Seller Interest decreases,

not the principal balance of the

Certificates. When the account balances

again increase, the Seller Interest is

increased. The Seller Interest will also

decline as a result of dilution of the

receivable portfolio resulting from

noncash reductions such as

merchandise returns or servicer errors.

The minimum receivable requirement

and Minimum Seller Interest

requirement imposed on MBNA by the

PSA (as described above) cause the

Trustee, Servicer or Seller to have

limited discretion regarding the

minimum size of the Trust. Each

relevant Rating Agency gains comfort

from these minimum receivable levels

that the Trust will be maintained so as

not to adversely affect the ability of the

Trust assets to support the promised

interest and/or principal payments to

Certificate holders.

7. Restrictions Regarding Addition

and Removal of Accounts. In addition to

the limitations discussed above

regarding the selection of accounts and

minimum receivable requirements, the

following restrictions apply to the

addition of accounts subsequent to the

initial transfer to the Trust. Any transfer

of receivables from additional accounts

must be preceded by written notice to

the Trustee, each relevant Rating

Agency and the Servicer specifying the

approximate aggregate amount of

receivables to be transferred. In

connection with the transfer, MBNA

will warrant that the additional

accounts are eligible accounts and that

each receivable is an eligible receivable,

and that no selection procedures

believed by MBNA to be materially

adverse to the interest of the

Certificateholders were utilized in

selecting the accounts. MBNA must

deliver an opinion of counsel with

respect to the added receivables to the

Trustee, with a copy to each relevant

Rating Agency, that such addition is

enforceable and that the Trust has either

a valid transfer of, or a grant of security

interest in, the additional accounts. The

PSA requires that the Servicer and the

Trustee receive confirmation from a

Rating Agency that no Ratings Effect

(i.e., a downgrade or withdrawal of the

then current rating of any outstanding

Series of Certificates) either (i) will

result from a proposed transfer of

receivables from additional accounts to

the Trust, or (ii) will have resulted from

the transfer of all receivables from

additional accounts added to the Trust

during the preceding three-month

period (beginning at quarterly intervals

specified in the PSA and ending in the

calendar month prior to the date such

confirmation is issued). However, a

Rating Agency confirmation will not be

required for any three-month period in

which any additions of newly originated

accounts occurred only after receipt of

a prior Rating Agency confirmation.

MBNA may remove receivables,

subject to the minimum receivable

requirements discussed above, not more

than once in a monthly period. MBNA

must give the Trustee and the Servicer

written notice stating the approximate

aggregate principal balance of the

removal, and certifying that such

removal must not result in a Pay Out

Event. MBNA must warrant that no

selection procedures believed by it to be

materially adverse to the

Certificateholders were utilized in

selecting the removed receivables. Each

relevant Rating Agency must have

confirmed that such proposed removal

will not result in a Ratings Effect.

MBNA states further that the amount of

any receivables that are removed must

be less than 5 percent of the aggregate

amount of principal receivables or, if

any Series is paid in full, the amount of

receivables removed must approximate

the initial investor interest of such

Series.

Each Rating Agency has determined

that the number of additional accounts

from which receivables may be added is

generally limited to: (i) with respect to

any three-month period, 15 percent of

the number of existing accounts

designated to the Trust as of the first

day of such period, and (ii) with respect

to any twelve-month period, 20 percent

of the number of accounts designated to

the Trust as of the first day of such 12-

month period. However, if this

maximum amount is greater than a

similar test (specified in the PSA) based

on the calendar year, then the calendar

year test serves as the maximum

addition. MBNA may be able to exceed

the maximum addition amount if

approval is received from each relevant

Rating Agency.

By informing the relevant Rating

Agencies of all details regarding

additions and removals, the Trust is

effectively reexamined each time these

events occur in order to assure that the

changes to the Trust assets will not

adversely affect the rating of any

outstanding Series. Each relevant Rating

Agency scrutinizes the receivables from

the additional accounts, or the relative

strength of the pool of receivables

designated to the Trust both before and

after the removal, as the case may be, in

making any such re-examinations.

8. Servicer Eligibility Requirements.

The Servicer of the receivables must be

either the Seller (MBNA), an affiliate of

MBNA, or an entity unaffiliated with

MBNA acting as a ‘‘Subservicer’’ which

is qualified to service a portfolio of

consumer revolving credit card accounts

and meets certain requirements. Under

such requirements, the entity acting as

either a Servicer or Subservicer must be

legally qualified and have the capacity

to service the accounts, must be

qualified to use the software used to

service the accounts, must have

demonstrated the ability to

professionally and competently service

a portfolio of similar accounts in

accordance with customary standards of

skill and care, and must have a certain

net worth (e.g. at least $50,000,000).

These requirements are in line with the

Rating Agencies’ standards for servicers.

Regardless of whether the Servicer is

MBNA, an affiliate, or a third party

meeting the eligibility requirements

discussed above, the Servicer’s duties
4046 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

are largely ministerial and are provided

in detail in the PSA. The Servicer

administers the receivables, collects

payments due thereunder, makes

withdrawals from the various accounts

created under the PSA which are

forwarded to the Trustee on the dates

and in the manner provided under the

PSA, commences enforcement

proceedings with respect to delinquent

receivables and makes filings and other

necessary reports with the SEC and any

state securities authorities as necessary

to comply with the law. The Servicer

must maintain fidelity bond coverage

insuring against losses through its own

wrongdoing, and is entitled to receive a

reasonable servicing fee which is

specifically enumerated in each PSA

supplement.

9. Servicer Daily Reports, Duties and

Public Accounting Firm Review. On

each business day the Servicer must

prepare and make available to the

Trustee a record of the collections

processed on the preceding day and the

aggregate amount of receivables as of the

close of business on the preceding day.

The Servicer must prepare monthly for

the Trustee, the paying agent, any credit

enhancement provider, and each

relevant Rating Agency, a certificate

setting forth the aggregate collections

processed during the preceding month

with respect to each Series outstanding,

the aggregate amounts of the investor

percentages of collections of finance

charge receivables and principal

receivables processed during the

preceding month with respect to each

Series outstanding, the balances in the

finance charge account, the principal

account or any Series account during

the preceding month, and other detailed

information.

The Servicer will provide annually a

certificate from an officer indicating that

the Servicer’s activities over a 12-month

period were reviewed and the officer

believed such obligations were fully

performed under the PSA. Every year, a

nationally recognized firm of

independent certified public

accountants will review the internal

accounting controls and their relation to

the servicing of the receivables as well

as the mathematical accuracy of the

Servicer’s monthly reports, and the

results will be provided to the Trustee,

any credit enhancement provider, and

each relevant Rating Agency. These

additional reviews of the Servicer are

designed to prevent Servicer fraud and

limit Servicer discretion. These

safeguards protect investors and are a

positive factor in a Rating Agency’s

evaluation.

10. Trustee Eligibility and Duties. The

Trustee must be a financial institution

organized, doing business and regulated

under the laws of the United States, any

State and/or the District of Columbia

and have a long-term unsecured debt

rating as specified in the PSA. The

Trustee must be independent of MBNA

and its affiliates and meet the same

requirements that would be necessary

for an eligible Servicer (as discussed

under ‘‘Servicer Eligibility

Requirements’’ above). Any successor

Trustee must also meet these

requirements and be approved by each

relevant Rating Agency.

The Trustee is responsible for

receiving collections from receivables as

provided in the PSA, investing any

moneys as directed in the PSA, and

directing payments to Certificateholders

according to the plan of allocation and

payment detailed in the PSA. In

performing these functions, the Trustee

has little, if any, discretion. The Trustee

is also responsible for examining any

resolutions, statements, certificates,

opinions, reports or other instruments

in order to determine whether they

substantially conform to the

requirements of the PSA. The Trustee

has no power to vary the corpus of the

Trust and must perform the duties of

other parties should they fail to perform

under the PSA. Like the Servicer

restrictions, the restrictions on the

Trustee limit discretion, enhance

investor protection, and are a positive

influence on a Rating Agency’s

evaluation.

11. Restrictions on Investments. The

collections of principal receivables and

finance charge receivables held in the

Trust may be invested by the Trustee

only in ‘‘permitted investments’’ during

the interim periods between collection

and payout to the Certificateholders.

Such permitted investments are detailed

in the PSA and represent what each

relevant Rating Agency considers to be

secure investments that sufficiently

protect investors. Under the proposed

exemption, permitted investments

would be investments that either (i) are

direct obligations of, or obligations fully

guaranteed as to timely payment of

principal and interest by, the United

States or any agency or instrumentality

thereof, provided that such obligation is

backed by the full faith and credit of the

United States, or (ii) have been rated (or

the obligor thereof has been rated) in

one of the three highest generic rating

categories by a Rating Agency. In

addition, all permitted investments

must be described in the PSA and

permitted by the relevant Rating

Agencies.

12. Protection From the Consequences

of Unplanned Events. If MBNA should

desire to merge or consolidate with, or

assume the obligations of, another

entity, certain provisions of the PSA

ensure that the Trust assets remain

secure. The new entity involved in the

merger or consolidation must be a

national banking association, a state

banking corporation or another entity

not subject to bankruptcy laws and must

be organized and regulated under the

laws of the United States, any State and/

or the District of Columbia. The new

entity must expressly assume the

performance of every covenant and

obligation of MBNA, and MBNA must

provide the Trustee with an opinion of

counsel that such assumption is legal,

valid and binding. Finally, each relevant

Rating Agency must be notified in

advance of the change. Similarly, a

merger, consolidation or assumption of

the obligations of the Servicer also

requires the same protections of a full

assumption of liabilities, an opinion of

counsel and Rating Agency notification.

The Certificateholders of each Series

receive protection from certain

unplanned events (called ‘‘Pay Out

Events’’). If a ‘‘Pay Out Event’’ occurs

with respect to a Series, either (i) a rapid

amortization period will commence

during which the Certificates of such

Series will be paid down periodically,

as provided in the PSA Supplement,

with the principal collections allocable

to such Series or with principal

collections allocable to other Series

which are shared within the same

Group (as discussed in Paragraph 15

below), or (ii) a rapid accumulation

period will commence during which the

Series’ principal collections will be

accumulated until a designated payment

date. Pay Out Events include ‘‘Trust Pay

Out Events,’’ which apply to all Series,

and ‘‘Series Pay Out Events,’’ which

apply to particular Series. ‘‘Trust Pay

Out Events’’ include: (i) certain events

of insolvency, conservatorship or

receivership relating to MBNA; (ii) the

Trust becomes an ‘‘investment

company’’ within the meaning of the

Investment Company Act of 1940, as

amended; and (iii) MBNA becomes

unable for any reason to transfer

receivables to the Trust as required by

the PSA.

Series Pay Out Events generally

include:

(a) Failure of MBNA to make required

payments or observe its other covenants

to the extent there is a material adverse

effect on the Certificateholders of that

Series;

(b) Breach by MBNA of its

representations and warranties to the

extent there is a material adverse effect

on the Certificateholders of that Series;
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4047

(c) A default by the Servicer that

would have a material adverse effect on

the Certificateholders of that Series; and

(d) The portfolio yield for any three

consecutive monthly periods is less

than the average base rate for such

period (an ‘‘Economic Pay Out Event’’).

With respect to item (d) above, MBNA

states that an ‘‘Economic Pay Out

Event’’ will occur automatically when

the portfolio yield for any series of

certificates, averaged over three

consecutive months (or such other

period approved by one of the Rating

Agencies) is less than the base rate of

the series averaged over the same

period. Portfolio yield for a series of

certificates for any period is equal to the

sum of the finance charge collections

and other amounts treated as finance

charge collections less total defaults for

the series divided by the outstanding

principal balance of the investor

certificates of the series, or such other

measure approved by one of the Rating

Agencies. The base rate for a series of

certificates for any period is the sum of

(i) amounts payable to certificateholders

of the series with respect to interest, (ii)

servicing fees allocable to the series

payable to the servicer, and (iii) any

credit enhancement fee allocable to the

series payable to a third party credit

enhancer, divided by the outstanding

principal balance of the investor

certificates of the series, or such other

measure approved by one of the Rating

Agencies.

MBNA states that an ‘‘Economic Pay

Out Event’’ should not occur because

the amount of receivables included

within the Trust has been designed to

create ‘‘excess spread’’ between the

yield on the receivables and the

certificate rates. Excess spread is the

amount by which the yield on the

receivables held by the Trust exceeds, at

any point in time, the amounts

necessary to pay certificate interest,

principal (if such payments are due to

certificateholders), servicing fees and

expenses, and to satisfy cardholder

defaults or charge-offs. The Rating

Agencies examine the expected amount

of ‘‘excess spread’’ very closely before

providing a high credit rating for the

certificates.

A ‘‘Pay Out Event’’ accelerates the

scheduled payments or accumulation of

principal on the Certificates as specified

within each PSA Supplement, and

eliminates shared allocations from such

Series, thus increasing the probability of

full payment to senior

Certificateholders, including plan

investors. During a rapid amortization

period, which is triggered by a ‘‘Pay Out

Event’’, all collections are distributed

periodically (instead of being

distributed on the originally scheduled

principal payment dates), as provided in

the PSA Supplement, until the senior

Certificateholders are paid in full.

During a rapid accumulation period,

also triggered by a ‘‘Pay Out Event’’, all

principal collections allocated to the

senior Certificates are accumulated and

invested by the Trustee until the senior

Certificateholders’ interest is backed in

full by cash and/or permitted

investments which will be distributed

on the originally scheduled payment

date. Payments or accumulations are

then directed to the next level of

Certificates below the senior

Certificates, until all Certificates have

been paid or accumulated, or the Trust

terminates. Because this accelerated pay

out or accumulation schedule is

triggered as a result of poor

performance, senior Certificateholders

are protected from a loss which might

result from long-term yield reduction,

and are, to a level of certainty necessary

to support a rating of ‘‘AA’’ (or better),

likely to receive their entire investment

return. The timing or amount of the

payments or accumulations is

specifically defined in each PSA

Supplement, further protecting

investors from mismanagement. This

automatic pay out trigger is important to

each relevant Rating Agency as well,

because it strictly limits the potential

losses to investors.

Investors are also protected from the

negative consequences of an event of

Seller insolvency. If one or more of a

number of indications of insolvency are

present, a ‘‘Pay Out Event’’ occurs and

a rapid amortization or a rapid

accumulation period is triggered. As

discussed above, this event accelerates

payments or accumulation of collections

to maximize the probability that senior

Certificateholders will be paid promptly

and in full. In addition, the Trustee also

liquidates the receivables (unless

otherwise instructed by

Certificateholders representing

undivided interests aggregating more

than 50 percent of each outstanding

Series) in order to further accelerate the

pay out or accumulation process. The

proceeds of the liquidation are

distributed or accumulated in the tiered

manner discussed above in the lowyield scenario.

13. Limited Discretion. Inherent in all

of the restrictions surrounding creation

and management of the Trust, discussed

above, is the limited ability of any party

to the transaction to make discretionary

decisions that would have a major

impact on the Trust assets. The PSA

addresses every possible important

decision and provides the exact course

of action required. Each detail is

designed to ensure maximum investor

security, and minimum Trustee and

Servicer discretion.

The Series

14. Once a Trust is established, a

Series of Certificates may be issued

pursuant to a PSA Supplement. One

Trust typically supports multiple Series

of Certificates over time. Each Series

issued under a Trust is secured, along

with other outstanding Series, by the

assets of the issuing Trust. The PSA

Supplement builds on the PSA by

specifying the parameters for the Series,

such as the number and type of

Certificates, subordination and payment

structuring, and other credit

enhancement features.

The life of a Series consists of a

revolving period and an amortization or

accumulation period. During both

periods, daily collections are allocated

to the Trust accounts in the manner

specified in the PSA Supplement.

Interest payments are made periodically

to the Certificateholders as provided in

the PSA Supplement, and principal is

paid in a lump sum on the date

designated in the PSA Supplement (in

the case of an accumulation period), or

periodically pursuant to a schedule in

the PSA Supplement (in the case of an

amortization period), for each class of

Certificates. The allocation of

collections and the priority of payments

differs slightly during the revolving

period and the amortization or

accumulation period.

15. During a Series’ revolving period,

periodic interest payments are made to

Certificateholders. Principal payments,

however, are not made until the

amortization period or at the end of the

accumulation period. Principal

collections during the revolving period

typically are shared among the Series

that are members of the same Group. If

one Series has principal receipts greater

than needed to pay principal for that

period, the excess may be used to pay

principal for another Series in the

Group which may have a need for such

principal collections. In such instances,

the minimum principal receivable

balances required by the Rating

Agencies for all Series must be

maintained. The process of sharing

within the Group spreads payment risk

over a broader base of collections and

effectively allows concentration of

principal collections supporting a

particular Series, resulting in increased

reliability of the payment streams.

Principal collections received during

the amortization or accumulation period

are also potentially shared, but are first

applied to the principal funding for the

Series to which they relate. The
4048 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

amortization or accumulation period

ends on the earliest of: (i) when the

investors interests are paid in full; (ii)

the Series termination date provided in

the PSA Supplement; or (iii) the

commencement of a rapid amortization

or rapid accumulation period. Finance

charges and fees collected during the

revolving period and the accumulation

or amortization period are applied to the

related Series, and are not generally

shared within the Group.

16. Every Trust will have a variety of

credit enhancement features, as

described in the PSA and specified in

the applicable PSA Supplement. In

addition to the Group sharing of

collections discussed above, other credit

enhancements may include

subordination and letters of credit or

other third party arrangements. The type

and value of credit enhancement for a

particular Series is designed to

compliment the underlying Trust

receivables so that, as a whole, the Trust

assets satisfy the relevant Rating

Agency’s requirements for the superior

rating desired. In this regard, MBNA

represents that the particular class of

certificates for each series to which this

proposed exemption would apply (an

Exempt Class) will have credit support

provided to the Exempt Class through

either a senior-subordinated series

structure or other form of third party

credit support which, at a minimum,

will represent five (5) percent of the

outstanding principal balance of

certificates issued for the Exempt Class,

so that an investor in the Exempt Class

will not bear the initial risk of loss.

Each Series with an Exempt Class

covered by the proposed exemption will

include one or more of the following

credit enhancing investor safeguards (as

discussed further below): (i)

Subordination; (ii) Third Party Credit

Enhancement; and (iii) Allocation of

Collections and Payments to

Certificateholders Allows No Variation.

17. Subordination. Typically, a Series

will have some form of subordination

incorporated within the payment

schedule detailed in the PSA

Supplement. Such a Series will consist

of at least one class of senior Certificates

(typically designated as ‘‘Class A

Certificates’’) which will be allocated

collections in a more favorable manner

than, and/or prior to, another class (or

other classes) of Certificates (i.e., the

next lower level, typically designated as

‘‘Class B Certificates’’) and often will

include an uncertificated class

subordinate to the Class B Certificates

(typically designated as the ‘‘Collateral

Interest’’ or ‘‘Class C Interest’’). The

subordination process generally will

involve both the receipt of collections

and the effect of losses. Thus, such

collections will be applied to the senior

(or Class A) Certificates first and then

the second tier (or Class B) Certificates,

and will be applied last to the lowest

level class of Certificates (or the

Collateral Interest). Conversely, the

losses will first reduce the lowest class

of Certificates (or the Collateral Interest),

only affecting the senior (or Class A)

Certificates after all other classes have

been reduced to zero. The result of this

tiered structure is that the senior (or

Class A) Certificates are protected from

nonpayment by the lower classes. If the

certainty of payment provided by the

subordination or other credit support

mechanism is insufficient to allow each

relevant Rating Agency to bestow one of

its two highest ratings on the senior

Certificates, the senior Certificates

would not be eligible for the relief

provided under the proposed

exemption.

18. Third Party Credit Enhancement.

A Series may include a form of credit

enhancement provided by an outside

party, such as a letter of credit, a cash

collateral account, insurance or a

guaranty or other extension of credit.

This arrangement will be documented

by a separate contract outlining the

terms of the enhancement. A holder of

the Collateral Interest (described in the

preceding paragraph) or other

subordinate interest holder may be a

loan provider or an investor in the Class

C Interest, and the PSA Supplement

typically requires that a minimum

Collateral Interest (or subordinate

interest) be a feature of each Series. As

with all the forms of credit

enhancement, the terms and the amount

of the Collateral Interest will be

dependent upon an evaluation of the

other Trust assets and the additional

support needed to satisfy each relevant

Rating Agency that the Certificates are

sufficiently protected from default.

19. Allocation of Collections and

Payments to Certificateholders Allows

No Variation. The PSA Supplement

provides instructions to the Servicer

regarding each day’s collections and the

allocation of those collections to the

various accounts created by the PSA.

These instructions indicate how to make

the payments and allocations during the

revolving period, the amortization or

accumulation period and the rapid

amortization or rapid accumulation

period, if any. The instructions also

cover the treatment of other moneys

from loans or other credit enhancement

features, and carefully describe how to

accommodate any excess collections, or

how to compensate for any shortfalls. In

following these detailed instructions,

the Servicer does not make any

discretionary decisions. The tasks are

predetermined and largely ministerial.

These explicit instructions, in concert

with the Servicer reporting and review

requirements, are designed to permit

each relevant Rating Agency to

conclude that mismanagement risks are

minimal.

The Certificates

20. Each Series may include a class or

various classes of Certificates, some of

which may be subordinate to others.

Certificateholders will be entitled to

receive periodic payments of interest

based upon a fixed or variable interest

rate which is set forth in the PSA

Supplement and applied to the

Certificateholder’s unpaid principal

balance. Certificateholders will also be

entitled to receive a lump sum principal

payment on the scheduled payment

date, or a series of periodic payments

beginning on the scheduled payment

commencement date, as specified in the

PSA Supplement, to the extent of the

Certificateholder’s investor interest.

As noted earlier, only Certificates that

are not subordinate to any other class or

classes of Certificates (the ‘‘Senior

Certificates’’) would be eligible for

exemptive relief under the proposed

exemption.

21. MBNA represents that a plan

would invest in the Certificates for the

same reasons any investor would invest

in a highly secure, ‘‘AA’’ (or better)

rated investment with attractive yields.

The Senior Certificates represent an

investment alternative which offers all

the benefits of a highly rated fixedincome security, such as fixed payment

streams, investment diversity and

market rates of return. Permitting plans

to invest in Senior Certificates in

reliance on the proposed exemption

would provide plans with additional

and safe investment opportunities.

22. With respect to the credit ratings

of the Certificates, MBNA states that the

rating reflects a Rating Agency’s opinion

as to the relative amount of protection

that investors have against loss of

principal and interest during the life of

the security. A high rating comports

with a low risk of loss. In order to

achieve this rating, each relevant Rating

Agency requires the credit card

securitizations effected through the

Trust to include a variety of

safeguards—such as subordination or

other forms of credit enhancement,

limitations on the Seller’s discretion,

and Rating Agency approval of certain

actions taken with respect to the Trust

or a Series of Certificates. Each relevant

Rating Agency typically requires legal

opinions regarding the credit card

securitization’s structure and performs
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4049

11 In this regard, the Department was advised by

representatives from two of the Rating Agencies (RA

Reps) of certain issues concerning the ratings of

certificates issued by trusts holding credit card

receivables. The RA Reps discussed, among other

things, the fact that different banks use different

underwriting standards and may offer cardholders

different terms on their accounts. Some banks may

be willing to accept cardholders with more risky

credit histories while other banks may not or may

offer better terms to cardholders with superior

payment histories. The result may be that some

banks have a higher quality portfolio of receivables

than other banks. The RA Reps stated that if a bank

securitizes a portfolio of receivables which holds a

number of riskier accounts, the Rating Agencies

will require more credit enhancement measures

because different assumptions will have to be made

about the performance of the portfolio—e.g. higher

charge-off rates will be assumed and greater ‘‘excess

spread’’ will be necessary to avoid losses—in order

to achieve an ‘‘AAA’’ rating. Thus, for example,

Bank A’s certificates may receive an ‘‘AAA’’ rating

along with MBNA’s certificates even though Bank

A may experience more charge-offs on the credit

card accounts and may have different payment rates

on the receivables associated with those accounts.

12The Department’s regulation defining ‘‘plan

assets’’ provides that, if a plan invests in a publiclyoffered security, the plan’s assets will not include,

solely by reason of such investment, any of the

underlying assets of the entity issuing the security

(i.e. the ‘‘look-through rule’’ will not apply and the

operations of the entity will not be subject to

scrutiny under the prohibited transaction

provisions of the Act). The regulation defines a

‘‘publicly-offered’’ security as one that is freely

transferable, widely-held, and registered under the

federal securities laws. A class of securities is

‘‘widely held’’ if it is owned by 100 or more

investors who are independent of the issuer and of

one another at the conclusion of the offering (see

29 CFR 2510.3–101(b)(3)).

13Section 406(b) of the Act, in pertinent part,

prohibits a plan fiduciary from dealing with the

assets of the plan in his own interest or for his own

account, or from acting on behalf of a party (or

representing a party) whose interests are adverse to

the interests of the plan and its participants and

beneficiaries.

14As indicated in Footnote 7 above, PTE 97–34

(which granted an amendment to the Underwriter

Exemptions) contains the most comprehensive

listing of these exemptions.

stress tests on the portfolio of selected

receivables in order to evaluate the

securitization’s anticipated performance

within a range of significant market

fluctuations. In addition, each relevant

Rating Agency performs a

comprehensive review of all documents

related to the credit card securitization

before the formal rating is given. Each

relevant Rating Agency must provide

confirmations that additions of

receivables from accounts to a Trust, or

withdrawals of existing accounts from a

trust, will not result in a Ratings Effect

on the Certificates.

After its rating is assigned, the Rating

Agency monitors the performance of the

credit card receivables included in a

Trust in order to assess whether the

performance remains consistent with

the rating. Although variations in

portfolio performance are expected

during a Certificate’s duration and are

factored into a Rating Agency’s analysis,

extreme and unexpected performance

results may result in a revision of the

rating. MBNA makes its Trust

performance information available to

each relevant Rating Agency in a variety

of ways, in order to ensure that the

Rating Agency receives all the

information it deems necessary to make

its evaluation. For example, MBNA

provides information on portfolio

performance broken down by account

balance, credit limit, account age,

delinquency period and geographic

distribution.

MBNA states that the receipt of one of

the two highest generic ratings from a

Rating Agency represents the result of

an exhaustive analysis of the many risk

factors involved with a Series of

Certificates, and provides a comfort

level to investors that the potential

reduction in yield as a result of credit

losses is minimal.11

23. MBNA represents that the

statistics on Certificates backed by

credit card trusts indicate that they are

sound investments. In this regard,

MBNA states that public credit card

securitization transactions have been in

existence since 1987 and issuers have

successfully sold over $230 billion in

Certificates backed by credit card

receivables since then with a zero

investor loss rate. MBNA states further

that plans have invested during this

time in such Certificates, despite the

prohibited transaction provisions of the

Act, in reliance upon the Department’s

regulation defining ‘‘plan assets’’ and,

specifically, the ‘‘100-Holder

Exception’’ for ‘‘publicly-offered’’

securities (see 29 CFR 2510.3–101).12

MBNA maintains that the proposed

exemption offers a number of safeguards

in the form of concentration restrictions

that are designed to provide additional

protections for plan investors which are

not included in the typical 100-holder

exception transactions. For example, for

purposes of the relief from the

prohibitions of section 406(b) of the

Act 13 provided under Section I.B.

herein (relating to certain obligors of the

Trust who may have discretionary

authority for a plan investing in

certificates of the Trust), the proposed

exemption limits such plan’s

investment in any class of Certificates of

any Series to not more than 25 percent

of the principal amount of the

Certificates of that class outstanding at

the time of acquisition. In addition,

immediately after the acquisition of the

certificates, not more than 25 percent of

the assets of such a plan may be

invested in certificates representing an

interest in the trust, or trusts containing

receivables sold or serviced by the same

entity. Further, the proposed exemption

requires that at least 50 percent of the

outstanding principal amount of each

class of Certificates in which plans have

invested, and at least 50 percent of the

outstanding aggregate interest of the

Trust, in connection with the initial

issuance of the Certificates, must be

acquired by persons independent of the

Sponsor, the Servicer and other related

parties. These restrictions are designed

to protect plan investors from the risks

inherent in excessive ownership

concentration and related party

transactions.

24. MBNA represents that the

requested exemption is similar to the

Underwriter Exemptions.14 The

Underwriter Exemptions are a series of

exemptions granted by the Department

to various underwriters or trust

sponsors for transactions relating to the

acquisition by plans of certificates

representing interests in trusts holding

various types of assets (e.g. single and

multi-family residential or commercial

mortgages, motor vehicle leases and

related vehicles, equipment leases or

other secured obligations), as provided

in Section III.B. of the Underwriter

Exemptions.

The Trusts described under the

proposed exemption for Certificates

backed by credit card receivables differ

from trusts holding secured obligations

in that the Trusts do not contain a fixed

pool of assets and the receivables are

not secured by real or tangible personal

property. However, MBNA states that

this difference in structure does not

represent a difference in the quality or

safety of investments by plans and other

investors in the Certificates. Under the

proposed exemption, MBNA represents

that the other forms of credit

enhancement provide at least the same

level of security for investors in Trusts

holding credit card receivables as exists

for investors in trusts holding tangible

or real property as collateral for the

payment obligations to

Certificateholders. In addition, Trusts

holding credit card receivables do not

involve the expense and administrative

complexities of foreclosure procedures

relating to tangible and real property.

25. Certificateholders are entitled to

receive periodic payments of interest

based upon an interest rate, which may

be variable or fixed. This interest rate is

specified or defined in the PSA

Supplement for the particular Series

and is applied to the outstanding

principal balance of the Certificates.

This outstanding balance (net of any

charge-offs) is known as the investor
4050 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

15RA Reps have indicated to the Department that

certain series of certificates issued by a trust

holding credit card receivables will have certificate

ratings that are not dependent on the existence of

a swap transaction entered into by the trust.

Therefore, a downgrade in the swap counterparty’s

credit rating would not cause a downgrade in the

rating established by the Rating Agency for the

certificates. RA Reps state that in such instances

there will be more credit enhancements (e.g.

‘‘excess spread’’, letters of credit, cash collateral

accounts) for the series to protect the

certificateholders than there would be in a

comparable series where the trust enters into a socalled Ratings Dependent Swap. Non-Ratings

Dependent Swaps are generally used as a

convenience to enable the trust to pay certain fixed

interest rates on a series of certificates. However,

the receipt of such fixed rates by the trust from the

counterparty is not a necessity for the trust to be

able to make its fixed rate payments to the

certificateholders.

interest for the senior class of

Certificates. Certificateholders are also

entitled to receive principal payments

on the scheduled payment dates, or

sooner or later under certain limited

circumstances, pursuant to the PSA

Supplement to the extent of the

Certificateholders’ investor interest. The

payments are funded from collections

on the related receivables and allocated

to the investor interests as provided in

the PSA Supplement.

MBNA states that a Series or class of

Certificates may have the benefit of an

interest rate swap agreement entered

into between the Trustee for a Trust and

a bank or other financial institution

acting as a swap counterparty. Pursuant

to the swap agreement, the swap

counterparty would pay a certain rate of

interest to the Trust in return for a

payment of a rate of interest by the

Trust, from collections allocable to the

relevant Series or class of Certificates, to

the swap counterparty. MBNA

represents that the credit rating

provided to a particular Series or class

of Certificates by the relevant Rating

Agency may or may not be dependent

upon the existence of a swap agreement.

Thus, in some instances, the terms and

conditions of the swap agreements will

not effect the credit rating of the Series

or class of Certificates to which the

swap relates (i.e. a ‘‘Non-Ratings

Dependent Swap’’).

MBNA states that whether or not the

credit rating of a particular Series or

class of Certificates is dependent upon

the terms and conditions of one or more

interest rate swap agreements entered

into by the Trust (i.e. a ‘‘Ratings

Dependent Swap’’ or a ‘‘Non-Ratings

Dependent Swap’’), each particular

swap transaction will be an ‘‘Eligible

Swap’’ as defined in Section III.HH.

above.

In this regard, an Eligible Swap will

be a swap transaction:

(a) Which is denominated in U.S.

Dollars;

(b) Pursuant to which the Trust pays

or receives, on or immediately prior to

the respective payment or distribution

date for the applicable senior class of

Certificates, a fixed rate of interest, or a

floating rate of interest based on a

publicly available index (e.g. LIBOR or

the U.S. Federal Reserve’s Cost of Funds

Index (COFI)), with the Trust receiving

such payments on at least a quarterly

basis and obligated to make separate

payments no more frequently than the

counterparty, with all simultaneous

payments being netted;

(c) Which has a notional amount that

does not exceed either (i) the certificate

balance of the class of certificates to

which the swap relates, or (ii) the

portion of the certificate balance of such

class represented by receivables;

(d) Which is not leveraged (i.e.

payments are based on the applicable

notional amount, the day count

fractions, the fixed or floating rates

designated in item (b) above, and the

difference between the products thereof,

calculated on a one to one ratio and not

on a multiplier of such difference);

(e) Which has a final termination date

that is the earlier of the date on which

the Trust terminates or the related class

of Certificates is fully repaid; and

(f) Which does not incorporate any

provision which could cause a

unilateral alteration in any provision

described in items (a) through (e) above

without the consent of the Trustee.

In addition, any Eligible Swap entered

into by the Trust will be with an

‘‘Eligible Swap Counterparty’’, which

will be a bank or other financial

institution with a rating at the date of

issuance of the Certificates by the Trust

which is in one of the three highest

long-term credit rating categories, or one

of the two highest short-term credit

rating categories, utilized by at least one

of the Rating Agencies rating the

Certificates (see Section III.II above).

However, if a swap counterparty is

relying on its short-term rating to

establish its eligibility, such

counterparty must either have a longterm rating in one of the three highest

long-term rating categories or not have

a long-term rating from the applicable

Rating Agency.

With respect to a Ratings Dependent

Swap, an Eligible Swap Counterparty

will be subject to certain

collateralization or other arrangements

satisfactory to the Rating Agencies in

the event of a rating downgrade of such

swap counterparty below a level

specified by the Rating Agency, which

would be no lower than the level that

would make such counterparty

‘‘eligible’’ under this proposed

exemption (see Section III.II. above). If

these arrangements are not established

within a specified period, as described

in the PSA, there will be an early payout

event causing certificateholders to

receive an earlier than expected payout

of principal on their certificates for the

series to which the swap relates.

However, with respect to a Non-Ratings

Dependent Swap, the PSA will not

specify that there be an early payout

event for the series to which the swap

relates if the credit rating of the swap

counterparty falls below the level

required for it to be considered an

Eligible Swap Counterparty (as

described in Section III.II. above). In

such instances, in order to protect the

interests of the Trust as a swap

counterparty, the servicer (as agent for

the trustee of the trust) will be required

to either:

(i) Obtain a replacement swap

agreement with an Eligible Swap

Counterparty, the terms of which are

substantially the same as the current

swap agreement (at which time the

earlier swap agreement will terminate);

(ii) Cause the swap counterparty to

post collateral with the trustee of the

trust in an amount equal to all payments

owed by the counterparty if the swap

transaction were terminated; or

(iii) Terminate the swap agreement in

accordance with its terms.

Under any termination of a swap, the

Trust will not be required to make any

termination payments to the swap

counterparty (other than a currently

scheduled payment under the swap

agreement) except from ‘‘excess finance

charge collections’’ or other amounts

that would otherwise be payable to the

servicer or the seller (i.e. MBNA). In this

regard, ‘‘excess finance charge

collections’’ will be, as of any day funds

are distributed from the Trust, the

amounts by which the finance charge

collections allocated to certificates of a

series exceed the amounts necessary to

pay certificate interest, servicing fees

and expenses, to satisfy cardholder

defaults or charge-offs, and to reinstate

credit support.

With respect to Non-Ratings

Dependent Swaps, each Rating Agency

rating the Certificates must confirm, as

of the date of issuance of the Certificates

by the Trust, that entering into the swap

transactions with the Eligible Swap

Counterparty will not effect the rating of

the Certificates, even if such

counterparty is no longer an ‘‘eligible’’

counterparty and the swap is

terminated.15

Any class of senior Certificates to

which one or more swap agreements

entered into by the trust applies, will be

acquired or held only by Qualified Plan
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4051

16See Footnote 8 above.

17See Footnote 9 above.

Investors (as defined in Section III.JJ.

above). Qualified Plan Investors will be

plan investors represented by an

appropriate independent fiduciary that

is qualified to analyze and understand

the terms and conditions of any swap

transaction relating to the class of senior

Certificates to be purchased and the

effect such swap would have upon the

credit rating of the senior Certificates to

which the swap relates.

For purposes of the proposed

exemption, such a qualified

independent fiduciary will be either:

(i) A ‘‘qualified professional asset

manager’’ (i.e. QPAM), as defined under

Part V(a) of PTE 84–14; 16

(ii) an ‘‘in-house asset manager’’ (i.e.

INHAM), as defined under Part IV(a) of

PTE 96–23; 17 or

(iii) A plan fiduciary with total assets

under management of at least $100

million at the time of the acquisition of

such Certificates.

Disclosures Available to Investing Plans

26. In connection with the original

issuance of certificates, the prospectus

or private offering memorandum will be

furnished to investing plans. The

prospectus or private offering

memorandum will contain information

pertinent to a plan’s decision to invest

in the Certificates, such as:

(a) Information concerning the

Certificates, including payment terms,

certain tax consequences of owning and

selling Certificates, the legal investment

status and rating of the Certificates, and

any special considerations with respect

to the Certificates;

(b) Information about the underlying

receivables, including the types of

receivables, statistical information

relating to the receivables, their

payment terms, and the legal aspects of

the receivables;

(c) Information about the servicing of

the receivables, including the identity of

the servicer and servicing

compensation;

(d) Information about the Sponsor of

the Trust;

(e) A full description of the material

terms of the Pooling and Servicing

Agreement; and

(f) Information about the scope and

nature of the secondary market, if any,

for such Certificates.

Certificateholders will be provided

with information concerning the

amount of principal and interest to be

paid on Certificates in connection with

each distribution to Certificateholders.

Certificateholders will also be provided

with periodic information statements

setting forth material information

concerning the status of the Trust.

In the case of a Trust that offers and

sells Certificates in a registered public

offering, the Trustee, the Servicer or the

Sponsor will file such periodic reports

as may be required to be filed under the

Securities Exchange Act of 1934 (the ’34

Act). Although some Trusts that offer

Certificates in a public offering will file

quarterly reports on Form 10–Q and

Annual Reports on Form 10–K, many

Trusts (i) obtain, by application to the

SEC, a complete exemption from the

requirement to file quarterly reports on

Form 10–Q and a modification of the

disclosure requirements for annual

reports on Form 10–K; or (ii) are not

subject to such requirements for one or

more Series of Certificates issued by the

Trust. If such an exemption is obtained,

these Trusts normally would continue

to have the obligation to file current

reports on Form 8–K to report material

developments concerning the Trust and

the Certificates. While the SEC’s

interpretation of the periodic reporting

requirement is subject to change,

periodic reports concerning a Trust will

be filed to the extent required under the

’34 Act.

MBNA states that at or about the time

distributions are made to

Certificateholders, reports will be

delivered to the Trustee as to the status

of the Trust and its assets, including

underlying Receivables. Such reports

will typically contain information

regarding the Trust’s assets, payments

received or collected by the Servicer,

the amount of delinquencies and

defaults, the amount of any payments

made pursuant to any credit support or

credit enhancement feature, and the

amount of compensation payable to the

Servicer. Such reports will also be

delivered or made available to the

Rating Agency that currently rates the

Certificates. Such reports will be

available to investors and its availability

will be made known to potential

investors. In addition, promptly after

each distribution date,

Certificateholders will receive a

statement summarizing information

regarding the Trust and its assets and

the applicable Series, including

underlying receivables.

28. In summary, MBNA represents

that the proposed transactions will meet

the statutory criteria of section 408(a) of

the Act because, among other things:

(a) The acquisition of senior

Certificates by a plan will be on terms

(including Certificate price) that are at

least as favorable to the plan as such

terms would be in an arm’s-length

transaction with an unrelated party;

(b) The rights and interests evidenced

by the senior Certificates will not be

subordinated to the rights and interests

evidenced by other investor Certificates

of the Trust;

(c) Any senior Certificates acquired by

a plan will have received a rating at the

time of such acquisition that is in one

of the two highest generic rating

categories from any one of the Rating

Agencies or, for certificates with a

duration of one year or less, the highest

short-term generic rating category from

any one of the Rating Agencies;

(d) The Trustee of the Trust will not

be an affiliate of any other member of

the Restricted Group;

(e) The sum of all payments made to

and retained by the underwriters in

connection with the distribution or

placement of Certificates will represent

not more than reasonable compensation

for underwriting or placing the

Certificates; the consideration received

by the Sponsor as a consequence of the

assignment of receivables (or interests

therein) to the Trust will represent not

more than the fair market value of such

receivables (or interests); and the sum of

all payments made to and retained by

the Servicer, which are allocable to the

Series or class of certificates purchased

by a plan, will represent not more than

reasonable compensation for the

Servicer’s services under the Pooling

and Servicing Agreement and

reimbursement of the Servicer’s

reasonable expenses in connection

therewith;

(f) Any plan investing in such

Certificates will be an ‘‘accredited

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

Regulation D of the SEC under the

Securities Act of 1933;

(g) The terms of each Series or class

of Certificates, and the conditions under

which MBNA may designate additional

accounts to, or remove previouslydesignated accounts from, the Trust will

be described in the prospectus or

private placement memorandum

provided to investing plans;

(h) The Trustee of the Trust will be a

substantial financial institution or trust

company experienced in trust activities

and would be familiar with its duties,

responsibilities and liabilities as a

fiduciary under the Act;

(i) The PSA will include ‘‘Economic

Pay Out Events’’ triggered by a decline

in the performance of the receivables in

the Trust;

(j) To protect against fraud,

chargebacks or other dilution of the

receivables in the Trust, the PSA and

the Rating Agencies will require MBNA,

as the Trust’s sponsor, to maintain a

seller interest of not less than 2 percent
4052 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

18Section 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).

19For 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.

of the principal balance of the

receivables contained in the Trust;

(k) Each receivable added to a Trust

will be an eligible receivable, based on

criteria of the relevant Rating

Agency(ies) and as specified in the PSA;

(l) The PSA will require that any

change in the terms of any cardholder

agreements also will be made applicable

to the comparable segment of accounts

owned or serviced by MBNA which are

part of the same program or have the

same or substantially similar

characteristics;

(m) The addition of new receivables

or designation of new accounts, or

removal of previously-designated

accounts, will meet the terms and

conditions for such additions,

designations, or removals as described

in the prospectus or private placement

memorandum for such Certificates,

which terms and conditions will have

been approved by each relevant Rating

Agency, and will not result in the

Certificates receiving a lower credit

rating from the relevant Rating Agency

than the then current rating of the

Certificates;

(n) Any swap transaction relating to

senior Certificates that are covered by

the proposed exemption must satisfy the

several investor-protective conditions

applicable to Eligible Swaps and must

be entered into by the Trust with an

Eligible Swap Counterparty; and

(o) Any class of Certificates to which

one or more swap agreements entered

into by the Trust applies may be

acquired or held by plans in reliance

upon this proposed exemption only if

such plans are represented by

‘‘Qualified Plan Investors.’’

FOR FURTHER INFORMATION CONTACT: Mr.

E.F. Williams of the Department,

telephone (202) 219–8194. (This is not

a toll-free number.)

Citibank (South Dakota), N.A., Citibank

(Nevada), N.A., and Affiliates

Located in North Sioux Falls, South Dakota

(Application No. D–10313)

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the Act

and section 4975(c)(2) of the Code and

in accordance with the procedures set

forth in 29 CFR part 2570, subpart B (55

FR 32836, 32847, August 10, 1990).

Section I—Transactions

A. Effective as of the date this

proposed exemption is granted, the

restrictions of sections 406(a) and 407(a)

of the Act and the taxes imposed by

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

reason of section 4975(c)(1) (A) through

(D) of the Code, shall not apply to the

following transactions involving trusts

and certificates evidencing interests

therein:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

the trust, the sponsor or an underwriter

and an employee benefit plan subject to

the Act or section 4975 of the Code (a

plan) when the sponsor, servicer, trustee

or insurer of a trust, the underwriter of

the certificates representing an interest

in the trust, or an obligor is a party in

interest with respect to such plan;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates; and

(3) The continued holding of

certificates acquired by a plan pursuant

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

Notwithstanding the foregoing,

Section I.A. does not provide an

exemption from the restrictions of

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

for the acquisition or holding of a

certificate on behalf of an Excluded

Plan, as defined in Section III.K. below,

by any person who has discretionary

authority or renders investment advice

with respect to the assets of the

Excluded Plan that are invested in

certificates.18

B. Effective as of the date this

proposed exemption is granted, the

restrictions of sections 406(b)(1) and

406(b)(2) of the Act and the taxes

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

the Code, by reason of section

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

apply to:

(1) The direct or indirect sale,

exchange or transfer of certificates in the

initial issuance of certificates between

the trust, the sponsor or an underwriter

and a plan when the person who has

discretionary authority or renders

investment advice with respect to the

investment of plan assets in the

certificates is (a) an obligor with respect

to receivables contained in the trust

constituting 0.5 percent or less of the

fair market value of the aggregate

undivided interest in the trust allocated

to the certificates of a series, or (b) an

affiliate of a person described in (a); if

(i) The plan is not an Excluded Plan;

(ii) Solely in the case of an acquisition

of certificates in connection with the

initial issuance of the certificates, at

least 50 percent of each class of

certificates in which plans have

invested is acquired by persons

independent of the members of the

Restricted Group, as defined in Section

III.L., and at least 50 percent of the

aggregate undivided interest in the trust

allocated to the certificates of a series is

acquired by persons independent of the

Restricted Group;

(iii) A plan’s investment in each class

of certificates of a series does not exceed

25 percent of all of the certificates of

that class outstanding at the time of the

acquisition;

(iv) Immediately after the acquisition

of the certificates, no more than 25

percent of the assets of a plan with

respect to which the person has

discretionary authority or renders

investment advice is invested in

certificates representing the aggregate

undivided interest in a trust allocated to

the certificates of a series and

containing receivables sold or serviced

by the same entity; 19 and

(v) Immediately after the acquisition

of the certificates, not more than 25

percent of the assets of a plan with

respect to which the person has

discretionary authority or renders

investment advice is invested in

certificates representing an interest in

the trust, or trusts containing

receivables sold or serviced by the same

entity. For purposes of paragraphs

B.(1)(iv) and B.(1)(v) only, an entity

shall not be considered to service

receivables contained in a trust if it is

merely a subservicer of that trust;

(2) The direct or indirect acquisition

or disposition of certificates by a plan in

the secondary market for such

certificates, provided that conditions set

forth in Section I. B.(1)(i), (iii) through

(v) are met; and

(3) The continued holding of

certificates acquired by a plan pursuant

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

C. Effective as of the date that the

proposed exemption is granted, the

restrictions of sections 406(a), 406(b)

and 407(a) of the Act and the taxes

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

the Code, by reason of section 4975(c)

of the Code, shall not apply to

transactions in connection with the

servicing, management and operation of

a trust, including the reassignment to

the sponsor of receivables, the removal

from the trust of accounts previously

designated to the trust, the changing of

the underlying terms of accounts

designated to the trust, the adding of
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4053

20 In the case of a private placement

memorandum, such memorandum must contain

substantially the same information that would be

disclosed in a prospectus if the offering of the

certificates were made in a registered public

offering under the Securities Act of 1933. In the

Department’s view, the private placement

memorandum must contain sufficient information

to permit plan fiduciaries to make informed

investment decisions. For purposes of this proposed

exemption, all references to ‘‘prospectus’’ include

any related supplement thereto, and any documents

incorporated by reference therein, pursuant to

which certificates are offered to investors.

new receivables to the trust, the

designation of new accounts to the trust,

the retention of a retained interest by

the sponsor in the receivables, the

exercise of the right to cause the

commencement of amortization of the

principal amount of the certificates, or

the use of any eligible swap

transactions, provided:

(1) Such transactions are carried out

in accordance with the terms of a

binding pooling and servicing

agreement; and

(2) The pooling and servicing

agreement is provided to, or described

in all material respects in the prospectus

or private placement memorandum

provided to, investing plans before they

purchase certificates issued by the

trust; 20

(3) The addition of new receivables or

designation of new accounts, or the

removal of receivables or previouslydesignated accounts, meets the terms

and conditions for such additions,

designations or removals as are

described in the prospectus or private

placement memorandum for such

certificates, which terms and conditions

have been approved by Standard &

Poor’s Ratings Services, Moody’s

Investor Service, Inc., Duff & Phelps

Credit Rating Co., or Fitch Investors

Service, L.P., or their successors

(collectively, the Rating Agencies), and

does not result in the certificates

receiving a lower credit rating from the

Rating Agencies than the then current

rating for the Certificates; and

(4) The series of which the certificates

are a part will be subject to an Economic

Early Amortization Event, which is set

forth in the pooling and servicing

agreement and described in the

prospectus or private placement

memorandum associated with the

series, the occurrence of which will

cause any Revolving Period, Controlled

Amortization Period, or Accumulation

Period applicable to the certificates to

end, and principal collections to be

applied to monthly payments of

principal to, or accumulated for the

account of, the certificateholders of such

series until the earlier of: (i) payment in

full of the outstanding principal amount

of such certificates of such series, or (ii)

the series termination date specified in

the prospectus or private placement

memorandum.

Notwithstanding the foregoing,

Section I.C. does not provide an

exemption from the restrictions of

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

taxes imposed under section 4975(a)

and (b) of the Code, by reason of section

4975(c)(1)(E) or (F) of the Code, for the

receipt of a fee by the servicer of the

trust, in connection with the servicing

of the receivables and the operation of

the trust, from a person other than the

trustee or sponsor, unless such fee

constitutes a ‘‘qualified administrative

fee’’ as defined in Section III.S. below.

D. Effective as of the date that the

proposed exemption is granted, the

restrictions of sections 406(a) and 407(a)

of the Act and the taxes imposed by

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

reason of sections 4975(c)(1)(A) through

(D) of the Code, shall not apply to any

transaction to which those restrictions

or taxes would otherwise apply merely

because a person is deemed to be a party

in interest or disqualified person

(including a fiduciary) with respect to a

plan by virtue of providing services to

the plan (or by virtue of having a

relationship to such service provider as

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

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

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

because of the plan’s ownership of

certificates.

Section II—General Conditions

A. The relief provided under Section

I is available only if the following

conditions are met:

(1) The acquisition of certificates by a

plan is on terms (including the

certificate price) that are at least as

favorable to the plan as such terms

would be in an arm’s-length transaction

with an unrelated party;

(2) The rights and interests evidenced

by the certificates are not subordinated

to the rights and interests evidenced by

other certificates of the same trust;

(3) The certificates acquired by the

plan have received a rating at the time

of such acquisition that is either: (i) in

one of the two highest generic rating

categories from any one of the Rating

Agencies; or (ii) for certificates with a

duration of one year or less, the highest

short-term generic rating category from

any one of the Rating Agencies;

provided that, notwithstanding such

ratings, this exemption (if granted) shall

apply to a particular class of certificates

only if such class (an Exempt Class) is

part of a series in which credit support

is provided to the Exempt Class through

a senior-subordinated series structure or

other form of third-party credit support

which, at a minimum, represents five (5)

percent of the outstanding principal

balance of certificates issued for the

Exempt Class, so that an investor in the

Exempt Class will not bear the initial

risk of loss;

(4) The trustee is not an affiliate of

any other member of the Restricted

Group. However, the trustee shall not be

considered to be an affiliate of a servicer

solely because the trustee has succeeded

to the rights and responsibilities of the

servicer pursuant to the terms of a

pooling and servicing agreement

providing for such succession upon the

occurrence of one or more events of

default by the servicer;

(5) The sum of all payments made to

and retained by the underwriters in

connection with the distribution or

placement of certificates represents not

more than reasonable compensation for

underwriting or placing the certificates;

the consideration received by the

sponsor as a consequence of the

assignment of receivables (or interests

therein) to the trust represents not more

than the fair market value of such

receivables (or interests); and the sum of

all payments made to and retained by

the servicer, that are allocable to the

series of certificates purchased by a

plan, represents not more than

reasonable compensation for the

servicer’s services under the pooling

and servicing agreement and

reimbursement of the servicer’s

reasonable expenses in connection

therewith;

(6) The plan investing in such

certificates is an ‘‘accredited investor’’

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

Regulation D of the Securities and

Exchange Commission (SEC) under the

Securities Act of 1933;

(7) The trustee of the trust is a

substantial financial institution or trust

company experienced in trust activities

and is familiar with its duties,

responsibilities, and liabilities as a

fiduciary under the Act (i.e. ERISA).

The trustee, as the legal owner of the

receivables in the trust, enforces all the

rights created in favor of

certificateholders of such trust,

including employee benefit plans

subject to the Act;

(8) Prior to the issuance of any new

series in the trust, confirmation must be

received from the Rating Agencies that

such issuance will not result in the

reduction or withdrawal of the then

current rating or ratings of the

certificates held by any plan pursuant to

this exemption;

(9) To protect against fraud,

chargebacks or other dilution of

receivables in the trust, the pooling and
4054 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

21The Department notes that no relief would be

available under the exemption if the participation

interests held by the trust were subordinated to the

rights and interests evidenced by other

servicing agreement and the Rating

Agencies require the sponsor to

maintain a seller interest of not less than

the greater of (i) 2 percent of the initial

aggregate principal balance of investor

certificates issued by the trust, or (ii) 7

percent of the outstanding aggregate

principal balance of investor certificates

issued by the trust;

(10) Each receivable added to the trust

will be an eligible receivable, based on

criteria of the Rating Agency and as

specified in the pooling and servicing

agreement. The pooling and servicing

agreement requires that any change in

the terms of any cardholder agreements

also be made applicable to the

comparable segment of Accounts owned

or serviced by the sponsor which are

part of the same program or have the

same or substantially similar

characteristics;

(11) The pooling and servicing

agreement limits the number of the

sponsor’s newly originated accounts to

be added to the trust, unless the Rating

Agency otherwise affirmatively

consents, to the following: (i) with

respect to any three month period, 15

percent of the number of existing

accounts designated to the trust as of the

first day of such period, and (ii) with

respect to any calendar year, 20 percent

of the number of existing accounts

designated to the trust as of the first day

of such calendar year;

(12) The pooling and servicing

agreement requires the sponsor to

deliver an opinion of counsel semiannually confirming the validity and

perfection of each transfer of newly

originated accounts to the trust;

(13) The pooling and servicing

agreement requires the sponsor and the

trustee to receive at specified quarterly

intervals during the year, confirmation

from a Rating Agency that the addition

of all newly originated accounts added

to the trust (during the three month

period ending in the calendar month

prior to such confirmation) will not

have resulted in a Ratings Effect;

(14) If a particular series of certificates

held by any plan involves a Ratings

Dependent or Non-Ratings Dependent

Swap entered into by the trust, then

each particular swap transaction

relating to such certificates:

(a) Shall be an Eligible Swap;

(b) Shall be with an Eligible Swap

Counterparty;

(c) In the case of a Ratings Dependent

Swap, shall include as an early

amortization event, as specified in the

pooling and servicing agreement, the

withdrawal or reduction by any Rating

Agency of the swap counterparty’s

credit rating below a level specified by

the Rating Agency where the servicer (as

agent for the trustee) has failed, for a

specified period after such rating

withdrawal or reduction, to meet its

obligation under the pooling and

servicing agreement to:

(i) Obtain a replacement swap

agreement with an Eligible Swap

Counterparty which is acceptable to the

Rating Agency and the terms of which

are substantially the same as the current

swap agreement (at which time the

earlier swap agreement shall terminate);

or

(ii) Cause the swap counterparty to

establish any collateralization or other

arrangement satisfactory to the Rating

Agency such that the then current rating

by the Rating Agency of the particular

series of certificates will not be

withdrawn or reduced;

(d) In the case of a Non-Ratings

Dependent Swap, shall provide that, if

the credit rating of the swap

counterparty is withdrawn or reduced

below the lowest level specified in

Section III.II. hereof, the servicer (as

agent for the trustee) shall within a

specified period after such rating

withdrawal or reduction:

(i) Obtain a replacement swap

agreement with an Eligible Swap

Counterparty, the terms of which are

substantially the same as the current

swap agreement (at which time the

earlier swap agreement shall terminate);

or

(ii) Cause the swap counterparty to

post collateral with the trustee of the

trust in an amount equal to all payments

owed by the counterparty if the swap

transaction were terminated; or

(iii) Terminate the swap agreement in

accordance with its terms; and

(e) Shall not require the trust to make

any termination payments to the swap

counterparty (other than a currently

scheduled payment under the swap

agreement) except from ‘‘Excess Finance

Charge Collections’’ (as defined below

in Section III.LL.) or other amounts that

would otherwise be payable to the

servicer or the seller; and

(15) Any Series of certificates which

entails one or more swap agreements

entered into by the trust shall be sold

only to Qualified Plan Investors.

B. Neither any underwriter, sponsor,

trustee, servicer, insurer, or any obligor,

unless it or any of its affiliates has

discretionary authority or renders

investment advice with respect to the

plan assets used by a plan to acquire

certificates, shall be denied the relief

provided under Section I, if the

provision in Section II.A.(6) above is not

satisfied for the acquisition or holding

by a plan of such certificates, provided

that:

(1) Such condition is disclosed in the

prospectus or private placement

memorandum; and

(2) In the case of a private placement

of certificates, the trustee obtains a

representation from each initial

purchaser which is a plan that it is in

compliance with such condition, and

obtains a covenant from each initial

purchaser to the effect that, so long as

such initial purchaser (or any transferee

of such initial purchaser’s certificates) is

required to obtain from its transferee a

representation regarding compliance

with the Securities Act of 1933, any

such transferees shall be required to

make a written representation regarding

compliance with the condition set forth

in Section II.A.(6).

Section III—Definitions

For purposes of this proposed

exemption:

A. Certificate means

(1) A certificate:

(a) That represents a beneficial

ownership interest in the assets of a

trust;

(b) That entitles the holder to

payments denominated as principal and

interest, and/or other payments made in

connection with the assets of such trust,

either currently, or after a Revolving

Period during which principal

payments on assets in the trust are

reinvested in new assets; or

(2) A certificate denominated as a

debt instrument that represents an

interest in a financial asset

securitization investment trust (FASIT)

within the meaning of section 860L of

the Code, and that is issued by and is

an obligation of a trust;

which is sold upon initial issuance by

an underwriter (as defined in Section

III.C.) in an underwriting or private

placement.

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) Either

(a) Receivables (as defined in Section

III.T.); or

(b) Participations in a pool of

receivables (as defined in Section III.T.)

where such beneficial ownership

interests are not subordinated to any

other interest in the same pool of

receivables; 21
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4055

participation interests in the same pool of

receivables.

22Citibank states that it is possible for credit card

receivables to be secured by bank account balances

or security interests in merchandise purchased with

credit cards. Thus, the proposed exemption should

permit foreclosed property to be an eligible trust

asset.

23 In a series involving an accumulation period (as

defined in Section III.AA), a yield supplement

agreement may be used by the Trust to make up the

difference between (i) the reinvestment yield on

permitted investments, and (ii) the interest rate on

the certificates of that series.

24For a listing of the Underwriter Exemptions, see

the description provided in the text of the operative

language of Prohibited Transaction Exemption

(PTE) 97–34 (62 FR 39021, July 21, 1997).

(2) Property which has secured any of

the assets described in Section

III.B.(1); 22

(3) Undistributed cash or permitted

investments made therewith maturing

no later than the next date on which

distributions are to be made to

certificate holders, except during a

Revolving Period (as defined herein)

when permitted investments are made

until such cash can be reinvested in

additional receivables described in

paragraph (a) of this Section III.B.(1);

(4) Rights of the trustee under the

pooling and servicing agreement, and

rights under any cash collateral

accounts, insurance policies, third-party

guarantees, contracts of suretyship and

other credit support arrangements for

any certificates, swap transactions, or

under any yield supplement

agreements,23 yield maintenance

agreements or similar arrangements; and

(5) Rights to receive interchange fees

received by the sponsor as partial

compensation for the sponsor’s taking

credit risk, absorbing fraud losses and

funding receivables for a limited period

prior to initial billing with respect to

accounts designated to the trust.

Notwithstanding the foregoing, the

term ‘‘trust’’ does not include any

investment pool unless: (i) the

investment pool consists only of

receivables of the type which have been

included in other investment pools; (ii)

certificates evidencing interests in such

other investment pools have been rated

in one of the two highest generic rating

categories by at least one of the Rating

Agencies for at least one year prior to

the plan’s acquisition of certificates

pursuant to this exemption; and (iii)

certificates evidencing an interest in

such other investment pools have been

purchased by investors other than plans

for at least one year prior to the plan’s

acquisition of certificates pursuant to

this exemption.

C. Underwriter means an entity which

has received an individual prohibited

transaction exemption from the

Department that provides relief for the

operation of asset pool investment trusts

that issue ‘‘asset-backed’’ pass-through

securities to plans, that is similar in

format and structure to this proposed

exemption (the Underwriter

Exemptions); 24 any person directly or

indirectly, through one or more

intermediaries, controlling, controlled

by or under common control with such

entity; and any member of an

underwriting syndicate or selling group

of which such firm or affiliated person

described above is a manager or comanager with respect to the certificates.

D. Sponsor means Citibank or an

affiliate of Citibank that organizes a trust

by transferring credit card receivables or

interests therein to the trust in exchange

for certificates.

E. Master Servicer means Citibank or

an entity affiliated with Citibank that is

a party to the pooling and servicing

agreement relating to trust receivables

and is fully responsible for servicing,

directly or through subservicers, the

receivables in the trust pursuant to the

pooling and servicing agreement.

F. Subservicer means Citibank or an

affiliate, or an entity unaffiliated with

Citibank, which, under the supervision

of and on behalf of the master servicer,

services receivables contained in the

trust, but is not a party to the pooling

and servicing agreement.

G. Servicer means Citibank or an

affiliate which services receivables

contained in the trust, including the

master servicer and any subservicer or

their successors pursuant to the pooling

and servicing agreement.

H. Trustee means an entity which is

independent of Citibank and its

affiliates and is the trustee of the trust.

In the case of certificates which are

denominated as debt instruments,

‘‘trustee’’ also means the trustee of the

indenture trust.

I. Insurer means the insurer or

guarantor of, provider of other credit

support for, or other contractual

counterparty of, a trust.

Notwithstanding the foregoing, a swap

counterparty is not an insurer, and a

person is not an insurer solely because

it holds securities representing an

interest in a trust which are of a class

subordinated to certificates representing

an interest in the same trust.

J. Obligor means any person, other

than the insurer, that is obligated to

make payments with respect to any

receivable included in the trust.

K. Excluded Plan means any plan

with respect to which any member of

the Restricted Group is a ‘‘plan sponsor’’

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

of the Act.

L. Restricted Group with respect to a

class of certificates means:

(1) Each underwriter;

(2) Each insurer;

(3) The sponsor;

(4) The trustee;

(5) Each servicer;

(6) Each swap counterparty;

(7) Any obligor with respect to

receivables contained in the trust

constituting more than 0.5 percent of

the fair market value of the aggregate

undivided interest in the trust allocated

to the certificates of a series, determined

on the date of the initial issuance of

such series of certificates by the trust; or

(8) Any affiliate of a person described

in Section III.L.(1)–(7).

M. Affiliate of another person

includes:

(1) Any person directly or indirectly,

through one or more intermediaries,

controlling, controlled by, or under

common control with such other

person;

(2) Any officer, director, partner,

employee, relative (as defined in section

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

a spouse of a brother or sister of such

other person; and

(3) Any corporation or partnership of

which such other person is an officer,

director or partner.

N. Control means the power to

exercise a controlling influence over the

management or policies of a person

other than an individual.

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

another person only if:

(1) Such person is not an affiliate of

that other person; and

(2) The other person, or an affiliate

thereof, is not a fiduciary who has

investment management authority or

renders investment advice with respect

to any assets of such person.

P. Sale includes the entrance into a

forward delivery commitment (as

defined in Section III.Q. below),

provided:

(1) The terms of the forward delivery

commitment (including any fee paid to

the investing plan) are no less favorable

to the plan than they would be in an

arm’s length transaction with an

unrelated party;

(2) The prospectus or private

placement memorandum is provided to

an investing plan prior to the time the

plan enters into the forward delivery

commitment; and

(3) At the time of the delivery, all

conditions of this exemption applicable

to sales are met.

Q. Forward Delivery Commitment

means a contract for the purchase or

sale of one or more certificates to be

delivered at an agreed future settlement

date. The term includes both mandatory
4056 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

contracts (which contemplate obligatory

delivery and acceptance of the

certificates) and optional contracts

(which give one party the right but not

the obligation to deliver certificates to,

or demand delivery of certificates from,

the other party).

R. Reasonable Compensation has the

same meaning as that term is defined in

29 CFR section 2550.408c–2.

S. Qualified Administrative Fee

means a fee which meets the following

criteria:

(1) The fee is triggered by an act or

failure to act by the obligor other than

the normal timely payment of amounts

owing with respect to the receivables;

(2) The servicer may not charge the

fee absent the act or failure to act

referred to in (1);

(3) The ability to charge the fee, the

circumstances in which the fee may be

charged, and an explanation of how the

fee is calculated are set forth in the

pooling and servicing agreement or

described in all material respects in the

prospectus or private placement

memorandum provided to the plan

before it purchases certificates issued by

the trust; and

(4) The amount paid to investors in

the trust is not reduced by the amount

of any such fee waived by the servicer.

T. Receivables means secured or

unsecured obligations of credit card

holders which have arisen or arise in

Accounts designated to a trust. Such

obligations represent amounts charged

by cardholders for merchandise and

services and amounts advanced as cash

advances, as well as periodic finance

charges, annual membership fees, cash

advance fees, late charges on amounts

charged for merchandise and services

and over-limit fees and fees of a similar

nature designated by card issuers (other

than a qualified administrative fee as

defined in Section III.S. above).

U. Accounts are revolving credit card

accounts serviced by Citibank or an

affiliate, which were originated or

purchased by Citibank or an affiliate,

and are designated to a trust such that

receivables arising in such accounts

become assets of the trust.

V. Pooling and Servicing Agreement

means the agreement or agreements

among a sponsor, a servicer and the

trustee establishing a trust and any

supplement thereto pertaining to a

particular series of certificates. In the

case of certificates which are

denominated as debt instruments,

‘‘pooling and servicing agreement’’ also

includes the indenture entered into by

the trustee of the trust issuing such

certificates and the indenture trustee.

W. Early Amortization Event means

the events specified in the pooling and

servicing agreement that result (in some

instances without further affirmative

action by any party) in an early

amortization of the certificates,

including: (1) the failure of the sponsor

or the servicer (i) to make any payment

or deposit required under the pooling

and servicing agreement or supplement

thereto within five (5) business days

after such payment or deposit was

required to be made, or (ii) to observe

or perform any of its other covenants or

agreements set forth in the pooling and

servicing agreement or supplement

thereto, which failure has a material

adverse effect on investors and

continues unremedied for 60 days; (2) a

breach of any representation or warranty

made by the sponsor or the servicer in

the pooling and servicing agreement or

supplement thereto that continues to be

incorrect in any material respect for 60

days; (3) the occurrence of certain

bankruptcy events relating to the

sponsor or the servicer; (4) the failure by

the sponsor to convey to the trust

additional receivables to maintain the

minimum seller interest that is required

by the pooling and servicing agreement

and the Rating Agencies; (5) if a class of

investor certificates is in an

Accumulation Period, the amount on

deposit in the accumulation account in

any month is less than the amount

required to be on deposit therein; (6) the

failure to pay in full amounts owing to

investors on the expected maturity date;

and (7) the Economic Early

Amortization Event.

X. Series means an issuance of a class

or various classes of certificates by the

trust all on the same date pursuant to

the same pooling and servicing

agreement and any supplement thereto

and restrictions therein.

Y. Revolving Period means a period of

time, as specified in the pooling and

servicing agreement, during which

principal collections allocated to a

series are reinvested in newly generated

receivables.

Z. Controlled Amortization Period

means a period of time specified in the

pooling and servicing agreement during

which a portion of the principal

collections allocated to a series will

commence to be paid to the

certificateholders of such series in

installments.

AA. Accumulation Period means a

period of time specified in the pooling

and servicing agreement during which a

portion of the principal collections

allocated to a series will be deposited in

an account to be distributed to

certificateholders in a lump sum on the

expected maturity date.

BB. CCA or Cash Collateral Account

means that certain account, established

by the trustee, that serves as credit

enhancement with respect to the

investor certificates and consists of cash

deposits and the proceeds of

investments thereon, which investments

are permitted investments, as defined

below.

CC. Permitted Investments means

investments which: (1) are direct

obligations of, or obligations fully

guaranteed as to timely payment of

principal and interest by, the United

States or any agency or instrumentality

thereof, provided that such obligation is

backed by the full faith and credit of the

United States, or (2) 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.

DD. Group means a group of any

number of series offered by the trust that

share finance charge and/or principal

collections in the manner described in

the prospectus.

EE. An Economic Early Amortization

Event occurs automatically when

finance charge collections averaged over

three consecutive months are less than

the total amount payable on the investor

certificates, including (i) amounts

payable to, or on behalf of,

certificateholders, with respect to

interest, defaults, and chargeoffs, (ii)

servicing fees payable to the servicer,

and (iii) any credit enhancement fee

payable to the third-party credit

enhancer and allocable to the

certificateholders. With respect to a

series to which an Accumulation Period

(as defined above in Section III.AA.)

applies, an additional Economic Early

Amortization Event occurs when, for

any time during the Accumulation

Period, the yield on the receivables in

the Trust is less than the weighted

average of the certificate rates of all

series included in a particular Group

within the Trust.

FF. Ratings Effect means the

reduction or withdrawal by a Rating

Agency of its then current rating of the

investor certificates of any outstanding

series.

GG. Principal Receivables Discount

means, with respect to any account

designated by the sponsor, the portion

of the related principal receivables that

represents a discount from the face

value thereof and that is treated under

the pooling and servicing agreement as

finance charge receivables.

HH. Eligible Swap means an interest

rate swap, or (if purchased by or on

behalf of the trust) an interest rate cap,

that is part of the structure of a Series

of certificates:
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4057

25PTE 84–14 provides a class exemption for

transactions between a party in interest with respect

to an employee benefit plan and an investment fund

(including either a single customer or pooled

separate account) in which the plan has an interest,

and which is managed by a QPAM, provided

certain conditions are met. QPAMs (e.g. banks,

insurance companies, registered investment

advisers with total client assets under management

in excess of $50 million) are considered to be

experienced investment managers for plan investors

that are aware of their fiduciary duties under

ERISA.

26PTE 96–23 permits various transactions

involving employee benefit plans whose assets are

managed by an INHAM, an entity which is

generally a subsidiary of an employer sponsoring

the plan which is a registered investment adviser

with management and control of total assets

attributable to plans maintained by the employer

and its affiliates which are in excess of $50 million.

27With respect to such Similar Master Trusts,

Citibank states that the Small Business Act of 1996

created a new form of statutory entity called a

‘‘financial asset securitization investment trust’’

(FASIT) which may be used to securitize debt

obligations such as credit card receivables, home

equity loans, and automobile loans. The Applicants

state that a FASIT is equitably owned by a single

taxable corporation and issues asset-backed

securities that are treated as debt for Federal Income

Tax purposes. Activities of a FASIT are generally

limited to holding a portfolio of qualified loans. For

local law purposes, a FASIT might be a trust, a

corporation, or a designated subset of the assets of

a trust or a corporation. The Applicants represent

that some certificates covered by the proposed

exemption may be issued by a FASIT, assuming all

of the conditions of the exemption are met

including the requirement that the certificates be

issued by a Trust (as defined herein).

(1) Which is denominated in U.S.

Dollars;

(2) Pursuant to which the trust pays

or receives on or immediately prior to

the respective payment or distribution

date for the series of certificates, a fixed

rate of interest, or a floating rate of

interest based on a publicly available

index (e.g. LIBOR or the U.S. Federal

Reserve’s Cost of Funds Index (COFI)),

with the trust receiving such payments

on at least a quarterly basis and

obligated to make separate payments no

more frequently than the swap

counterparty, with all simultaneous

payments being netted;

(3) Which has a notional amount that

does not exceed either (i) the certificate

balance of the class of certificates to

which the swap relates, or (ii) the

portion of the certificate balance of such

class represented by receivables;

(4) Which is not leveraged, (i.e.

payments are based on the applicable

notional amount, the day count

fractions, the fixed or floating rates

designated in (2) above, and the

difference between the products thereof,

calculated on a one to one ratio and not

on a multiplier of such difference);

(5) Which has a termination date that

is the earlier of the date on which the

trust terminates or the related Series of

certificates is fully repaid; and

(6) Which does not incorporate any

provision which could cause a

unilateral alteration in a provision

described in clauses (1) through (4)

hereof without the consent of the

trustee.

II. Eligible Swap Counterparty means

a bank or other financial institution

with a rating at the date of issuance of

the certificates by the trust which is in

one of the three highest long-term credit

rating categories, or one of the two

highest short-term credit rating

categories, utilized by at least one of the

Rating Agencies rating the certificates;

provided that, if a swap counterparty is

relying on its short-term rating to

establish eligibility hereunder, such

counterparty must either have a longterm rating in one of the three highest

long-term rating categories or not have

a long-term rating from the applicable

Rating Agency, and provided further

that if the series of certificates with

which the swap is associated has a final

maturity date of more than one year

from the date of issuance of the

certificates, and such swap is a Ratings

Dependent Swap, the swap counterparty

is required by the terms of the swap to

establish any collateralization or other

arrangement satisfactory to the Rating

Agency in the event of a ratings

downgrade of the swap counterparty.

JJ. Qualified Plan Investor means a

plan investor or group of plan investors

on whose behalf the decision to

purchase certificates is made by an

appropriate independent fiduciary that

is qualified to analyze and understand

the terms and conditions of any swap

transaction used by the trust and the

effect such swap would have upon the

credit ratings of the certificates. For

purposes of the proposed exemption,

such a fiduciary is either:

(1) A ‘‘qualified professional asset

manager’’ (QPAM), as defined under

Part V(a) of PTE 84–14 (49 FR 9494,

9506, March 13, 1984);25

(2) An ‘‘in-house asset manager’’

(INHAM), as defined under Part IV(a) of

PTE 96–23 (61 FR 15975, 15982, April

10, 1996);26 or

(3) A plan fiduciary with total assets

under management of at least $100

million at the time of the acquisition of

such certificates.

KK. Ratings Dependent Swap means

an interest rate swap, or (if purchased

by or on behalf of the trust) an interest

rate cap contract, that is part of the

structure of a series of certificates where

the rating assigned by the Rating Agency

to any series of certificates held by any

plan is dependent on the terms and

conditions of the swap and the rating of

the swap counterparty, and if such

certificate rating is not dependent on the

existence of such swap and rating of the

swap counterparty, such swap or cap

shall be referred to as a ‘‘Non-Ratings

Dependent Swap’’. With respect to a

Non-Ratings Dependent Swap, each

Rating Agency rating the certificates

must confirm, as of the date of issuance

of the certificates by the trust, that

entering into an Eligible Swap with

such counterparty will not affect the

rating of the certificates.

LL. Excess Finance Charge Collections

means, as of any day funds are

distributed from the trust, the amount

by which the finance charge collections

allocated to certificates of a series

exceed the amount necessary to pay

certificate interest, servicing fees and

expenses, to satisfy cardholder defaults

or charge-offs, and to reinstate credit

support.

The Department notes that this

proposed exemption, if granted, will be

included within the meaning of the term

‘‘Underwriter Exemption’’ as it is

defined in Section V(h) of the Grant of

the Class Exemption for Certain

Transactions Involving Insurance

Company General Accounts, which was

published in the Federal Register on

July 12, 1995 (see PTE 95–60, 60 FR

35925).

Summary of Facts and Representations

1. The applicants are Citibank (South

Dakota), N.A., Citibank (Nevada), N.A.

(together referred to herein as either

‘‘the Banks’’ or ‘‘Citibank’’), and their

Affiliates (collectively, the Applicants).

Each of the Banks is a national banking

association and an indirect whollyowned subsidiary of Citicorp.

2. The Banks are, collectively, through

their securitization trust vehicles, the

largest issuers of credit card receivable

asset-backed securities (ABS) in the

United States. As of May 26, 1996, such

vehicles had issued over $46 billion of

credit card receivable ABS. The Banks

created Citibank Credit Card Master

Trust I (the Trust), formerly known as

Standard Credit Card Master Trust I, in

May 1991 by entering into a pooling and

servicing agreement (a Pooling

Agreement) with Yasuda Bank and

Trust Company (U.S.A.), as trustee (the

Trustee), for the purpose of securitizing

a portion of each Bank’s portfolio of

credit card receivables.

Although the Banks, the Trust and the

Pooling Agreement are described herein,

the Applicants request an exemption for

any master trust similar to the Trust (a

Similar Master Trust) 27 established by

either of the Banks or an Affiliate

pursuant to a pooling and servicing

agreement or other contractual

arrangement similar to the Pooling
4058 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

Agreement and satisfying the conditions

set forth in this proposed exemption. In

addition, although Citibank (South

Dakota) is described as the owner of

Accounts and the servicer and a seller

with respect to the Trust, the Applicants

request an exemption for any Similar

Master Trust established by the Banks or

one or more Affiliates of the Banks,

regardless of the identity or affiliation of

the servicer, for which Citibank or an

Affiliate acts as the Master Servicer.

The Series

3. The Pooling Agreement allows the

Trust to issue multiple series of investor

certificates (each, a Series) with

different coupons, interest payment

dates, maturities and other terms. The

assets of the Trust consist primarily of

receivables (the Receivables) from a

portfolio of revolving credit card

accounts (the Accounts) and collections

thereon. The Banks are required to

provide sufficient Receivables to allow

the reinvestment of principal collections

during the Revolving Period (as

discussed below) for a Series. The Banks

retain an ownership interest in the Trust

in the form of a seller certificate. By

maintaining this interest, the Banks

share with the certificateholders of each

Series a pro rata mutual interest in the

overall credit quality of the Receivables

in the Trust.

Investor certificates of a Series may be

sold by the Banks directly to purchasers,

through underwriting syndicates led by

one or more managing underwriters,

through an underwriter acting alone or

through agents designated from time to

time. As of June 25, 1997, investors in

the Trust owned approximately $24.5

billion in certificates issued by the

Trust, comprising 33 outstanding Series.

The Banks expect to issue additional

Series evidencing interests in the Trust

from time to time. The Banks may offer

additional Series with terms similar to

or significantly different from an

outstanding Series. Before issuance of

any new Series, the Banks must receive

confirmation from Standard & Poor’s

Ratings Group, Moody’s Investors

Service, Inc., Duff & Phelps Credit

Rating Co., or Fitch Investors Service,

L.P. (a Rating Agency) that the ratings

on any outstanding Series will not be

reduced or withdrawn (a Ratings Effect)

as a result of such new issuance. The

particular terms of each Series are

determined at the time of sale and are

contained in a supplement to the

Pooling Agreement (a Series

Supplement).

The investor certificates of each Series

represent beneficial interests in the

assets of the Trust and evidence the

right to receive distributions of

principal and interest therefrom.

Although representing beneficial

interests in the Trust assets, the investor

certificates have a structure similar to

debt instruments, with a principal

amount and a coupon. The investor

certificates are treated as debt for federal

income tax purposes, and are also

issued in authorized denominations like

debt. Each Series has an expected

maturity date (the Expected Final

Payment Date) and a legal final maturity

date (the Series Termination Date).

Citibank states that the Expected Final

Payment Date is not the date on which

the payment of the security is legally

obligated to be paid. Rather, the

Expected Final Payment Date is the date

on which, to a high degree of certainty,

collections on the Receivables are

expected to be sufficient to repay the

investors. However, the investors must

be repaid by the Series Termination

Date and, if necessary, any interest in

the Receivables represented by the

investor certificates of such Series will

be sold and the proceeds distributed to

investors to make such repayment.

All Series issued by the Trust to date

are subdivided into a senior class of

investor certificates and a junior or

subordinated class of investor

certificates, or have the benefit of thirdparty credit support such that a person

other than an investor in senior

certificates bears the initial risk of loss.

In this regard, Citibank represents that

the particular class of certificates for

each series to which this proposed

exemption would apply (an Exempt

Class) will have credit support provided

to the Exempt Class through either a

senior-subordinated series structure or

other form of third party credit support

which, at a minimum, will represent

five (5) percent of the outstanding

principal balance of certificates issued

for the Exempt Class, so that an investor

in the Exempt Class will not bear the

initial risk of loss.

The subdivision of a Series into two

classes, along with the credit

enhancement discussed herein, permits

the senior or Class A certificates to

receive an ‘‘AAA’’ rating, the highest

possible investment grade rating. The

subordinate or Class B certificates also

receive an investment grade rating,

typically ‘‘A’’. The ratings address the

likelihood that investors will receive all

interest when due and principal by the

legal final maturity date. As discussed

in more detail below, these ratings are

based upon, among other things, (i) the

historical performance of the

Receivables arising in the Accounts, (ii)

a loan made by a third party financial

institution to a cash collateral account

(CCA) established by the Trustee to

serve as credit enhancement for the

Class A and Class B Certificates or other

credit enhancement, and (iii) in the case

of the Class A Certificates, the

subordination of the Class B Certificates.

The Applicants state that if a CCA is

used as credit enhancement for a Series,

only cash in the form of a loan will be

contributed or deposited in a CCA. The

loans made to a CCA will be made by

third-party financial institutions,

unrelated to Citibank. The Trustee will

have the right to draw on the CCA under

the terms of the Series supplement to

the Pooling Agreement and the related

loan agreement for the CCA. Cash

deposits held in a CCA will be invested

in certain permitted investments, as

described in the Pooling Agreement,

and such investments will be either

highly rated or otherwise approved by a

Rating Agency. The Applicants state

further that not all Series will have the

benefit of a CCA. Some Series will have

other forms of credit enhancement (such

as a letter of credit or a reserve fund) as

set forth in the applicable prospectus

supplement for the Series.

In general, under current Rating

Agency guidelines for the Master Trust,

the Class A Certificates comprise 94

percent of the principal amount of a

Series and the Class B Certificates

comprise 6 percent of the principal

amount of a Series. Citibank states that

where a CCA is used as enhancement

for a Series, the CCA will be funded at

closing in an amount generally equal to

7 percent of the principal amount of the

Series. The CCA is often further divided

into a 5 percent shared CCA, which is

shared by the Class A and Class B

Certificateholders, but with the Class A

Certificateholders having priority, and a

2% Class B CCA, which is for the

exclusive benefit of the Class B

Certificateholders. The CCA provider

receives a monthly fee for providing the

loan. This fee is deducted from the

monthly finance charge collections

allocated to the Series, but only after

first deducting amounts payable to, or

on behalf of, the investor

certificateholders of such Series, as

described below.

Citibank represents that the Trust may

commence a new program (the ‘‘MTC

Program’’) for the issuance of a new

Series of investor certificates to be

comprised of senior certificates (Series

A Certificates) and subordinate

certificates (Series B Certificates). Under

the MTC Program, the Series B

Certificates will be subordinated to each

Series of Series A Certificates, in

accordance with the current Rating

Agency guidelines. The Series issued

under the MTC Program will also have

the benefit of a common CCA which
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4059

28 VISA and MasterCard are registered trademarks

of VISA U.S.A., Inc. and MasterCard International

Incorporated, respectively.

will be funded in an amount sufficient

to permit each of the Series A

Certificates to receive an ‘‘AAA’’ rating

and each of the Series B Certificates to

receive at least an ‘‘A’’ rating.

The Receivables and the Accounts

4. The Receivables conveyed by the

Banks to the Trust consist of all

amounts charged by cardholders for

merchandise and services and amounts

advanced as cash advances (Principal

Receivables), and all periodic finance

charges, annual membership fees, cash

advance fees, late charges on amounts

charged for merchandise and services

and certain other fees designated by the

Banks (Finance Charge Receivables).

Citibank states that as of April 21, 1997,

the Trust had $35,677,604,475 in

Receivables, of which $35,175,269,487

were Principal Receivables and

$502,335,488 were Finance Charge

Receivables. The Receivables conveyed

to the Trust to date were generated

under the VISA or MasterCard 28

programs and were either originated by

Citibank or purchased by Citibank from

other credit card issuers. Citibank states

that other credit card receivables may be

included in the Trust so long as the

eligibility criteria discussed herein are

met.

The Accounts are owned by Citibank

(South Dakota), but a participation in

the Receivables in certain of the

Accounts was sold to Citibank (Nevada)

prior to their conveyance to the Trust.

The Accounts have been selected from

substantially all of the Eligible Accounts

(as defined under ‘‘Eligibility Criteria’’

below) in the credit card portfolio of

Citibank (South Dakota) (referred to

herein as ‘‘the Portfolio’’). Citibank

(South Dakota) believes that the

Accounts are representative of the

Eligible Accounts in the Portfolio.

Citibank represents in the Pooling

Agreement that the inclusion of the

Accounts, as a whole, does not

represent an adverse selection from

among the Eligible Accounts.

The Pooling Agreement designates

Citibank (South Dakota) to service the

Accounts on behalf of the Trust,

including collecting payments due

under the Receivables. Citibank, as the

servicer of the Trust, receives fees for its

services from the Trustee or sponsor of

the Trust. Citibank states that the sum

of all payments made to and retained by

Citibank, as the servicer of the Trust,

which are allocable to the series of

certificates purchased by a plan, will

represent not more than reasonable

compensation for such services and

reimbursement of any reasonable

expenses in connection therewith.

Citibank, in its role as servicer of the

Receivables in the Trust, does not

receive fees from other persons other

than the Trustee or sponsor. Citibank

may receive fees from others for

activities unrelated to the Trust, and

may receive payments from obligors on

Receivables in the Trust because it has

some other relationship to the obligors,

such as the provider of credit card

insurance. In this regard, Citibank states

that the proposed exemption would

permit it to receive a ‘‘qualified

administrative fee’’ (as defined in

Section III.S) from a person other than

the Trustee or sponsor of the Trust

under circumstances which are similar

to those which were permitted in the

Underwriter Exemptions.

Principal receivables are sold to the

Trust at par (or, as discussed below, at

a discount to par) in exchange for a

seller certificate or to maintain investor

certificates during the Revolving Period.

Each dollar of investor certificates

entitles an investor to a dollar of

principal receivables. Prior to

transferring principal receivables to the

Trust, Citibank may redesignate a

portion of principal receivables to be

classified as finance charge receivables

(a/k/a the Principal Receivables

Discount). This allows Citibank to

transfer lower yielding receivables to

the Trust at a discount from their par

value and to treat the discounted

portion of the principal receivables

collected as finance charge receivables

(a Discount Option). The Discount

Option enables Citibank to add

receivables relating to credit card

accounts with relatively low finance

charge rates without adversely effecting

the ‘‘excess spread’’ between the

certificate rate and the overall net yield

on the receivables held in the Trust. The

discounted portion of the principal

receivables is not counted toward any

requirements for maintaining the

‘‘required minimum principal balance’’

(as discussed below). Citibank states

that the redesignation of principal

receivables as finance charge receivables

will not disadvantage investors as each

dollar of investor certificates will

always be entitled to a dollar of

principal receivables held in the Trust.

Upon the sale of investor certificates,

the transaction between Citibank and

the Trust is characterized as a sale for

generally accepted accounting

principals. However, legal opinions

issued in connection with such a sale

may conclude that the transaction is

either an absolute transfer of the

receivables to the Trust or, in the

alternative, a grant of a perfected

security interest in the Receivables for

the benefit of certificateholders in the

Trust.

The Pooling Agreement sets forth the

various requirements governing the

quantity and quality of Receivables that

may be included in the Trust. In

connection with any conveyance to the

Trust, Citibank must make certain

representations and warranties

regarding the Receivables, including

that the Receivables to be conveyed

meet eligibility criteria described below

and specified in the Pooling Agreement.

Citibank also must maintain the level of

Principal Receivables at or above a

certain minimum amount specified by

the Rating Agencies (see discussion of

additions of accounts in Paragraph 7

below).

Notwithstanding such requirements,

the Pooling Agreement contains

provisions analogous to the collateral

substitution provisions in a loan

agreement or indenture relating to a

secured loan, which permit Citibank,

subject to certain conditions imposed by

the Rating Agencies, to designate new

Accounts or remove certain Accounts,

to cause the reassignment to Citibank of

previously conveyed Receivables and,

subject to certain limitations, to change

the underlying terms of the Accounts

with cardholders.

5. Representations and Warranties.

On the issuance date for a Series of

investor certificates, Citibank makes

representations and warranties to the

Trust relating to the Receivables and

Accounts to the effect, among other

things, that:

(a) Each Account was an Eligible

Account (as defined under the

‘‘Eligibility Criteria’’ below), generally

as of the date the Receivables arising

therein were initially conveyed to the

Trust;

(b) Each of the Receivables then

existing in the Accounts is an Eligible

Receivable; and

(c) As of the date of creation of any

new Receivable, such Receivable is an

Eligible Receivable.

The Pooling Agreement provides that

if Citibank breaches any such

representation or warranty, and such

breach has a material adverse effect on

the investor certificateholders’ interest,

as determined by the Trustee, the

Receivables with respect to the affected

Account will be reassigned to Citibank

if the breach remains uncured after a

specified period of time.

Citibank states that it also represents

and warrants to the Trust, among other

things, that as of the issuance date for

a Series of investor certificates the

Pooling Agreement and Series
4060 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

29A Due Period refers to the monthly period

beginning at the close of business on the fourth-tolast business day of each month and ending at the

close of business on the fourth-to-last business day

of the immediately following month.

Supplement thereto creates a valid sale,

transfer and assignment to the Trust of

all right, title and interest of Citibank in

the Receivables or the grant of a first

priority perfected security interest

under the Uniform Commercial Code as

in effect in South Dakota and Nevada in

such Receivables. If Citibank breaches

such representation or warranty, and

such breach has a material adverse

effect on the investor certificateholders’

interest, the Trustee or the holders of

the investor certificates may direct

Citibank to accept the reassignment of

the Receivables in the Trust and transfer

funds to the Trust in an amount equal

to the outstanding principal amount of

the investor certificates plus accrued

interest thereon.

6. Eligibility Criteria. An Eligible

Account is a credit card account owned

by Citibank (South Dakota) which: (a) is

in existence and maintained by Citibank

(South Dakota); (b) is payable in U.S.

dollars; (c) in the case of initial

Accounts, has a cardholder with a

billing address located in the United

States or its territories or possessions or

a military address; (d) has a cardholder

who has not been identified as being

involved in a voluntary or involuntary

bankruptcy proceeding; (e) has not been

identified as an Account with respect to

which the related card has been lost or

stolen; (f) has not been sold or pledged

to any other party; (g) does not have

receivables which have been sold or

pledged to any other party; and (h) in

the case of the Accounts initially

assigned to the Trust, is a VISA or

MasterCard revolving credit card

account.

An Eligible Receivable is a Receivable:

(a) Which has arisen under an Eligible

Account; (b) which was created in

compliance in all material respects with

all requirements of law and pursuant to

a credit card agreement which complies

in all material respects with all

requirements of law; (c) with respect to

which all material consents, licenses,

approvals or authorizations of, or

registrations with, any governmental

authority required to be obtained or

given in connection with the creation of

such Receivable or the execution,

delivery, creation and performance by

Citibank (South Dakota) or by the

original credit card issuer, if not

Citibank (South Dakota), of the related

credit card agreement have been duly

obtained or given and are in full force

and effect; (d) as to which at the time

of its transfer to the Trust, the Banks or

the Trust have good and marketable

title, free and clear of all liens,

encumbrances, charges and security

interests; (e) which has been the subject

of a valid transfer and assignment from

the Banks to the Trust of all the Banks’

right, title and interest therein or the

grant of a first priority perfected security

interest therein (and in the proceeds

thereof); (f) which will at all times be a

legal, valid and binding payment

obligation of the cardholder thereof

enforceable against such cardholder in

accordance with its terms, subject to

certain customary exceptions relating to

the bankruptcy of the cardholder; (g)

which at the time of its transfer to the

Trust, has not been waived or modified

except as permitted under the Pooling

Agreement; (h) which is not at the time

of its transfer to the Trust subject to any

right of rescission, set off, counterclaim

or defense (including the defense of

usury), other than certain bankruptcyrelated defenses; (i) as to which Citibank

has satisfied all obligations to be

fulfilled at the time it is transferred to

the Trust; (j) as to which Citibank has

done nothing, at the time of its transfer

to the Trust, to impair the rights of the

Trust or investor certificateholders of a

Series therein, and (k) which constitutes

either an ‘‘account’’ or a ‘‘general

intangible’’ under the Uniform

Commercial Code as then in effect

under South Dakota or Nevada state

law.

7. Additions of Accounts. To maintain

Citibank’s seller interest in the Trust,

the Pooling Agreement contains

provisions analogous to collateral

maintenance requirements under a

secured loan that require Citibank to

designate new Accounts (the receivables

in which will be conveyed to the Trust)

if, as of the end of any calendar week,

the total amount of Principal

Receivables in the Trust is less than the

amount required by the Rating Agencies

(the Required Minimum Principal

Balance).

The Pooling Agreement provides that

Citibank will be required to make a

Lump Sum Addition to the Trust in the

event that the amount of Principal

Receivables is not maintained at a

minimum level equal to the greater of:

(a) 107 percent of the sum of the

invested amounts of all outstanding

investor certificates of all Series, or (b)

102 percent of the sum of the initial

invested amounts of all outstanding

investor certificates of all Series (or, if

applicable for a particular Series, the

highest invested amount during a Due

Period,29 or, during any accumulation

period, scheduled amortization period,

early amortization period or Class A

amortization period, the highest

invested amount during the Due Period

preceding the first Due Period for such

accumulation scheduled amortization

period, early amortization period or

Class A amortization period). Citibank

may, upon 30 days prior notice to the

Trustee, the Rating Agency and any

provider of Series credit enhancement,

reduce the Required Minimum Principal

Balance, provided that such reduction

will not result in (1) a reduction or

withdrawal of any Rating Agency’s

rating of the investor certificates of any

outstanding Series, or (2) an adverse

effect, as defined in the Pooling

Agreement (an Adverse Effect) on the

certificateholders of any Series, and

provided further that the Required

Minimum Principal Balance may never

be less than 102 percent of the sum of

the initial invested amounts of all

outstanding investor certificates of all

Series (or, if applicable for a particular

Series, the highest invested amount

during a Due Period, or, during any

scheduled amortization period, early

amortization period or Class A

amortization period, the highest

invested amount during the Due Period

preceding the first Due Period for such

scheduled amortization period, early

amortization period or Class A

amortization period).

As previously noted, the requirement

that Citibank maintain Principal

Receivables in an amount at least equal

to the Required Minimum Principal

Balance is one mandated by the Rating

Agencies. The purpose of the Required

Minimum Principal Balance is to ensure

that Citibank’s interest in the Trust is

large enough to absorb dilution caused

by obligors returning merchandise

originally charged under their Account

(‘‘Returns’’) and possible seasonal

fluctuations in the Receivables. In

assessing the size of the Required

Minimum Principal Balance, Rating

Agencies generally consider a number of

factors including historical portfolio

dilution, the timing of Returns, the

portfolio composition, rebate programs

and the structural provisions designed

to ensure that a minimum amount of

Principal Receivables is maintained.

The Rating Agencies must affirmatively

confirm by written notice to the Trustee

that any reduction in the Required

Minimum Principal Balance will not

result in the reduction or withdrawal of

the rating assigned to any outstanding

Series or class of investor certificates.

Conveyance of additional receivables

(i.e. a Lump Sum Addition) may consist

of:

(a) Receivables arising in additional

Eligible Accounts from the Portfolio;

(b) Receivables arising in portfolios of

revolving credit card accounts acquired
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4061

30 Because additional Accounts may not be

accounts of the same type as previously included

in the Trust, Citibank states that there can be no

assurance that such additional Accounts will be of

the same credit quality as the initial Accounts or

the additional Accounts currently included in the

Trust. In addition, such additional Accounts may

consist of credit card accounts which have different

terms than the initial Accounts, including lower

periodic finance charges, which may have the effect

of reducing the average yield on the portfolio of

Accounts. However, as with any removal of any

Accounts, the designation of additional Accounts

will be subject to the satisfaction of certain

conditions required by the Rating Agencies,

including that (i) such addition will not result in

a Ratings Effect (i.e. a lower credit rating for the

certificates), and (ii) Citibank must deliver to the

Trustee and any provider of credit enhancement for

the Series a certificate of an authorized officer to the

effect that, in the reasonable belief of Citibank, such

addition will not at the time of such addition or at

a future date cause an early amortization event or

adversely affect the timing or amount of payments

to certificateholders (referred to in the Series

prospectus as an ‘‘Adverse Effect’’—see Paragraph

8 regarding the Reassignment of Receivables for

further discussion of an Adverse Effect).

31The complete conditions specified by the Series

prospectus for the removal of Accounts from the

Trust are as follows:

(a) on or before the fifth business day

immediately preceding the date upon which such

Accounts are to be removed, Citibank will give the

Trustee, the Servicer, the Rating Agency and any

provider of credit support (i.e., Series

Enhancement) written notice of such removal

specifying the date for removal of the Removed

Accounts (the Removal Date);

(b) on or prior to the date that is five business

days after the Removal Date, Citibank will deliver

to the Trustee a list of the Removed Accounts

specifying for each such Account, as of the removal

notice date, its account number, the aggregate

amount outstanding in such Account and the

aggregate amount of Principal Receivables

outstanding in such Account;

(c) Citibank will represent and warrant as of each

Removal Date that the list of Removed Accounts

delivered pursuant to (b) above, as of the Removal

Date, is true and complete in all material respects;

(d) the Trustee shall have received advance

confirmation from the Rating Agency that such

removal will not result in a Ratings Effect;

(e) Citibank will deliver to the Trustee and any

provider of Series Enhancement a certificate of an

authorized officer, dated as of the Removal Date, to

the effect that Citibank reasonably believes that

such removal will not at the time of its occurrence

or at a future date cause an Adverse Effect (i.e., the

occurrence of an early amortization event for any

Series or a reduction of the amount of surplus

finance charge collections below the level required

by the Rating Agencies, or an event which adversely

affects in any manner the timing or amount of

payments to investor certificateholders of any

Series or any enhancement invested amounts); and

(f) Citibank will deliver to the Trustee, the Rating

Agency and any provider of Series Enhancement an

opinion of counsel acceptable to the Trustee that for

federal and state tax law purposes: (i) Following

such removal the Trust will not be an association

(or publicly traded partnership) taxable as a

corporation, and (ii) such removal will not

adversely affect the characterization of the investor

certificates of any Series as debt and will not cause

a taxable event to holders of any such investor

certificates.

by the Banks from other credit card

issuers;

(c) Receivables arising from certain

non-premium and premium MasterCard

and VISA credit card accounts

previously transferred by Citibank to

certain trusts in securitization

transactions that have matured or

terminated;

(d) Receivables arising in any other

revolving credit card accounts of a type

which have not been previously

included in the Accounts; 30 and/or

(e) Participations in a pool of

receivables.

After giving effect to a Lump Sum

Addition, the total amount of Principal

Receivables in the Trust will at least

equal the Required Minimum Principal

Balance. In addition, subject to the

conditions contained in the Pooling

Agreement, Citibank may from time to

time, at its sole discretion, voluntarily

make a Lump Sum Addition to the

Trust.

Subject to limitations and conditions

in the Pooling Agreement, Citibank from

time to time may also designate, at its

sole discretion, Receivables in newly

originated Eligible Accounts to be

included as Accounts (New Accounts).

By adding Receivables in New

Accounts, the Seller’s interest will be

increased, but the Seller and the

investors will share interests in all of

the Receivables, including all those

arising in New Accounts and in

Accounts previously assigned to the

Trust. Citibank has designated New

Accounts (the Receivables in which

have been added to the Trust) since the

creation of the Trust, and Citibank may

continue to do so in the future. To

protect the Trust from dramatic changes

in composition, the number of New

Accounts Citibank may designate with

respect to any specified three month

period may not exceed 15 percent of the

number of Accounts as of the first day

of such period, and the number of New

Accounts designated during any

calendar year may not exceed 20

percent of the number of Accounts as of

the first day of such calendar year. The

Pooling Agreement also requires

Citibank to deliver an opinion of

counsel semi-annually with respect to

the New Accounts included as

Accounts, confirming the validity of

each transfer of Receivables in such

New Accounts.

8. Reassignment of Receivables.

Citibank has the right to require the

reassignment to Citibank of the

Receivables with respect to certain

Accounts. Citibank represents that it

may desire such a reassignment, for

example, to set up a new master trust or

other securitization vehicle. However,

such a reassignment may only occur

upon satisfaction of certain conditions

in the Pooling Agreement under

guidelines established by the Rating

Agencies, which are described in the

Series prospectus. Citibank states that in

order to satisfy such conditions, the

Rating Agencies must confirm in

advance that such reassignment will not

cause the rating assigned to any

outstanding Series or class of investor

certificates to be withdrawn or reduced.

In addition, Citibank must deliver an

officers’ certificate to the effect that

Citibank reasonably believes that such

reassignment will not, at the time of its

occurrence or a future date: (a) Cause an

early amortization event; (b) cause a

reduction of the amounts of surplus

finance charge collections with respect

to any Series of investor certificates

below the level required by the Rating

Agencies; or (c) adversely affect the

amount or timing of payments to

investor certificateholders of any Series.

Only after satisfaction of these and

other conditions set forth in the Series

prospectus 31 for the removal of

Accounts from the Trust will the

Trustee execute and deliver to Citibank

a written reassignment to reconvey to

Citibank, without recourse, the

Receivables arising in Removed

Accounts (Removed Accounts).

9. Modification to the Underlying

Terms of the Accounts. Each cardholder

is subject to an agreement governing the

terms and conditions of such

cardholder’s Account. Pursuant to such

agreement, Citibank (South Dakota), as

owner of the Accounts, has the right to

change or terminate any terms,

conditions, services or features of the

Accounts (including increasing or

decreasing periodic finance charges or

minimum payments). Citibank has

covenanted in the Pooling Agreement

that, except as otherwise required by

any requirement of law or as is deemed

necessary by Citibank to maintain its

credit card business on a competitive

basis, it will not take actions which

would reduce the net portfolio yield on

the Receivables (after subtracting

therefrom the amount of Principal

Receivables that were written off as

uncollectible) to be less than the sum of:

(a) the weighted average certificate rate

of each class of investor certificates of

each Series; and (b) the weighted

average of the net servicing fee rate

allocable to each class of investor

certificates of each Series. In addition,

Citibank has agreed in the Pooling

Agreement that, unless required by law,

it will not reduce such net portfolio

yield to less than the highest certificate

rate for any outstanding Series or class.

Citibank also has covenanted in the

Pooling Agreement that it will change
4062 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

32 In addition, Citibank states that in some

instances principal collections on receivables

allocated to a particular Series may be shared with

other Series within the same Group, provided that

the minimum principal receivable balances

required by the Rating Agencies for all Series

within the Group are maintained. However,

Citibank states further that under its current

payment structure, principal collections on

receivables allocated to a particular Series are

usually not shared.

the terms relating to the Accounts

designated to the Trust only if such

change is made applicable to the

comparable segment of the portfolio of

Accounts owned or serviced by Citibank

which are part of the same program or

which have the same or substantially

similar characteristics. The ability of

Citibank to change the terms of the

Accounts is necessary to meet the

competitive demands of the

marketplace.

Citibank states that it offers a variety

of different underwriting standards and

terms on its credit card accounts. For

example, Citibank offers Gold Visa cards

and Regular Classic Visa cards. Citibank

also offers ‘‘co-branded’’ cardholder

programs, in conjunction with, among

others, American Airlines, under which

cardholders can earn frequent flyer

miles or credits to be applied to the

purchase price of goods or services.

With respect to such programs, some

Accounts are designated to the Trust

and some are not. If Citibank determines

to change an underwriting standard or

cardholder agreement terms under one

of these programs, Citibank does so

without distinguishing those affected

Accounts designated to the Trust from

those affected Accounts which are not

designated to the Trust. This failure to

distinguish is mandated by the Pooling

Agreement and the Rating Agencies.

Citibank’s decisions are fundamentally

decisions with respect to how to operate

its business in a competitive manner

and will not treat Accounts designated

to a Trust any differently than other

Accounts.

Citibank states that if changes to

underwriting standards or cardholder

agreement terms were to adversely affect

the performance of the Receivables in

the Trust (e.g. cause an increase in

charge-offs or defaults, or a lower yield

on the Receivables), investors are

protected by the early amortization

event triggers (as discussed further in

Paragraphs 13 and 14 below) and credit

enhancement. In order for certificates

issued by the Trust to obtain a high

credit rating, there must be sufficient

credit enhancement to meet the Rating

Agency’s ‘‘high stress’’ scenarios to

ensure full and timely payment of

principal and interest. In this regard, an

‘‘economic early amortization event’’

occurs immediately upon the

occurrence of either of the two events

specified in Paragraph 14 below,

without any notice or other action on

the part of the Trustee or the

certificateholders.

Pass-Through of Cardholder Payments

10. Cardholder payments for each

month are separated into principal

collections and finance charge

collections, both of which, as well as

defaults on Principal Receivables, are

allocated to each Series and to Citibank

pro rata based on the relative interest of

each in the Trust. Investors will,

however, receive a fixed allocation of

principal collections during the

Accumulation or Amortization Period.

Citibank’s interest in the Trust

represents the portion of the Principal

Receivables in the Trust that is not

represented by investor certificates.

Finance charge collections are used to

pay the coupon on the investor

certificates of each Series, as well as to

pay the servicing costs and cover

defaults on principal payments due

from cardholders. Principal collections

are typically reinvested in new

Receivables and/or allowed to

accumulate for a period of time, rather

than distributed immediately to

investors, so that the investor

certificates’ payment characteristics will

mirror those of comparable long-term

debt instruments. However, the Pooling

Agreement specifies Early Amortization

Events following the occurrence of

which all principal collections will

commence being distributed to

investors.

11. Principal Collections. If principal

collections that were allocated to a

Series were immediately distributed to

the investors, the investors would be

quickly repaid. For example, Citibank

states that in 1996 the average monthly

cardholder principal payment rate was

18.46 percent, which means all

investors would be repaid over a sixmonth period assuming all Series in the

Trust simultaneously amortize. To

structure the investor certificates so as

to perform as if they were long-term

debt instruments, principal collections

allocated to a Series are reinvested in

newly generated Receivables arising in

the Accounts for a period of time

specified in the Series Supplement (i.e.,

the Revolving Period). Reinvestment in

Receivables during the Revolving Period

maintains the principal amount of the

Series invested in the Trust for such

period. At the end of the Revolving

Period, shortly before the expected

maturity date, a portion of the principal

collections allocated to a Series either

will commence to be paid to the

investor certificateholders of such Series

in monthly installments (a Controlled

Amortization Period) or will be

deposited in an account to be

distributed to such certificateholders in

a lump sum on the expected maturity

date (an Accumulation Period),

depending on the terms specified in the

related Series Supplement. Generally,

each of the recently issued Series has:

(i) an eleven-month Accumulation

Period for the Class A Certificates,

which may be shortened (and the

Revolving Period extended) according to

an objective formula used to project the

level of principal collections in the

Trust; and (ii) a one-month

accumulation period for the Class B

Certificates.

12. Finance Charge Collections.

Finance charge collections that are

allocated to Series belonging to the same

Group are pooled together and then

shared among all Series in the Group

based on the amount of total expenses

of each Series for coupon, losses and

servicing fees. 32 All Series issued to

date have been designated as belonging

to Group One. As a result of this

reallocation of finance charges, those

Series that have higher coupons will

receive a proportionately larger share of

the finance charge income and thus may

avoid suffering a shortfall which might

occur if finance charge income were

allocated based on the relative interest

(based on aggregate principal amounts)

of such Series in the Trust. However, if

finance charge income is not sufficient

to cover total expenses in Group One,

all Series within Group One will share

proportionately in the shortfall

regardless of the interest rate of the

investor certificates of an individual

Series. Finance charge collections

allocable to a Series belonging to one

Group will not impact finance charge

collections allocable to any Series

belonging to a different Group.

All Series issued under the MTC

Program will be designated as belonging

to Group Two. Finance charge

collections that are allocated to Series

belonging to Group Two will be pooled

together and then shared the same way

as the Series which are included in

Group One.

Early Amortization Events

13. Citibank represents that an earlier

than scheduled payout of principal to

investor certificateholders of a Series

will occur under certain circumstances

specified in the Pooling Agreement

(each condition is described as an Early

Amortization Event).

Generally, Early Amortization Events

include:
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4063

33The Series to which an Accumulation Period

applies contain an additional Economic Early

Amortization Event which is triggered if, during the

Accumulation Period, the yield on the Receivables

in the Trust is less than the weighted average of the

certificate rates of all Series included in the Group.

(a) The failure of the Bank to either (i)

make any payment or deposit required

under the Pooling Agreement or any

Series Supplement within five (5)

business days after such payment or

deposit was required to be made, or (ii)

observe or perform any of its other

covenants or agreements set forth in the

Pooling Agreement or any Series

Supplement, which failure has a

material adverse effect on investors and

continues unremedied for 60 days;

(b) A breach of any representation or

warranty made by Citibank in the

Pooling Agreement or any Series

Supplement which continues to be

uncorrected in any material respect for

60 days;

(c) The occurrence of certain

bankruptcy events relating to either

Bank (an Insolvency Event);

(d) The failure by the Banks to make

a Lump Sum Addition;

(e) The occurrence of any servicer

default by Citibank;

(f) If a class of investor certificates is

in an Accumulation Period, the amount

on deposit in the accumulation account

in any month is less than the amount

required to be on deposit therein;

(g) The failure to pay in full amounts

owing to investors on the expected

maturity date; and

(h) The Economic Early Amortization

Event described below.

Each Series Supplement may contain

other Early Amortization Events for the

related Series in addition to those

specified in the Pooling Agreement. To

date, no Early Amortization Event has

occurred with respect to any Series of

investor certificates issued by the Trust.

Citibank has no discretion with

respect to the determination whether an

Early Amortization Event has occurred.

However, certain Early Amortization

Events, such as the breach of a

representation or warranty, are qualified

by materiality and may be declared at

the option of the Trustee. Citibank states

that in light of the complexity of these

securitization transactions, such

flexibility is intended to permit the

Trustee to act in the best interests of

investor certificateholders, which may

be to forego early amortization by reason

of a mere technical violation. Other

Early Amortization Events, such as the

Economic Early Amortization Event, are

not qualified by materiality and operate

automatically. In effect, such events are

always material.

The occurrence of an Early

Amortization Event will cause the

Revolving Period, Controlled

Amortization Period or Accumulation

Period, as may be applicable, to end and

principal collections will be used

thereafter to make monthly payments of

principal to the investor

certificateholders of such Series (i.e. an

Early Amortization Period) until the

earlier of payment in full of the

outstanding principal amount of the

certificates of such Series or the legal

final maturity date for such Series

specified in the related Series

Supplement. If an Accumulation Period

has already begun for a Series, then all

monies that have been previously

deposited in an accumulation account

for such Series will be withdrawn upon

the occurrence of an Early Amortization

Event and paid to the investor

certificateholders of such Series.

In addition to the foregoing

consequences of an Early Amortization

Event described above, if an Insolvency

Event occurs, Citibank will immediately

cease to transfer Receivables to the

Trust. Thereafter, unless the requisite

number of investor certificateholders

instruct otherwise, the Trustee will sell

or otherwise liquidate the Receivables

in the Trust in a commercially

reasonable manner and on commercially

reasonable terms. The proceeds of such

sale or liquidation will be applied first

to payments on the Class A Certificates,

then to the Class B Certificates.

14. Economic Early Amortization

Events. Citibank represents that all

outstanding Series include an Economic

Early Amortization Event, which is

triggered if finance charge collections

averaged over three consecutive months

are less than the total amounts payable

with respect to the Class A and Class B

Certificates (including amounts payable

with respect to interest, servicing fees,

defaults, charge-offs and any credit

enhancement fee).33 Upon the

occurrence of an Economic Early

Amortization Event, monies on deposit

in the CCA will be used to make

payments of principal to the Class A

Certificateholders and Class B

Certificateholders. However, Citibank

states that because the amount on

deposit in a CCA is likely to be

insufficient to pay outstanding principal

amounts in full, additional collections

with respect to the Receivables will be

required to fully pay down the

certificates. Thus, the Trust generally

will depend on several forms of credit

enhancement [e.g. ‘‘excess spread’’

between the Receivables and the

certificate rate, subordination of the

Class B Certificates, letters of credit or

other third party credit enhancement],

as well as any interest rate swap

transactions (as discussed in Paragraph

16 below) and the maintenance of the

‘‘required minimum principal balance’’

for the Receivables under guidelines set

by the Rating Agencies, to ensure timely

repayment of principal and interest to

the certificateholders.

Utilization of Credit Support—The Role

of the Master Servicer and the Role of

the Trustee

15. The servicer of Citibank’s credit

card ABS does not supply credit

support. Further, if the servicer fails to

call upon a credit support mechanism to

produce needed funds, the Trustee may

exercise its rights as beneficiary of the

credit support to obtain the funds under

the credit support mechanism.

Therefore, in all cases, the Trustee will

be ultimately responsible for deciding

when to exercise its rights as beneficiary

of the credit support.

In some cases, the servicer or an

affiliate will be required under the terms

of the Pooling Agreement to provide

liquidity (but not credit) advances to the

Trust. In these cases, the servicer will

advance funds to cover shortfalls and

will be reimbursed on the following

distribution date from collections on the

Receivables or Series credit support.

The servicer will not be required to

make any such liquidity advance unless

there is sufficient Series credit support

available to ensure repayment of the

liquidity advance on the following

distribution date. If the servicer fails to

advance funds in respect of a shortfall

when obligated to do so, the Trustee

will exercise its rights under any

available credit support on the

following distribution date to obtain the

necessary funds under the credit

support mechanism.

The servicer has servicing guidelines

which include a general policy as to the

allowable delinquency period after

which Receivables ordinarily are

deemed uncollectible. The Pooling

Agreement requires the servicer to

follow its normal servicing guidelines

and also sets forth in the definition of

Defaulted Receivables the servicer’s

general policy as to the period of time

after which delinquent Receivables will

be considered uncollectible.

On a monthly basis the servicer is

required to report to the Trustee the

amount of all past-due payments along

with other current information as to

collections on the Receivables and

draws upon, or payments to be made

from, the credit support. Further, the

servicer is required to deliver to the

Trustee annually a certificate of an

officer of the servicer stating that a

review of the servicing activities has

been made under such officer’s
4064 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

34Banks or financial institutions other than

Citibank may be swap counterparties to the Trust

on other interest rate swaps. In addition, an interest

rate ‘‘cap’’ could be used where the Trust issues

floating rate certificates. In such instances, a

counterparty would be paid a premium in advance

by Citibank (from its own funds). Under the interest

rate cap agreement, if the floating rate on the

certificates were to rise above a specified rate (i.e.

the cap rate), the counterparty would be required

to provide the Trust with the amounts in excess of

the cap rate necessary to pay the balance of the

interest on the certificates.

35 If such amount is positive, it will be referred

to as the ‘‘Class A Net Swap Payment’’, and if such

amount is negative, it will be referred to as the

‘‘Class A Net Swap Receipt’.

36The day count fraction used in any swap would

correspond to the day count fraction used in the

related Series of certificates. For example, industry

convention is that fixed rate securities bear interest

on a 30/360 day count fraction while floating rate

securities often bear interest on an actual/360 day

count fraction. Accordingly, any floating payments

made by a swap counterparty to the Trust which

relate to a floating rate Series of certificates with an

actual/360 day count fraction would also have an

actual/360 day count fraction and any fixed

payments made by a swap counterparty to a Trust

which relate to a fixed rate Series of certificates

with a 30/360 day count fraction would also have

a 30/360 day count fraction.

37 It should be noted that a substantial portion of

the Receivables in the Trust bear interest at the

prime rate plus a margin, while the investor

certificates will bear interest at one or more fixed

or floating rates specified in the related prospectus.

If there is a decline in the prime rate, the amount

of Finance Charge Receivables in the Trust may be

reduced and, even if there is a similar reduction in

any floating rate or other rates applicable to the

investor certificates, there will not be a similar

reduction in the other amounts (e.g. servicing fees

or expenses for operating the Trust) required to be

funded out of such Receivables. The subject Series

prospectus notes that this mismatch between the

various cashflows into and out of the Trust results

in ‘‘basis risk’’ which is partially mitigated by the

presence of the Interest Rate Swaps. Thus, as noted

in more detail above, payment of the Class A

Certificate Rate and the credit rating for such

certificates may be dependent, in part, on the swap

agreements and the creditworthiness of the swap

counterparty.

supervision, and either stating that the

servicer has fulfilled all of its

obligations under the Pooling

Agreement or, if the servicer has

defaulted under any of its obligations,

specifying any such default. The

servicer’s reports are reviewed annually

by independent accountants to ensure

that the servicer is following its normal

servicing standards and that the

servicer’s reports conform to the

servicer’s internal accounting records.

The results of the independent

accountant’s review are delivered to the

Trustee.

Interest Rate Swap Agreements by the

Trust

16. For certain Series of certificates,

the Trust will have the benefit of

interest rate swap agreements for the

exclusive benefit of the Class A

Certificateholders (the Class A Interest

Rate Swap) and/or interest rate swap

agreements for the exclusive benefit of

the Class B Certificateholders (the Class

B Interest Rate Swap). Citibank (South

Dakota) and Citibank (Nevada) may be

the counterparties to the Trust for these

Interest Rate Swaps.34

Pursuant to the terms and conditions

of the Interest Rate Swaps, the Trust

will be obligated to make certain

payments periodically to the swap

counterparty based on either a fixed or

floating interest rate. In turn, the swap

counterparty will be obligated to make

payments periodically to the Trust

based on either a fixed or floating

interest rate. Payments received by the

Trust pursuant to the Class A Interest

Rate Swaps will be available to pay

interest due on the Class A Certificates

on each Class A interest payment date

and payments received by the Trust

pursuant to the Class B Interest Rate

Swaps will be available to pay interest

due on the Class B Certificates on each

Class B interest payment date. The Trust

will also have the benefit of funds on

deposit in a CCA or other applicable

credit support.

As an example, Citibank has

submitted information for the Series of

certificates issued by the Trust on

August 29, 1996 (known as

$750,000,000 Floating Rate Class A

Credit Card Participation Certificates,

Series 1996–5 and $48,000,000 Floating

Rate Class B Credit Card Participation

Certificates, Series 1996–5). On the

Series issuance date (August 29, 1996),

the Trustee of the Trust, for the

exclusive benefit of the Class A

Certificateholders, entered into two

Class A Interest Rate Swaps with

Citibank (South Dakota) and Citibank

(Nevada), respectively, which together

had a combined notional amount as of

any swap payment date equal to the

outstanding principal amount of the

Class A Certificates as of the close of

business on the preceding distribution

date.

Interest with respect to the investor

certificates accrues from August 29,

1996 and is payable quarterly on the

fifteenth day of March, June, September

and December, commencing December

15, 1996. Pursuant to the Class A

Interest Rate Swaps, on the business day

preceding each distribution date,

payments are made by the Trust to

Citibank (if the following is a positive

number), or by Citibank to the Trust (if

the following is a negative number) of

an amount in the aggregate equal to: 35

(i) one quarter of the product of

(A) the Class A Notional Amount; and

(B) 6.8691 percent (the Class A Swap

Rate); minus

(ii) the product of

(A) a fraction, the numerator of which

is the actual number of days from and

including the prior distribution date

(excluding the related distribution date),

and the denominator of which is 360; 36

(B) the Class A Notional Amount; and

(C) The Class A Certificate Rate.

The Class A Certificate Rate for each

interest period is a per annum rate equal

to the arithmetic mean of London

interbank offered quotations for United

States dollar deposits (i.e. LIBOR) for

the applicable three month period, plus

.105 percent.37

The principal on the Class A and

Class B Certificates issued on August 29,

1996, is scheduled to be paid on the

September 2003 payment date, but

principal and interest for such

certificates may be paid earlier under

the circumstances described herein (e.g.

an economic early amortization event).

Principal payments will not be made to

Class B Certificateholders until the final

principal payment has been made for

the Class A Certificates. Unless an early

amortization event has occurred, the

Revolving Period will end and the

Accumulation Period (i.e. for principal

payments to certificateholders) will

commence at the close of business on

the fourth-to-last business day of August

2002. However, Citibank, as Servicer,

may shorten the length of the

Accumulation Period and extend by an

equivalent period the length of the

Revolving Period based on the amount

of principal available to the investor

certificates of all Series determined

based on the principal payment rate on

the Receivables and the amount of

principal distributable to

certificateholders of all outstanding

Series.

The Series prospectus for these

certificates indicates that the CCA was

funded by an initial deposit of

$55,860,000, of which $39,900,000 was

for the benefit of both the Class A and

Class B Certificates, and $15,960,000

was for the exclusive benefit of the Class

B Certificates. In the event of an

economic early amortization event, the

available shared enhancement amount

(after giving affect to other withdrawals

from the CCA on the distribution date)

will be applied to pay principal of the

Class A Certificates and the remainder

of the available CCA will be applied to

pay principal of the Class B Certificates.

The Series prospectus states that it

was a condition to the issuance of the

Class A Certificates on August 29, 1996,

that they be rated in the highest rating

category by at least one Rating Agency.

Under this proposed exemption,

employee benefit plan investors are able
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4065

38 In this regard, the Department notes that the

Trustee would be obligated, as a fiduciary for ‘‘plan

assets’’ held by the Trust, to ensure that the Servicer

uses reasonable efforts to take whatever actions are

necessary to satisfy the Rating Agency so as to avoid

a reduction or withdrawal of the current rating for

certificates of a particular Series following any

reduction or withdrawal of the swap counterparty’s

rating.

39The Department cautions plan fiduciaries to

fully understand the risks and benefits associated

with investments made in asset-backed securities,

such as credit card receivable ABS, or any other

fixed-income security. In this regard, section 404(a)

of the Act requires, among other things, that a plan

fiduciary act prudently when making investment

decisions on behalf of a plan. The Department also

cautions plan fiduciaries that if the assets of a trust

which issues certificates is deemed to be ‘‘plan

assets’’ under the Department’s regulations (see 29

CFR 2510.3–101), the plan’s assets would include

not only the certificates purchased but also an

undivided interest in each of the underlying assets

of the trust, including any interest rate swap

agreement between the trust and a bank. For a

current statement of the Department’s views on the

use of ‘‘derivatives’’ by pension plans, see DOL

Letter from Olena Berg, Assistant Secretary for

Pension and Welfare Benefits, to The Honorable

Eugene A. Ludwig, Comptroller of the Currency,

dated March 21, 1996.

40The Series prospectus states that the aggregate

amount of Receivables in the Accounts included in

the Trust as of July 7, 1996 was $31,796,288,366,

of which $31,414,439,867 were Principal

Receivables and $381,848,499 were Finance Charge

Receivables.

to acquire only the Class A Certificates.

The rating of the Class A Certificates

was based primarily on the value of the

Receivables (see Rating Agency Analysis

in Paragraph 17 below), the extent of the

initial shared enhancement amount (i.e.

the CCA, etc.), the circumstances in

which funds may be withdrawn from

the CCA for the benefit of the investor

certificateholders, the terms of the Class

B Certificates and the Interest Rate

Swaps and the credit ratings of the swap

counterparties [e.g., Citibank (South

Dakota) and Citibank (Nevada)]. In the

event the short-term debt rating of either

swap counterparty is withdrawn or

reduced below A–1+ by Standard &

Poor’s Ratings Group or its long-term

debt rating is withdrawn or reduced

below Aa3 by Moody’s Investors

Service, the Servicer will (as agent for

the Trustee),38 within 30 days after such

rating withdrawal or reduction, use

reasonable efforts to (i) obtain a

replacement interest rate swap

agreement with terms substantially the

same as the respective Interest Rate

Swap, or (ii) establish any other

arrangement satisfactory to the

applicable Rating Agency, such that the

ratings of the investor certificates by the

applicable Rating Agency will not be

withdrawn or reduced. In the event no

such replacement interest rate swap

agreement is obtained, or no other

arrangement satisfactory to the Rating

Agency is established within such

period, an early amortization event will

occur. The Series prospectus states that

there can be no assurance that the

ratings of the investor certificates will

remain for any given period of time or

that such ratings will not be lowered or

withdrawn entirely by the Rating

Agency if in its judgment circumstances

in the future so warrant.39

The Series prospectus states that

delivery of these investor certificates

was made in book-entry form through

the facilities of the Depository Trust

Company (DTC), Cedel Bank and the

Euroclear System on August 29, 1996.

The underwriters for the Class A

Certificates were Citibank, Goldman,

Sachs & Co., Merrill Lynch & Co. and

Salomon Brothers Inc. An application

was made by Citibank to list the

certificates on the Luxembourg Stock

Exchange. The Trust had previously

issued thirty (30) other Series of

investor certificates which evidence

undivided interests in the Trust which

were still outstanding at that time.40 The

Series prospectus states that additional

Series are expected to be issued from

time to time by the Trust and that

additional credit enhancement will be

provided for each additional Series

issued.

Citibank represents that the credit

rating provided to a particular Series or

class of certificates by the relevant

Rating Agency may or may not be

dependent upon the existence of a swap

agreement. Thus, in some instances, the

terms and conditions of a swap

agreement entered into by the Trust will

not effect the credit rating of the Series

or class of certificates to which the swap

relates (i.e. a ‘‘Non-Ratings Dependent’’

Swap). Citibank states that typically

when a swap agreement is entered into

by the Trust, the credit rating

established by the Rating Agency for the

particular Series of certificates to which

the swap relates will be dependent upon

the existence of the swap (i.e. a ‘‘Ratings

Dependent’’ Swap).

Citibank represents further that each

particular swap transaction entered into

by the Trust will be an ‘‘Eligible Swap’’

(as defined in Section III.HH. above). In

addition, each swap transaction will be

with an ‘‘Eligible Swap Counterparty’’,

which shall be a bank or other financial

institution with a rating at the date of

issuance of the certificates by the trust

which is in one of the three highest

long-term credit rating categories, and/

or one of the two highest short-term

credit rating categories, utilized by the

Rating Agencies rating the certificates.

However, if a swap counterparty is

relying on its short-term rating to

establish its eligibility, such

counterparty must either have a longterm rating in one of the three highest

long-term rating categories or not have

a long-term rating from the applicable

Rating Agency. If the rating of a

particular Series or class of certificates

is dependent upon the terms and

conditions of an Eligible Swap entered

into by the Trust (i.e., a ‘‘Ratings

Dependent’’ Swap), the swap

counterparty will be subject to certain

collateralization or other arrangements

satisfactory to the Rating Agencies in

the event of a rating downgrade of the

swap counterparty below a level

specified by the Rating Agency, which

would be no lower than the level that

would make such counterparty

‘‘eligible’’ under this proposed

exemption (see Section III.II above). If

these arrangements are not established

within a specified period, as described

in the Pooling Agreement, there will be

an early amortization event causing

certificateholders to receive an earlier

than expected payout of principal on

their certificates for the series to which

the swap relates. However, with respect

to a Non-Ratings Dependent Swap, the

Pooling Agreement will not specify that

there be an early amortization event for

the series to which the swap relates if

the credit rating of the swap

counterparty falls below the level

required for it to be considered an

Eligible Swap Counterparty (as

described in Section III.II. above). In

such instances, in order to protect the

interests of the trust as a swap

counterparty, the servicer (as agent for

the trustee of the trust) will be required

to either:

(i) Obtain a replacement swap

agreement with an Eligible Swap

Counterparty, the terms of which are

substantially the same as the current

swap agreement (at which time the

earlier swap agreement will terminate);

(ii) Cause the swap counterparty to

post collateral with the trustee of the

trust in an amount equal to all payments

owed by the counterparty if the swap

transaction were terminated; or

(iii) Terminate the swap agreement in

accordance with its terms.

Under any termination of a swap, the

trust will not be required to make any

termination payments to the swap

counterparty (other than a currently

scheduled payment under the swap

agreement) except from ‘‘excess finance

charge collections’’ or other amounts

that would otherwise be payable to the

servicer or the seller (i.e. Citibank). In

this regard, ‘‘excess finance charge

collections’’ will be, as of any day funds

are distributed from the trust, the

amounts by which finance charge

collections allocated to certificates of a
4066 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

41Representatives from two of the Rating

Agencies (RA Reps) have indicated to the

Department that certain series of certificates issued

by a trust holding credit card receivables will have

certificate ratings that are not dependent on the

existence of a swap transaction entered into by the

trust. Therefore, a downgrade in the swap

counterparty’s credit rating would not cause a

downgrade in the rating established by the Rating

Agency for the certificates. RA Reps state that in

such instances there will be more credit

enhancements (e.g. ‘‘excess spread’’, letters of

credit, cash collateral accounts) for the series to

protect the certificateholders than there would be

in a comparable series where the trust enters into

a so-called Ratings Dependent Swap. Non-Ratings

Dependent Swaps are generally used as a

convenience to enable the trust to pay certain fixed

interest rates on a series of certificates. However,

the receipt of such fixed rates by the trust from the

counterparty is not a necessity for the trust to be

able to make its fixed rate payments to the

certificateholders.

42 For example, the annual portfolio yield for the

Trust in 1995 was 18.11 percent. The annual

certificate rates for each Series outstanding at that

time varied between approximately 5.50 and 8.8

percent, depending upon the date of issuance, the

expected duration, whether the particular Series

certificates were Class A or Class B, etc. The Series

servicing rates (including interchange fees) varied

between 0.37 and 1.87 percent of the outstanding

receivables. The annual loss rate for the receivables

in the Trust, as a percentage of the average principal

receivables outstanding was approximately 3.8

percent during this period. Under the Rating

Agencies hypothetical ‘‘stress’’ scenarios submitted

by Citibank, the annual loss rate could have been

increased to approximately 27.5 percent during this

period without resulting in a failure of the Trust to

pay any interest or principal on the AAA rated

certificates.

series exceed the amounts necessary to

pay certificate interest, servicing fees

and expenses, to satisfy cardholder

defaults or charge-offs, and to reinstate

credit support.

With respect to Non-Ratings

Dependent Swaps, each Rating Agency

rating the Certificates must confirm, as

of the date of issuance of the Certificates

by the Trust, that entering into the swap

transactions with the Eligible Swap

Counterparty will not affect the rating of

the Certificates, even if such

counterparty is no longer an ‘‘eligible’’

counterparty and the swap is

terminated.41

Any Series of certificates which

conveys rights with respect to an

Eligible Swap would only be sold to a

Qualified Plan Investor (as defined in

Section III.JJ. above). Qualified Plan

Investors will be plan investors

represented by an appropriate

independent fiduciary that is qualified

to analyze and understand the terms

and conditions of any swap transaction

used by the Trust and the effect such

swap would have upon the credit

ratings of the certificates. For purposes

of the proposed exemption, such a

qualified independent fiduciary would

be either: (i) A ‘‘qualified professional

asset manager’’ (i.e. QPAM), as defined

under Part V(a) of PTE 84–14; (ii) an

‘‘in-house asset manager’’ (i.e. INHAM),

as defined under Part IV(a) of PTE 96–

23; or (iii) a plan fiduciary with total

assets under management of at least

$100 million at the time of the

acquisition of such certificates.

Rating Agency Analysis

17. The Applicants state that the

rating guidelines and stress scenarios

used by the Rating Agencies in

assigning a rating to a credit card

receivable ABS take into consideration

many factors and are determined on a

case-by-case basis. The Rating Agencies

review three principal areas in arriving

at a credit enhancement level to support

a rating for a credit card receivable ABS:

(i) Quantitative performance of the

portfolio, including historical yield,

loss, delinquency and monthly payment

rates, as well as credit exposure caused

by factors such as geographic

concentration of risk;

(ii) Qualitative portfolio factors, such

as the originator’s underwriting

standards, audit and control procedures,

collection process and marketing

strategy; and

(iii) Legal and structural issues raised

by the securitization structure, such as

priority of security interests, timeliness

of cash flow and exposures to third

party bankruptcy risk (e.g. seller,

guarantor, obligor, servicer), etc.

The Applicants represent that each

Rating Agency adopts a slightly

different approach to the determination

of credit enhancement levels. For

example, Moody’s Investors Service,

Inc. (Moody’s) generally uses a Monte

Carlo simulation model utilizing various

possible cases with subjectively

assigned probabilities. This model then

enables Moody’s to arrive at an estimate

of potential lifetime losses which must

be covered by the credit support for the

securitization. Standard and Poor’s

Ratings Group (S&P) looks at a ‘‘worst

case’’ loss scenario based on

subjectively assigned multiples of

historical loss, portfolio yield and

payment rates to reflect a severe

economic downturn over the life of the

securities. As with Moody’s, this

process produces an estimate of

potential lifetime losses which must be

covered by the credit support.

The Applicants state that because the

credit card receivables in a master trust

are unsecured revolving debt

obligations, the Rating Agencies assume

no recoveries on defaulted credit card

accounts in determining credit

enhancement levels for each Series.

Stress scenarios are run reducing both

the portfolio yield (total yield on the

receivables minus the sum of certificate

interest, the servicing fee and amounts

necessary to satisfy cardholder defaults)

and the monthly payment rate, in order

to test the level of defaults that credit

enhancement can withstand. Such stress

tests assume no recoveries on defaulted

credit card accounts in the master trust.

For example, for ‘‘AAA’’ rated

certificates, available enhancement

levels are structured to enable a Series

to withstand the worst case ‘‘AAA’’

scenarios, just as would be the case with

similarly rated transactions involving

collateralized assets such as mortgage

loans or automobile loans or leases. The

first level of enhancement is typically

‘‘excess spread’’ (i.e. the amount by

which the yield on the credit card

receivables exceeds amounts necessary

to pay certificate interest and servicing

fees and to satisfy cardholder

defaults). 42 Additional forms of

enhancement for a Series may include

cash collateral accounts (i.e. a CCA),

reserve funds, letters of credit, the use

of a senior-subordinated structure or a

combination thereof.

Citibank represents that, in addition

to the enhancement described above,

certificates have the benefit of one or

more ‘‘economic early amortization

event’’ triggers relating to the

receivables performance. Breach of such

a trigger will cause an early

amortization event and an early payout

of principal to certificateholders,

thereby protecting certificateholders

from any potential future deterioration

of credit quality of receivables in the

master trust portfolio. Citibank states

that the combination of credit

enhancement (sized to satisfy Rating

Agency ‘‘high stress’’ scenarios) and

early amortization event triggers assures

that certificateholders will receive

payment in full of interest and

principal.

Citibank represents that its credit

cards are marketed nationally and are

held by millions of individuals. The

consequent size and diversity of

Citibank’s credit card accounts provide

balanced risk distribution. For example,

as of June 25, 1997, the largest Citibank

master trust held in excess of $35 billion

of receivables, generated by more than

28 million accounts, and each

individual cardholder had a principal

balance that averaged approximately

$1221. Similarly, Citibank states that its

portfolios are geographically diverse

with no more than 15 percent of the

receivables in Citibank’s largest master

trust being concentrated in a single state

and in only four states did the

percentage exceed 5 percent. Citibank

notes that the loss experience for a

geographically well diversified portfolio
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4067

43When the Department was advised by the

Rating Agencies concerning the ratings of

certificates issued by trusts holding credit card

receivables, the RA Reps noted, among other things,

that different banks use different underwriting

standards and may offer cardholders different terms

on their accounts. Some banks may be willing to

accept cardholders with riskier credit histories

while other banks may not or may offer better terms

to cardholders with superior payment histories. The

result may be that some banks have a higher quality

portfolio of receivables than other banks. The RA

Reps stated that if a bank securitizes a portfolio of

receivables which holds a number of riskier

accounts, the Rating Agencies will require more

credit enhancement measures because different

assumptions will have to be made about the

performance of the portfolio—e.g. higher charge-off

rates will be assumed and greater ‘‘excess spread’’

will be necessary to avoid losses—in order to

achieve a Triple A rating. Thus, for example, Bank

A’s certificates may receive a Triple A rating along

with Citibank’s certificates even though Bank A

may experience more charge-offs on the credit card

accounts and may have different payment rates on

the receivables associated with those accounts.

of a large number of relatively small

obligations is more stable and

predictable than a portfolio of fewer,

large individual obligations, and/or high

geographic concentrations. Citibank

represents that because of this

diversification, a Citibank master trust

should be able to withstand a recession

or similar economic downturn which

might affect different industries or

geographic regions at different times.

Citibank states that a combination of

credit enhancement, early amortization

triggers and portfolio characteristics are

among the reasons why no investor has

failed to receive payment in full of all

principal and interest on the over $51

billion of Citibank credit card receivable

ABS issued from 1988 to the present.

Citibank states further that no Citibank

credit card securitization has ever gone

into early amortization.43

Disclosures Available to Investing Plans

18. In connection with the original

issuance of certificates, the prospectus

or private offering memorandum will be

furnished to investing plans. The

prospectus or private offering

memorandum will contain information

pertinent to a plan’s decision to invest

in the certificates, such as:

(a) Information concerning the

certificates, including payment terms,

certain tax consequences of owning and

selling certificates, the legal investment

status and rating of the certificates, and

any special considerations with respect

to the certificates;

(b) Information about the underlying

Receivables, including the types of

Receivables, statistical information

relating to the Receivables, their

payment terms, and the legal aspects of

the Receivables;

(c) Information about the servicing of

the Receivables, including the identity

of the servicer and servicing

compensation;

(d) Information about the sponsor of

the Trust;

(e) A full description of the material

terms of the Pooling Agreement; and

(f) Information about the scope and

nature of the secondary market, if any,

for such certificates.

Certificateholders will be provided

with information concerning the

amount of principal and interest to be

paid on certificates 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

status of the Trust.

In the case of a Trust that offers and

sells certificates in a registered public

offering, the Trustee, the servicer or the

sponsor will file such periodic reports

as may be required to be filed under the

Securities Exchange Act of 1934 (the ’34

Act). Although some Trusts that offer

certificates in a public offering will file

quarterly reports on Form 10–Q and

Annual Reports on Form 10–K, many

Trusts 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. While the SEC’s

interpretation of the periodic reporting

requirement is subject to change,

periodic reports concerning a Trust will

be filed to the extent required under the

’34 Act.

The applicant states that 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 Receivables. Such report

will typically contain information

regarding the Trust’s assets, payments

received or collected by the servicer, the

amount of delinquencies and defaults,

the amount of any payments made

pursuant to any credit support, and the

amount of compensation payable to the

servicer. Such report will also be

delivered or made available to the

Rating Agencies or Agency that rated

the Trust’s certificates. Such report will

be available to investors and its

availability will be made known to

potential investors. In addition,

promptly after each distribution date,

certificateholders will receive a

statement summarizing information

regarding the Trust and its assets,

including underlying Receivables.

Reasons for Plans To Enter Into the

Exemption Transactions

19. Citibank states that a plan would

choose to purchase the investor

certificates offered by a master trust to

diversify its portfolio and enhance

investment return. During the past 10

years, asset-backed securities (including

Citibank credit card receivable backed

certificates) have developed into a very

significant sector of the U.S. capital

markets. Citibank represents that in

1996, public issuance of asset-backed

securities (i.e. ABS) totaled

approximately $151.7 billion and almost

equaled public issuance of corporate

debt, which totaled approximately

$161.8 billion. Further, Citibank states

that the vast majority of public ABS

issuances is AAA/Aaa-rated and, as a

result, public issuance of investment

grade ABS was greater than the public

issuance of investment grade rated

corporate debt, which totaled $135.1

billion.

Thus, Citibank represents that for

many fixed income investors who have

traditionally invested a significant

portion of their portfolios in corporate

bonds, credit card receivable ABS have

become a corporate bond substitute.

Citibank states that there are several

primary attributes of credit card

receivable ABS that make them

corporate bond substitutes, including:

(i) Very high credit quality (most are

AAA/Aaa rated); (ii) basic payment

terms which can be structured to

replicate corporate bonds (e.g. bullet

maturities or semiannual coupon

payments); (iii) healthy yield spreads in

comparison to U.S. Treasuries; and (iv)

the issuance of large, liquid transactions

that are characterized by relatively

narrow bid/offer spreads in the

secondary market. Citibank states that

for these reasons, the investor base for

credit card receivable ABS has

expanded in recent years and today

includes the entire range of institutional

investors. Further, given the

performance to date of the ABS market,

the Applicants expect that these

institutional investors will continue to

increase the proportion of their portfolio

devoted to ABS. The Applicants note

that on the supply side of the market,

given projections of continued growth

in the credit card business and the

growing importance of securitization as

a funding source for the credit card

industry, market participants predict

further growth in credit card ABS

issuance in the near term.

As a result of these developments, the

Applicants believe that fixed income
4068 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

investment managers seeking liquid,

high credit quality fixed income

securities which provide a fair yield to

U.S. Treasuries at relatively low risk, are

interested in or are already participating

in the credit card ABS market. The

requested exemption would facilitate

more investment by plans in this

market, and would enable the

Applicants to better structure offerings

which plan asset managers would find

attractive.

Citibank credit card receivable ABS

have been sold to employee benefit

plans covered by the Act (ERISA plans)

without concern regarding possible

prohibited transactions involving the

assets of the master trusts, as ‘‘publiclyoffered’’ securities described in the

Department’s regulations defining ‘‘plan

assets’’ (see 29 CFR 2510.3–101(b)(2)).

However, Citibank has requested the

proposed exemption in order to be able

to sell such securities to ERISA plans

without having to sell to one hundred

independent investors. Thus, if the

proposed exemption is granted, the

Applicants would have the ability to

sell credit card receivable ABS which

are designed to meet the investment

prerequisites of more limited groups of

investors, including ERISA plans.

20. In summary, the Applicants

represent that the proposed transactions

will meet the statutory criteria of section

408(a) of the Act because, among other

things:

(a) The acquisition of investor

certificates by a plan will be on terms

(including certificate price) that are at

least as favorable to the plan as such

terms would be in an arm’s-length

transaction with an unrelated party;

(b) The rights and interests evidenced

by the investor certificates will not be

subordinated to the rights and interests

evidenced by other investor certificates

of the trust;

(c) Any investor certificates acquired

by a plan will have received a rating at

the time of such acquisition that is in

one of two highest generic rating

categories from either of the Rating

Agencies, and/or the highest short-term

generic rating category from any one of

the Rating Agencies;

(d) The particular class of certificates

for each series to which this proposed

exemption will apply (an Exempt Class)

will have credit support provided to the

Exempt Class through a seniorsubordinated series structure or other

form of third party credit support

which, at a minimum, will represent

five (5) percent of the outstanding

principal balance of certificates issued

by the Exempt Class, so that an investor

in the Exempt Class will not bear the

initial risk of loss;

(e) The trustee of the trust will not be

an affiliate of any other member of the

Restricted Group;

(f) The sum of all payments made to

and retained by the underwriters in

connection with the distribution or

placement of certificates will represent

not more than reasonable compensation

for underwriting or placing the

certificates; the consideration received

by the sponsor as a consequence of the

assignment of receivables (or interests

therein) to the trust will represent not

more than the fair market value of such

receivables (or interests); and the sum of

all payments made to and retained by

the servicer, that are allocable to the

series of certificates purchased by a

plan, will represent not more than

reasonable compensation for the

servicer’s services under the pooling

and servicing agreement and

reimbursement of the servicer’s

reasonable expenses in connection

therewith;

(g) Any plan investing in such

certificates will be an ‘‘accredited

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

Regulation D of the SEC under the

Securities Act of 1933;

(h) The Revolving Period for a Series

of investor certificates, and the

conditions under which Citibank may

designate additional Accounts or

remove previously-designated

Accounts, will be described in the

prospectus or private placement

memorandum provided to investing

plans;

(i) The Trustee of the Trust will be a

substantial financial institution or trust

company experienced in trust activities

and would be familiar with its duties,

responsibilities, and liabilities as a

fiduciary under the Act;

(j) The Pooling Agreement will

include an Economic Early

Amortization Event triggered by a

decline in the performance of the

Receivables in the Trust;

(k) The Pooling Agreement will

require Citibank to maintain a seller

interest of not less than the greater of (i)

2 percent of the initial aggregate

principal balance of investor certificates

issued by the trust, or (ii) 7 percent of

the outstanding aggregate principal

balance of investor certificates issued by

the trust;

(l) The Pooling Agreement will

require that any change in the terms of

any cardholder agreements also will be

made applicable to the comparable

segment of Accounts owned or serviced

by Citibank which are part of the same

program or which have the same or

substantially similar characteristics;

(m) The addition of new Receivables

or designation of new Accounts, or

removal of Receivables or previouslydesignated Accounts, will meet the

terms and conditions for such additions,

designations, or removals as described

in the Pooling Agreement as well as the

prospectus or private placement

memorandum for such certificates,

which terms and conditions will have

been affirmatively approved by the

Rating Agencies, and will not result in

the certificates receiving a lower credit

rating from the Rating Agencies than the

then current rating for the certificates;

(n) Any swap transaction relating to

senior Certificates that are covered by

the proposed exemption must satisfy the

several investor-protective conditions

applicable to Eligible Swaps and must

be entered into by the Trust with an

Eligible Swap Counterparty; and

(o) Any Series of certificates which

entails one or more swap agreements

entered into by the Trust will be sold

only to Qualified Plan Investors.

FOR FURTHER INFORMATION CONTACT: Mr.

E.F. Williams of the Department,

telephone (202) 219–8194. (This is not

a toll-free number.)

Massachusetts Mutual Life Insurance

Company (MassMutual), Located in

Springfield, Massachusetts

[Application No. D–10436]

Proposed Exemption

The restrictions of sections 406(a),

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

sanctions resulting from the application

of section 4975 of the Code, by reason

of section 4975(c)(1)(A) through (E) of

the Code, shall not apply to (1) the

proposed mergers of the following

Connecticut Mutual Life Insurance

Company (CML) separate investment

accounts (SIAs), the assets of which

include assets of employee benefit plans

(the Plans), into the following

Massachusetts Mutual Life Insurance

Company (MassMutual) SIAs: CML

Select into MassMutual SIA–A, CML

Fixed Income into MassMutual SIA–E,

CML Basis into MassMutual SIA–F,

CML Money Market into MassMutual

SIA–G, and CML Overseas into

MassMutual SIA–I (the Merger

Transactions); (2) the proposed transfer

of Plan assets from CML Dimensions

and CML Converts, after termination of

those SIAs, into MassMutual SIA–E and

MassMutual SIA–A, respectively (the

Termination Transfers); and (3) the

proposed transfer of Plan assets from

CML Life Style Funds designated as

CML Asset Allocation A, CML Asset

Allocation B, and CML Asset Allocation

C, after termination of those funds, into

MassMutual SIA–BC, MassMutual SIA–

BP, and MassMutual SIA–BA,

respectively (the Life Style Transfers;
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4069

the Termination Transfers and the Life

Style Transfers are referred to

collectively as the Transfer

Transactions); provided the following

conditions are met:

(A) At least 30 days prior to the

effective date of each Merger and

Transfer Transaction, MassMutual

provides to a fiduciary of each Plan

participating in the CML SIAs (the Plan

Fiduciary) affected by the Transaction

full written disclosure of information

concerning the proposed Transaction

and the affected MassMutual SIAs,

including a current prospectus and a

full and detailed written description of

the fees charged by the affected

MassMutual SIA’s and the funds in

which they invest, the differential

between that fee level and the fee level

applicable to the affected CML SIAs and

the reasons why MassMutual believes

that the investment is appropriate for

the Plans. The notice will also inform

the Plan Fiduciary of the proposed

effective date of the Transaction;

(B) As part of the disclosure required

under paragraph (A) of this exemption,

MassMutual notifies the Plan Fiduciary

in writing that instead of participating

in the particular Merger or Transfer

Transaction proposed by MassMutual,

the Plan Fiduciary may direct that the

assets of the Plan in the affected CML

SIA may be transferred, without

penalty, charge or adjustment, to any

other available MassMutual SIA or

liquidated, without penalty, charge or

adjustment, for a cash payment to the

Plan equal to the fair market value of the

Plan’s interest in the affected SIA in lieu

of the Plan’s participation in the

proposed transaction;

(C) Upon completion of the Merger

Transactions, the fair market value of

the interests of each Plan participating

in the MassMutual SIAs immediately

following such Merger Transactions

equals the fair market value of such

Plan’s interest in the affected CML SIAs

immediately before the transactions;

(D) Upon completion of the Transfer

Transactions, the fair market value of

the interests of each Plan participating

in the MassMutual SIAs immediately

following such Transfer Transactions

equals the fair market value of such

Plan’s interest in the affected CML SIAs

immediately before the transaction;

(E) The assets of each of the Plans are

invested in the same or similar

investment type or asset class before

and after the Merger and Transfer

Transactions;

(F) The assets of the CML SIAs will

be valued for purposes of the Merger

and Transfer Transactions at the

‘‘independent current market price’’

within the meaning of Rule 17a–7 of the

Securities and Exchange Commission

under the Investment Company Act of

1940. The assets of the CML SIAs being

merged or transferred and the assets of

the MassMutual SIAs affected by the

merger or transfer will be valued in a

single valuation using the same

methodology by the same custodian at

the close of the same business day that

the Merger and Transfer Transactions

are effected;

(G) No later than forty five (45) days

after the Merger and Transfer

Transactions, each Plan Fiduciary will

be provided a written confirmation of

the Transactions which will include a

statement of the number of units held by

each Plan in each affected CML SIA, the

unit value of each such CML SIA unit

and the aggregate dollar value of such

Plan’s CML SIA units, determined

immediately prior to the Transactions,

as well as the number of units held by

each Plan in each affected MassMutual

SIA, the unit value of each such

MassMutual SIA unit, and the aggregate

dollar value of such Plan’s MassMutual

SIA units, determined immediately after

the Transactions.

(H) Neither MassMutual nor any of its

affiliates receives any fees or

commissions in connection with the

Merger and Transfer Transactions;

(I) The Plans pay no sales

commissions or fees in connection with

the Merger and Transfer Transactions;

(J) The Plans participating in the CML

SIAs are not employee benefit plans

sponsored or maintained by

MassMutual or CML; and

(K) All assets involved in the

transactions are securities for which

market quotations are readily available,

or cash.

Summary of Facts and Representations

1. The Plans involved in this

proposed exemption are pension, profit

sharing and stock bonus plans which

are exempt from Federal income

taxation under section 501(a) of the

Code by reason of qualifying under

section 401(a) of the Code.

2. The proposed exemption is

requested on behalf of the

Massachusetts Mutual Life Insurance

Company (MassMutual), a mutual life

insurance company organized under

Massachusetts law. Another previouslyunrelated mutual life insurance

company, Connecticut Mutual Life

Insurance Company (CML), merged into

MassMutual on February 29, 1996 (the

Company Merger).

3. MassMutual represents that it

performs a wide variety of services for

employee benefit plans, including

opportunities for the Plans to invest in

group annuity contracts (the GACs),

which are popular funding vehicles for

Plans. The funds invested in the GACs

are allocated by the Plans’ fiduciaries or

by individual participants among

separate investment accounts (SIAs)

maintained by MassMutual for

investment in various types and classes

of assets, including the MassMutual

Institutional Funds and other mutual

fund companies affiliated with Mass

Mutual. For example, funds invested by

a Plan in a GAC might be allocated

among several SIAs, which in turn

invest in various MassMutual mutual

funds. MassMutual represents that prior

to the Company Merger MassMutual

maintained twenty-five SIAs (the

MassMutual SIAs) and CML maintained

twelve SIAs (the CML SIAs). The assets

of the MassMutual SIAs involved in this

proposed exemption are invested solely

in mutual funds affiliated with

MassMutual, whereas the assets of the

CML SIAs involved in this proposed

exemption are invested in various

marketable equity and debt securities.

4. MassMutual represents that five of

the CML SIAs have investment

objectives and strategies which are

substantially similar to those of five

MassMutual SIAs, holding assets which

are of the same or similar class and type.

Since the Company Merger, these five

CML SIAs have been maintained by

MassMutual with the same investment

advisors and portfolio managers as the

corresponding MassMutual SIAs. In

order to eliminate duplicative

administrative expenses and take greater

advantage of economies of scale, and to

avoid the adverse consequences of

declining asset pools in the CML SIAs,

MassMutual proposes to merge the five

CML SIAs (the Merging CML SIAs) into

the corresponding MassMutual SIAs

(the Merger Transactions).

5. In addition to the Merger

Transactions, MassMutual also proposes

to effect transfer transactions with

respect to (a) two other CML SIAs (the

Terminating CML SIAs) which

MassMutual has determined to have

investment objectives and asset types

which are not widely utilized by Plans

covered by the Act, and, consequently,

will not maintain sufficient assets to

provide an appropriate investment

portfolio, and (b) three CML master

funds, called Life Style Funds.

The Terminating CML SIAs:

MassMutual states that upon the

Company Merger, it was determined

that MassMutual GAC funds would not

be invested in the Terminating CML

SIAs, and that CML GAC investors

would be allowed to convert their

investments to GACs issued by

MassMutual. Since the Company

Merger, the assets in the Terminating
4070 Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices

44The Unaffected CML SIAs will continue to be

maintained by MassMutual on behalf of investors

other than the Life Style Funds, and only the Life

Style Funds’ investments in the Unaffected CML

SIAs will be liquidated for transfer to the

MassMutual Life Style Funds. MassMutual chooses

not to transfer the CML Life Style Funds’ interests

in the Unaffected CML SIAs to the MassMutual Life

Style Funds because the Unaffected CML SIAs do

not have corresponding counterpart MassMutual

SIAs.

45MassMutual represents that such a transfer

would be accomplished first by accessing available

cash reserves in the affected CML SIA and then, to

the extent cash reserves are depleted, by liquidating

assets in the affected CML SIA.

46Rule 17a–7 under the 1940 Act provides a

general exception from Section 17(a) of the Act for

certain securities transactions between registered

investment companies and certain of their affiliates.

As a general matter, Section 17(a) of the 1940 Act

prohibits any ‘‘affiliated person’’ of a registered

investment company from selling any security to

the registered investment company. Rule 17a–7

permits certain types of affiliate transactions if,

among other things, the transaction is effected at an

independently verifiable price, the ‘‘current

independent market price’’ within the meaning of

Rule 17a–7. MassMutual states that this standard of

valuation is appropriate for the proposed exemption

for purposes of valuing the assets held in the

affected CML SIAs, which are not investments in

registered investment companies, that will be

merged or transferred into the affected MassMutual

SIAs, which are solely invested in registered

investment companies.

CML SIAs have declined steadily due to

Plan transfers and withdrawals. As a

result of these developments,

MassMutual represents that it will be

increasingly difficult for the

Terminating CML SIAs to maintain

well-diversified portfolios and risk and

return profiles that are appropriate for

the remaining Plan investors in the

Terminating CML SIAs. Accordingly,

MassMutual proposes to liquidate the

Terminating CML SIAs by liquidation of

the securities held in the SIAs and

transfer of the proceeds into the two

designated MassMutual SIAs to take

greater advantage of economies of scale

and to avoid the adverse consequences

of declining asset pools. Thus, Plans

previously invested in the Terminating

CML SIAs would own units in the

corresponding transferee MassMutual

SIAs of an equal value to their units in

the Terminating CML SIAs immediately

prior to the transfer.

The Life Style Funds: The Life Style

Funds are master funds, maintained by

both CML and MassMutual, which

distribute Plans’ investments in GACs

among various SIAs. Each of these Life

Style Funds offers to Plan asset

investors a particular approach to asset

mix, investment philosophy and overall

management, and a Plan asset investor

is able to designate a Life Style Fund

with an approach which is most

consistent and responsive to the

particular needs of the individual Plan.

After designation of one of the Life Style

Funds, those Plan assets invested in the

GACs of the insurance company are

directed into the designated Life Style

Fund, where such monies are then

directed to the particular SIAs in which

the selected Life Style Fund invests. The

CML Life Style Funds are designated as

CML Asset Allocation A, CML Asset

Allocation B, and CML Asset Allocation

C. The MassMutual Life Style Funds are

designated as MassMutual SIA-BC,

MassMutual SIA-BP, and MassMutual

SIA-BA.

MassMutual proposes to transfer the

assets from the CML Life Style Funds

into the three MassMutual Life Style

Funds, as follows: The CML Life Style

Funds are invested in (a) different

combinations of the Merging CML SIAs,

(b) the Terminating CML SIAs, and (c)

two other CML SIAs (the Unaffected

CML SIAs) which will continue to be

maintained by MassMutual and will not

be merged or terminated. Therefore, to

the extent the CML Life Style Funds

include investments in Merging CML

SIAs, the Life Style Transfers will be

accomplished in the same manner as the

merger of the Merging CML SIAs with

the corresponding MassMutual SIAs.

However, any investments of the CML

Life Style Funds which are held in one

of the Terminating CML SIAs or an

Unaffected CML SIA will be sold 44 and

the proceeds from the sale will be

transferred to the corresponding

MassMutual Life Style Fund.

MassMutual is unable to conclude

that the transactions described herein

do not constitute prohibited

transactions under the Act. Accordingly,

MassMutual is requesting an

administrative exemption from the

prohibitions of sections 406(a) and

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

Merger and Transfer Transactions.

6. No less than thirty days in advance

of each Merger and Transfer

Transaction, MassMutual will provide

to a fiduciary of each Plan participating

in the CML SIA affected by the

Transaction (the Plan Fiduciary) a

written notice of the proposed

Transaction (the Notice). The Notice

will consist of a full written disclosure

of information concerning the proposed

Transaction, the affected MassMutual

SIAs, and the proposed effective date of

the Transaction. The Notice will include

a current prospectus for each of the

mutual funds in which the affected

MassMutual SIAs invest and will

describe the fees charged by the affected

MassMutual SIAs and the funds in

which they invest and the differential

between that fee level and the fee level

applicable to the affected CML SIAs.

The proposed exemption requires that

the Notice advise the Plan Fiduciary

that in lieu of participating in the

proposed Transaction, the Plan

Fiduciary may direct that the assets of

the Plan in the affected CML SIA may

instead be transferred to any other

available MassMutual SIA or liquidated

for a cash payment to the Plan.45 In

addition, the Plan Fiduciary will be

provided with a written confirmation of

the subject Transaction.

7. In accordance with the procedures

to be utilized by MassMutual in

effecting the Merger and Transfer

Transactions, the fair market value of

the interests of the Plans participating in

the MassMutual SIAs immediately

following the Transactions will equal

the fair market value of each

participating Plan’s interest in the

affected CML SIAs immediately before

the Transactions. MassMutual

represents that the fair market value of

the CML SIAs involved in the

Transactions are readily ascertainable

by reference to external markets, and

that each underlying security involved

in the subject transactions will be

valued only at the ‘‘independent current

market price’’ within the meaning of

Rule 17a–7 of the Securities and

Exchange Commission under the

Investment Company Act of 1940 (the

1940 Act). MassMutual represents that

Rule 17a–7 constitutes a set of standards

for the determination of the

independently verifiable prices for

securities in transactions between

registered investment companies and

their affiliates.46 The Merger and

Transfer Transactions will be effected

without payment of commissions or

sales charges by the Plans, including

fees payable in accordance with Rule

12b–1 under the 1940 Act.

8. In addition to notification of each

Plan Fiduciary in advance of the Merger

and Transfer Transactions, as discussed

above, MassMutual will also provide to

each Plan Fiduciary a written

confirmation of the Transactions after

they have been completed. No later than

forty five days after the Merger and

Transfer Transactions, each Plan

Fiduciary will be provided a written

confirmation of the Transactions which

will include a statement of the number

of units held by each Plan in each

affected CML SIA, the unit value of each

such CML SIA unit and the aggregate

dollar value of such Plan’s CML SIA

units, determined immediately prior to

the Transactions, as well as the number

of units held by each Plan in each

affected MassMutual SIA, the unit value

of each such MassMutual SIA unit, and

the aggregate dollar value of such Plan’s

MassMutual SIA units, determined

immediately after the Transactions.
Federal Register / Vol. 63, No. 17 /Tuesday, January 27, 1998 / Notices 4071

9. In summary, the applicant

represents that the proposed

transactions satisfy the criteria of

section 408(a) of the Act for the

following reasons:

(a) Upon completion of the Merger

and Transfer Transactions, the fair

market value of the interests of each

Plan participating in the MassMutual

SIAs immediately following the

Transactions will equal the fair market

value of such Plan’s interest in the

affected CML SIA immediately before

the Transaction;

(b) The assets of each participating

Plan will be invested in the same or

similar investment type or asset class

before and after the Merger and Transfer

Transactions;

(c) The Plans will not pay, and

MassMutual and its affiliates will not

receive, any fees or commissions in

connection with the Merger and

Transfer Transactions; and

(d) A fiduciary on behalf of each Plan,

who is independent of and unrelated to

MassMutual or any of its affiliates, will

receive advance written disclosure of

the Merger and Transfer Transactions,

including notification that the assets of

the Plan in the affected CML SIA may

instead be transferred, without penalty,

charge or adjustment, to any other

available MassMutual SIA or liquidated,

without penalty, charge or adjustment,

for a cash payment to the Plan equal to

the fair market value of the Plan’s

interest in the affected SIA in lieu of the

Plan’s participation in the proposed

transaction.

FOR FURTHER INFORMATION CONTACT:

Ronald Willett 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 of

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

accurately describe all material terms of

the transaction which is the subject of

the exemption. In the case of continuing

exemption transactions, if any of the

material facts or representations

described in the application change

after the exemption is granted, the

exemption will cease to apply as of the

date of such change. In the event of any

such change, application for a new

exemption may be made to the

Department.

Signed at Washington, DC, this 21st day of

January, 1998.

Ivan Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

Department of Labor.

[FR Doc. 98–1790 Filed 1–26–98; 8:45 am]

BILLING CODE 4510–29–P