[Federal Register Volume 60, Number 98 (Monday, May 22, 1995)]
[Notices]
[Pages 27123-27140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12502]



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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09878, et al.]


Proposed Exemptions; Tenneco, Inc. Health Care Plan

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restriction of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
request 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. A request for a hearing must also state the issues to be 
addressed and include a general description of the evidence to be 
presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 
20210. Attention: Application No. 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, N.W., Washington, D.C. 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 [[Page 27124]] 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.
Tenneco, Inc. Health Care Plan (the Plan) Located in Houston, Texas

[Application No. D-09878]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act shall 
not apply to the proposed contribution to the Plan of common stock (the 
Stock) of Tenneco, Inc. (Tenneco) by Tenneco or any of its 
subsidiaries, provided the following conditions are satisfied: (a) The 
Plan will dispose of the Stock received within 2 business days of 
receipt, either by sale on the open market or by sale to Tenneco; (b) 
any sale of the Stock from the Plan to Tenneco will comply with 
conditions (1) and (2) of section 408(e) of the Act; and (c) Tenneco 
will pay any and all transactional costs for any sales by the Plan on 
the open market.

Summary of Facts and Representations

    1. Tenneco is a Fortune 50 company, the Stock of which is traded on 
the New York Stock Exchange (the NYSE). The major businesses of Tenneco 
include the transportation and sale of natural gas, the manufacture and 
sale of farm and construction equipment, and the manufacture and sale 
of automotive exhaust system parts. Tenneco is a Delaware corporation 
which has its principal office in Houston, Texas.
    2. The Plan is a voluntary employees' beneficiary association as 
described in section 501(c)(9) of the Code. The Plan pays for medical 
and dental benefits for employees and former employees of Tenneco and 
its participating domestic subsidiaries. The Plan has never accumulated 
reserves; benefits are paid by Tenneco through the Plan on a pay-as-
you-go basis.
    3. In 1992, Tenneco created the Tenneco Inc. Stock Employee 
Compensation Trust (the SECT). The SECT is not subject to the Act. The 
purpose of the SECT is to hold Stock which may be used to defray 
compensation and benefit obligations of Tenneco and its subsidiaries, 
including medical and dental benefits. The applicant represents that 
shares of Stock available under the SECT exceed the number of shares 
that Tenneco had anticipated would be needed for compensation and 
benefit purposes. The applicant represents that, for reasons of 
Delaware corporate law, the SECT may not sell more than 10% of the 
shares of Stock originally held by it. However, this limit applies only 
to sales, and there is no limit to the amount of Stock in the SECT 
which may be used for compensation and benefit purposes. The applicant 
represents that if the Stock is contributed to the Plan which, in turn, 
sells the Stock to Tenneco or on the open market, such transactions do 
not cause a violation of the 10% limit imposed on the SECT.
    4. Tenneco proposes to contribute Stock from the SECT to the Plan. 
Upon such contribution, the Plan will immediately sell the Stock on the 
open market or to Tenneco. The applicant represents that the Plan will 
dispose of the Stock received within 2 business days of receipt. In 
fact, it is Tenneco's intention that the Plan will dispose of the Stock 
as soon as possible, which the applicant anticipates will generally be 
a matter of hours or perhaps overnight after receipt.
    5. If the Plan sells the Stock to Tenneco, the applicant represents 
that the sale will be at a sale price equal to the price prevailing on 
the NYSE at the time of the sale to Tenneco. If the Plan sells the 
Stock on the open market, Tenneco will pay any and all transactional 
costs associated with such sales. The Plan will use the cash it 
receives for the Stock to pay medical and dental benefits under the 
Plan. This transaction may be done as often as needed to pay benefits. 
The applicant represents that it anticipates using approximately 
691,000 shares of Stock for Plan expenses in 1995. It is anticipated 
that contributions would be made by the SECT to the Plan either weekly 
or bi-weekly, based upon projected expenses. In 1994, the average daily 
volume of trading of Tenneco Stock was approximately 540,000 shares per 
day. Because the number of shares of Stock involved in the proposed 
transaction is small compared to the general trading volume of Tenneco 
shares, the applicant represents that it anticipates there should be no 
effect on the market price of the Stock as a result of the proposed 
transaction.
    6. The applicant represents that any sale of Stock by the Plan to 
Tenneco will comply with conditions (1) and (2) of Act section 408(e), 
because the sale will be for adequate consideration, and no commissions 
will be charged in connection with the sale. However, the applicant 
represents that the exemption proposed herein is needed for the subject 
transaction because the Stock being contributed to the Plan will 
constitute more than 10% of the Plan's assets in violation of sections 
406(a)(2) and 407(a) of the Act. Tenneco represents that it could 
contribute a small amount of cash to the Plan and make a succession of 
small contributions of Stock by the SECT immediately followed by sales 
thereof in such a manner that the Stock would never represent more than 
10% of the assets of the Plan. The applicant believes that this would 
be in compliance with Act section 407(a). However, such a procedure 
would be burdensome, and it would be advantageous for Tenneco to be 
able to make contributions of Stock to the Plan under the safeguards 
proposed without regard to the 10% limit of section 407(a) of the Act.
    7. In summary, the applicant represents that the proposed exemption 
satisfies the criteria contained in section 408(a) of the Act because: 
(a) The Plan will dispose of the Stock received within 2 business days 
of receipt either by sale on the open market or to Tenneco; (b) any 
sale of Stock by the Plan to Tenneco will comply with conditions (1) 
and (2) of section 408(e) of the Act; and (c) Tenneco will pay any and 
all transactional costs for any sales by the Plan on the open market.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

[[Page 27125]]

Construction Laborers Pension Trust for Southern California (the Trust) 
Located in El Monte, California

[Exemption Application No. D-09932]

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). If the exemption 
is granted, the restrictions of section 406(a) of the Act and the 
sanctions resulting from the application of section 4975 of the Code by 
reason of section 4975(c)(1) (A) through (D) of the Code, shall not 
apply, effective December 22, 1989, to the leasing (the Lease) of space 
in a commercial office building (the Property) owned by 4401 Santa 
Anita Corporation (the Corporation), a corporation that is wholly-owned 
by the Trust, to American Benefit Plan Administrators, Inc. (ABPA), a 
party in interest with respect to the Trust.
    This proposed exemption is conditioned on the following 
requirements: (1) The terms of all such leasing arrangements have been, 
and will remain, at least as favorable to the Trust as those obtainable 
in an arm's length transaction with an unrelated party; (2) an 
independent, qualified fiduciary determined, at the Lease's inception, 
that it was in the best interests of the Trust and its participants and 
beneficiaries; (3) An independent, qualified fiduciary has monitored 
and will continue to monitor the Lease for the Trust and the terms and 
conditions of the exemption; and (4) the rental charged by, and paid 
to, the Corporation under the Lease has been, and will continue to be, 
the fair market rental value of the premises as determined by an 
independent, qualified appraiser.

EFFECTIVE DATE: If granted, this proposed exemption will be effective 
December 22, 1989.

Summary of Facts and Representations

    1. The Trust is a multiemployer plan that covers employees of 
construction contractors in Southern California. Such contractors 
include developers, builders, construction managers and owner-builders. 
The Trust is jointly-administered by sixteen trustees (the Trustees), 
eight of whom are appointed by multiemployer trade associations 
representing employers contributing to the Trust and eight of whom are 
designated by the Southern California District Council of Laborers (the 
Union). Since 1989, various investment managers have had investment 
discretion over the assets of the Trust.
    2. As of December 31, 1990, the Trust had approximately 20,000 
participants and total assets of $671,079,119. The Trust is one of four 
affiliated Laborer Trusts for Southern California (the Laborer Trusts). 
The other affiliated Laborer Trusts include the Laborer's Health and 
Welfare Trust for Southern California, the Construction Laborer's 
Vacation Trust for Southern California (the Vacation Trust), and the 
Laborer's Training and Retraining Trust for Southern California.
    3. In an effort to relocate the Trusts' operations, Mitchell 
Hutchins Institutional Investors, Inc. (MHII), as investment manager, 
executed a purchase and sale agreement, on behalf of the Trust, with an 
unrelated party to acquire the Property in 1989.<SUP>1 The Trust's 
purchase of the Property coincided with the expiration of several 
leases of potential tenants, including various parties-in-interest. 
These potential tenants/parties-in-interest consisted of ABPA, which 
serves as the Trust's plan administrator, the Collection Office of the 
Laborers' Trust Funds for Southern California (the Collection Office) 
and the Union.<SUP>2 Prospective additional tenants included the Joint 
Apprenticeship Committee of the Laborers Training and Retraining Trust 
for Southern California (the Apprenticeship Committee), an operation 
newly-created through collective bargaining in 1988 and set to begin 
operations in 1989, and the Center for Contract Compliance (the 
Center), a jointly-trusteed, labor-management cooperation committee 
established through collective bargaining in 1988 for the purpose of 
monitoring employer compliance with the prevailing wage laws for public 
works in Southern California. The Trustees overlap to some extent with 
the trustees of the other trusts.

    \1\ The Department expresses no opinion in this proposed 
exemption as to whether plan fiduciaries violated any of the 
fiduciary responsibility provisions of Part 4 of Title I of the Act 
in acquiring and holding the Property.
    \2\ The Collection Office is a combined delinquency collection 
operation of the Laborer Trusts. Even though the Collection Office 
is operated under the auspices of the Vacation Trust, it is, in all 
respects, a shared administrative operation with the Laborer Trusts 
participating in its costs and management on a pro-rata basis.
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    4. The Property, located within the Airport Business Park at 4399 
and 4401 Santa Anita Avenue in El Monte, California, consists of two 
identical, 32,196 square foot, wood and steel frame office buildings 
and the underlying land. John J. Archer, ASA, a independent real estate 
appraiser located in Pasadena, California, appraised the Property prior 
to its purchase (the Appraisal). Mr. Archer has been involved in 
appraising all types of residential, commercial and industrial 
properties since 1953. Mr. Archer also placed the fair market value of 
the Property, as of February 9, 1989, at $6,800,000. In determining the 
fair market value of the Property, Mr. Archer gave considerable weight 
to the income approach of valuation due to the fact that the Property 
is income producing real estate. Mr. Archer also placed the fair market 
rental value of the Property for a net lease at $1.15 per square foot 
per month. At the time of the Appraisal, the Property did not have 
finished interior rental space.
    5. Upon its acquisition, the Property became an asset of the 
Corporation, which is wholly-owned by the Trust. Due to the unfinished 
interior of the rental space, the officers of the Corporation, each of 
whom has extensive experience in the construction industry, interviewed 
potential construction managers and retained Gibeon, Inc., an unrelated 
party, to oversee and assist the Corporation in the build-out of the 
Property.
    6. In early 1989, John S. Miller, Jr., Eva Marie Herhusky and John 
Berry (the Negotiators), all of Los Angeles, California, represented 
the Corporation in a series of negotiations with ABPA concerning the 
Lease. ABPA's space needs were primarily related to its servicing of 
the administrative needs of the Trust. However, its personnel also 
administer certain other client trusts in the Los Angeles area and its 
computer facility services all of its clientele nationwide.
    7. Prior to the Lease negotiations, ABPA had been actively 
soliciting new space for its operations and had settled upon space in 
the Equitable Plaza (Equitable Plaza) on mid-Wilshire in Los Angeles. 
ABPA's professional leasing agent had negotiated the terms and 
conditions of a ten-year gross lease on an arm's length basis with the 
owner of Equitable Plaza to the point that a letter of intent was ready 
for execution. Such terms and conditions included the rental of 
approximately 41,000 to 42,000 square feet at a rate of $21.60 per 
square foot per annum for the first five years (or $1.80 per square 
foot per month) and $24.00 per square foot per annum for the final five 
years (or $2.00 per square foot per month) with tenant improvements 
provided by the landlord at $35.00 per square foot. Additionally, the 
landlord offered to provide twenty-four months free rent from the 
commencement of the lease. This proposed lease required ABPA to share 
[[Page 27126]] in any increases in the actual operating costs of the 
building on a pro-rata basis.
    8. In the Lease negotiations, ABPA, on one hand, was attempting at 
a minimum to match the lease terms it had negotiated with Equitable 
Plaza. ABPA contended that it should receive better terms from the 
Corporation because the Equitable Plaza, a 35-story Los Angeles high 
rise, was a higher quality, more valuable leasehold for ABPA than a 
leasehold in the Airport Business Park, a low-rise facility in a 
residential suburb outside Los Angeles. The Negotiators, on the other 
hand, were attempting to obtain a lease that was at ``market rates'' 
for the area in which the Airport Business Park is located.
    9. In negotiating the terms of the Lease, the Negotiators relied on 
the Appraisal and two reports prepared by Mr. Archer which discussed 
the general concessions and improvements which landlords would 
typically offer to prospective tenants in order to secure a lease. Such 
reports included detailed discussions of the common practice of 
offering free rent for a period of time, the payment of utilities, 
tenant improvement allowances and probable normal expenses. By letter 
dated April 12, 1989, Mr. Archer opines that a typical owner of a new 
office building which was of good quality would expend $20 to $22 per 
square foot to finish out the building for tenant occupancy depending 
generally on the size of the area finished at one time. The applicants 
represent that this $20 to $22 per square foot cost estimate represents 
the expenditure that landlords would typically invest out of their own 
pockets without increasing their normal ``market rate of rent'' to a 
given tenant. The applicants further represent that once this number is 
exceeded, the landlord is likely to increase the normal rate of rent in 
order to recoup the higher costs of preparing the space.
    By letter dated September 14, 1989, Mr. Archer estimates that the 
total operating and fixed expenses per annum would be $401,400 or $6.51 
per square foot per annum (or 54.3 cents per square foot per month). 
Mr. Archer prepared such estimate based upon data for suburban office 
buildings from 50,000 to 100,000 square feet from the 1989 Building 
Office Management Association (BOMA) Experience Exchange Report, a 
compilation of office building data and surveys done for BOMA's 
members.
    10. The Negotiators represent that, during the Lease negotiations, 
they used the tenant improvement allowance estimate of $20 to $22 per 
square foot as a bench mark to determine whether the rate of rent 
negotiated was at least equal to the market rate of rent for similar 
buildings in similar areas. In addition, ABPA was negotiating for a 
full service, gross lease, a lease in which all operating and fixed 
expenses are paid by the landlord and passed through to the tenants in 
the form of a higher rate of rent per square foot. In order to ensure 
that the increased cost to the Corporation had been passed on to ABPA 
through an appropriately higher rate of rent, the Negotiators used the 
$6.51 per square foot per annum estimate as a basis to calculate the 
annual cost of the total operating and fixed expenses for which the 
Corporation would be assuming responsibility. The applicant represents 
that eventually the Lease terms and conditions were finalized at market 
levels.<SUP>3

    \3\ The Department notes that no relief is proposed herein for 
the provision of services by ABPA to the Trust. The provision of 
services would be exempt from the prohibitions of section 406(a) 
provided the conditions of section 408(b)(2) are met. In this 
regard, the Department notes that the Trust renegotiated its 
administrative services contract with ABPA at approximately the same 
time as the negotiation of the Lease. The Department further wishes 
to point out that the proposal limits relief to the Lease 
transaction. Thus, no relief is proposed for any transaction that is 
part of a broader agreement, arrangement or understanding involving 
the Lease in which a fiduciary caused plan assets to be used in a 
manner designed to benefit a party in interest.
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    Once this was accomplished, similar lease proposals were made to 
the Collection Office, the District Council, the Apprenticeship 
Committee and the Center.<SUP>4

    \4\ The applicant represents that Prohibited Transaction 
Exemption (PTE) 76-1 and PTE 77-10 provide relief from 406 (a) and 
(b)(2) for leasing of office space from multiemployer plans to a 
participating employee organization, a participating employer or 
employer association, or another multiemployer plan with common 
trustees. The Department expresses no opinion in this proposed 
exemption on whether the leasing of such office space satisfies the 
terms and conditions of such exemptions.
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    11. The primary provisions of the Lease include the rental of 
approximately 43,246 square feet at a rate of $2.045 per square foot 
per month for a term of ten years (or $24.54 per square foot per 
annum). As a full service gross lease, the landlord remains responsible 
for all fixed and operating expenses. However, the terms of Lease 
provide that ABPA is required to share in any increases in the actual 
operating costs of the Property on a pro-rata basis. In addition, the 
Lease provides that if the Trust and ABPA cancel their administrative 
contract at the end of the fifth year of the Lease or thereafter, 
either party has the right to terminate the Lease with six months 
written notice. Upon such termination, ABPA is to reimburse the 
Corporation for the unamortized value of ABPA's special improvements 
but such amount is not to exceed the lesser of $500,000 or one-half of 
the unamortized value of ABPA specific improvements.
    The Lease does not provide for a tenant improvement allowance; 
however, the Corporation is required to construct all tenant 
improvements, including the tenant-specific improvements. The cost of 
such improvements is included in the Lease payments at a capitalization 
rate of 9.5 percent over the term of the Lease or 23.5 cents per square 
foot per month (or $2.82 per square foot per annum).
    12. Prior to 1988 and through May 1990, MHII served as the 
independent, qualified fiduciary for the Trust with respect to the 
Lease (MHII's Fiduciary Period). By letter dated December 30, 1993, C. 
Gary Morris, Vice President of MHII, represents that MHII was an 
investment manager with the meaning of Section 3(38) of the Act. Mr. 
Morris represents that both he and MHII were unrelated to, and 
independent of, ABPA during MHII's Fiduciary Period. Mr. Morris states 
that MHII understood and acknowledged its duties, responsibilities, and 
liabilities in acting as a fiduciary with respect to the Trust.
    Mr. Morris represents that MHII was familiar with the terms of the 
Lease and all of the documents and relevant information in connection 
with the Lease, including the Appraisal. Mr. Morris states that the 
terms of the Lease compared favorably with the terms of similar 
transactions between unrelated parties and was an arm's length 
transaction as evidenced by the Appraisal.
    MHII reviewed the investment portfolio of the Trust as well as its 
diversification and liquidity needs. Based on this analysis, Mr. Morris 
represents that MHII believed that the Lease was in the best interests 
of the Trust and its participants and beneficiaries. Mr. Morris states 
MHII considered the Lease as an appropriate and desirable investment 
for the Trust, based on the Lease's rate of return, the stability of 
the tenant, the character and diversification of the Trust's other 
assets, and the projected liquidity needs of the Trust.
    MHII was responsible for monitoring the Lease throughout MHII's 
Fiduciary Period and was willing to take any appropriate action 
necessary to protect the interests of the Trust and its participants 
and beneficiaries.
    From July 1990 to July 1991, Am Cal served as the independent, 
qualified fiduciary for the Trust with respect to the Lease (Am Cal's 
Fiduciary Period). By letter dated April 1, 1993, James Mc 
[[Page 27127]] Kenna, Executive Vice President of American Realty 
Advisors, represents that prior to 1992, that he was the president and 
a director of Am Cal, an independent real estate investment advisory 
service. Mr. Mc Kenna further represents that Am Cal was an investment 
manager with the meaning of Section 3(38) of the Act. Mr. Mc Kenna 
represents that both he and Am Cal were unrelated to, and independent 
of, ABPA during Am Cal's Fiduciary Period. Mr. Mc Kenna states that Am 
Cal understood and acknowledged its duties, responsibilities and 
liabilities in acting as a fiduciary with respect to the Trust.
    Mr. Mc Kenna represents that once Am Cal became the investment 
manager for the Trust, it reviewed all the assets and investments of 
the Trust which included the Lease. Am Cal engaged Crane Realty 
Services (Crane), local commercial property manager, who further 
reviewed the terms of the Lease and other leases on the Property. Crane 
advised Mr. Mc Kenna that all of the leases of the Property, including 
the Lease, were ``at market.'' Additionally, Am Cal discussed the 
Property, the Lease and the other leases with the Negotiators to 
ascertain how the Property had been acquired and built out and how the 
Lease terms and conditions had been negotiated. In addition, Am Cal 
reviewed the Appraisal and the two reports prepared by Mr. Archer.
    After obtaining the above information, Mr. Mc Kenna represents that 
Am Cal reviewed the terms of the Lease and all of the documents and 
relevant information in connection with the Lease. Mr. Mc Kenna states 
that the terms of the Lease compared favorably with the terms of 
similar transactions between unrelated parties and would be an arm's 
length transaction as evidenced by the information provided by Crane, 
the Negotiators, Am Cal's knowledge of commercial leasing conditions in 
Los Angeles County, the Appraisal and the two reports prepared by Mr. 
Archer.
    Am Cal reviewed the investment portfolio of the Trust and 
considered the diversification of the Trust's assets as well as the 
liquidity needs of the Trust. Based on this analysis, Mr. Mc Kenna 
represents that Am Cal determined that the Lease was in the best 
interests of the Trust and its participants and beneficiaries. Mr. Mc 
Kenna states that Am Cal considered the Lease an appropriate and 
desirable investment for the Trust, based on the Lease's rate of 
return, the stability of the tenant, the character and diversification 
of the Trust's other assets, and the projected liquidity needs of the 
Trust. Mr. Mc Kenna represents that Am Cal, with the aide of Crane, 
monitored the Lease throughout Am Cal's Fiduciary Period.
    During Am Cal's Fiduciary Period, Mr. Archer, by letter dated 
October 15, 1991, reviewed the Lease and the draft report on the 
factors considered in the Lease negotiations for Am Cal. Taking into 
consideration not only the rental, but other terms of the Lease which 
would typically be found in a lease entered into by unrelated parties 
in arm's length negotiations, Mr. Archer opined that the Lease was at 
fair market rent as of December of 1989, the commencement of the Lease. 
Mr. Archer stated that although he did not directly participate in the 
negotiation of the Lease or any of its particular terms, he did provide 
advice to Mr. Berry and Mr. Miller concerning the calculation of rent 
under a gross rental lease and on customary provisions and practices in 
office space leases.
    Since July 1991, TDA, Inc. (TDA) has served as the independent, 
qualified fiduciary for the Trust with respect to the Lease. By letter 
dated November 11, 1992, Wayne Turner, a principal in TDA, represents 
that TDA is an investment manager with the meaning of Section 3(38) of 
the Act. Mr. Turner represents that both he and TDA are unrelated to, 
and independent of, ABPA. Mr. Turner states that TDA understands and 
acknowledges its duties, responsibilities and liabilities in acting as 
a fiduciary with respect to the Trust.
    Mr. Turner represents that TDA has reviewed the terms of the Lease 
and all of the documents and relevant information in connection with 
the Lease. Mr. Turner states that the terms of the Lease compare 
favorably with the terms of similar transactions between unrelated 
parties and is an arm's length transaction as evidenced by the 
negotiations.
    TDA has reviewed the current investment portfolio of the Trust as 
well as its diversification and liquidity needs. Based on this 
analysis, Mr. Turner represents that TDA believes that the Lease is in 
the best interests of the Trust and its participants and beneficiaries. 
Mr. Turner states that TDA considers the Lease to be an appropriate and 
desirable investment for the Trust.
    Mr. Turner represents that TDA has monitored and will continue to 
monitor the Lease throughout its entire duration and will take any 
appropriate action necessary to protect the interests of the Trust and 
its participants and beneficiaries.
    13. In summary, it is represented that the Lease transaction 
satisfies the statutory criteria for an exemption under section 408(a) 
of the Act because: (a) The terms of the Lease have been, and will 
remain, at least as favorable to the Trust as those obtainable in an 
arm's length transaction with an unrelated party; (b) MHII, as 
independent, qualified fiduciary believed, prior to its commencement, 
that the Lease was in the best interests of the Trust and its 
participants and beneficiaries; (c) MHII, Am Cal, and TDA as 
independent, qualified fiduciaries have monitored and TDA will monitor 
the Lease on behalf of the Trust as well as the terms and the 
conditions of the exemption at all times; and (d) the rental charge by 
the Corporation under the Lease has and continues to be based upon the 
fair market rental value of the premises as determined by an 
independent, qualified appraiser.

FOR FURTHER INFORMATION CONTACT: Kathryn Parr of the Department, 
telephone (202) 219-8971. (This is not a toll-free number.)
United Food and Commercial Workers Union Local 789 and St. Paul Food 
Employers Health Care Plan (the Plan) Located in Bloomington, Minnesota

[Application No. L-09933]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990). If the exemption is granted, the restrictions 
of section 406(a) of the Act shall not apply to the proposed purchase 
of prescription drugs, at discount prices, by Plan participants and 
beneficiaries, from Supervalu Pharmacies, Inc. (SPI) and Cub Foods 
(Cub), parties in interest with respect to the Plan, provided the 
following conditions are satisfied: (a) The terms of the transaction 
are at least as favorable to the Plan as those the Plan could obtain in 
a similar transaction with an unrelated party; (b) any decision by the 
Plan to enter into agreements governing the subject purchases will be 
made by Plan fiduciaries independent of SPI and Cub; and (c) at least 
50% of the preferred providers participating in the Preferred Pharmacy 
Network (PPN) which will be selling prescription drugs to the Plan's 
participants and beneficiaries will be unrelated to SPI and Cub.

Summary of Facts and Representations

    1. The Plan is a multiemployer welfare benefit plan which has been 
in existence since 1966. The Plan was [[Page 27128]] established to 
provide health and welfare benefits including life, sickness, accident 
and other benefits for participants and their beneficiaries. The Plan 
is directed by a joint board of trustees composed of five individuals 
selected to represent the United Food and Commercial Workers Union 
Local 789 (the Union) and five individuals selected to represent the 
retail food employers. The Plan currently has approximately 3,135 
participants and beneficiaries, and $2,209,380 in total assets.
    2. SPI is a wholly owned subsidiary of Supervalu, Inc. (Supervalu), 
a large retail grocer in Minnesota. Cub, another wholly owned 
subsidiary of Supervalu, is also a large retail grocer with stores 
located primarily throughout the Twin City Metropolitan Area. SPI's are 
located in Cub stores. The applicant represents that Supervalu and Cub 
are both parties in interest to the Plan because they make 
contributions to the Plan on behalf of their employees that are 
participants in the Plan.
    3. Under the Plan, participants have two alternative ways to 
receive the prescription drug benefit. One, a participant may have a 
prescription filled at an out-of-network pharmacy, pay the pharmacy's 
charge for the prescription at the time of dispensing, and submit a 
reimbursement claim to the Plan Administrator. The Plan would then 
reimburse the participant in full for the pharmacy's charge for the 
prescription, less the $5.00 participant co-payment. Two, a participant 
may have a prescription filled at a pharmacy within a preferred 
network, and pay only the $5.00 co-payment. The pharmacy then submits 
the claim for the remaining agreed-upon cost for the prescription 
directly to the Plan Administrator.
    4. Effective January 1, 1994, the trustees of the Plan implemented 
the Plan's first prescription drug PPN in order to manage prescription 
drug price and utilization, manage related costs, provide ready 
participant access to courteous and reliable pharmacy services and 
professional advice, and to minimize or eliminate eligibility policing 
problems. The first Preferred Provider Agreement (the Agreement), the 
result of arm's-length negotiations, is between the Plan and Snyder 
Drug Stores, Inc. (Snyder). Snyder is not a party in interest with 
respect to the Plan.
    5. Under the Agreement, Snyder agrees to provide prescription drugs 
to the Plan participants and their beneficiaries consistent with the 
Plan document and the Agreement at a specified reduced cost in exchange 
for the potential to realize an expanded customer base due to its 
status as a preferred pharmacy with respect to the Plan. The material 
elements of the Agreement are as follows:
    (1) Snyder agrees to dispense covered prescription drugs, using 
generic drugs when available, within prescribed dosage units for one 
dispensing fee;
    (2) The agreed upon dispensing fee is:
    (a) The lesser of:
    (i) The Usual and Customary charge for such prescription drug, or
    (ii) The sum of the Drug Acquisition Cost plus the Professional 
Dispensing Fee.
    The Drug Acquisition Cost for each prescription drug provided by 
the Pharmacy to an Eligible Person shall be defined to be the lesser of 
the following amounts:
    (a) 90% of the AWP (average wholesale price) for such prescription 
drug; or
    (b) The lowest stated maximum allowable cost (MAC) for such 
prescription drug on the most recently published pharmaceutical 
industry maximum allowable cost list, however, in no event will the MAC 
price exceed the Federal Upper Limits (as published by the Federal 
Government under the Federal Medical Entitlement Program).
    The Professional Dispensing Fee shall equal $2.45 for each 
dispensing of a prescription drug in accordance with the Plan and the 
Agreement.
    (3) Neither the Plan nor the participant is liable for the cost of 
any prescription drug dispensed contrary to the Agreement;
    (4) Snyder will provide eligibility identification cards, maintain 
a current computerized eligibility list, and verify eligibility prior 
to dispensation;
    (5) The Plan receives 67\1/2\ percent of formulary rebates received 
by Snyder based on the dispensing of each manufacturer's formulary 
drugs under the Plan and the Agreement. The Plan also receives 
quarterly formulary reports of formulary drugs dispensed and rebates 
received;
    (6) The Plan has the right to inspect Snyder's records to audit 
claims and formulary rebates;
    (7) Snyder must provide monthly prescription drug utilization 
reports; and
    (8) The Plan has the right to terminate the Agreement upon a 
maximum of 60 days written notice.
    6. The Plan's trustees have also negotiated an identical Agreement 
with SPI, thereby significantly expanding the PPN by including the 
pharmacies located in Cub stores. The terms of the SPI Agreement are 
identical to those of the Snyder Agreement. The applicant represents 
that the fees are determined by a combination of amounts objectively 
established by reference to industry resources and beyond the control 
or manipulation of SPI.
    7. The applicant represents that the Plan wishes to enter the 
Agreement with SPI to maximize the benefits that can be provided to 
participants and their beneficiaries. Reducing the cost paid by the 
Plan for prescription drugs will enable the Plan to maintain its 
current level of benefits to the participants and their beneficiaries. 
Expanding the PPN to include SPI, thereby increasing the utilization of 
the PPN, will enable the Plan to obtain additional discounts on 
prescriptions currently dispensed out-of-network. The Plan will be able 
to receive even greater savings due to the negotiated fees rather than 
the usual and customary billing of out-of-network pharmacies. The 
applicant represents that it is projected that the Plan will realize an 
additional 14% reduction of its prescription drug expenses over last 
year by the addition of SPI to the PPN. The requested exemption is also 
in the interest of the Plan because preferred pharmacies will be more 
conveniently located as a result of the expanded PPN.
    8. The applicant represents that the PPN will be at least 50% 
composed of preferred providers that are not affiliated with Supervalu 
or Cub. In addition, the applicant represents that one of the current 
trustees of the Plan, Mr. Markwell, is an employee of Cub. The 
applicant further represents that to address the potential conflict of 
interest, Mr. Markwell has in the past and will continue in the future, 
to recuse himself from all discussions and/or votes that relate to the 
operation or maintenance of the PPN. Thus, all Plan decisions with 
respect to the PPN, including any decision to enter into the Agreement 
with SPI, will be made by Plan fiduciaries unrelated to Supervalu or 
Cub.
    9. In summary, the applicant represents that the proposed 
transaction satisfies the criteria contained in section 408(a) of the 
Act for the following reasons: (a) The terms of the transaction are at 
least as favorable to the Plan as those the Plan could obtain in an 
arm's-length transaction with an unrelated party; (b) any decision made 
by the Plan with respect to the Agreement with SPI will be made by Plan 
fiduciaries independent of SPI and Cub; and (c) at least 50% of the 
preferred providers participating in the PPN which will be selling 
prescription drugs to the Plan's participants and beneficiaries will be 
unrelated to SPI and Cub.

 [[Page 27129]] FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of 
the Department, telephone (202) 219-8881. (This is not a toll-free 
number.)

The General Motors Hourly-Rate Employees' Pension Plan (the GM Hourly 
Plan); The General Motors Retirement Program for Salaried Employees 
(the GM Salaried Plan); The Saturn Individual Retirement Plan for 
Represented Team Members (the SIRP); The Saturn Personal Choices 
Retirement Plan for Non-Represented Team Members (the SPCRP;) and The 
Employees' Retirement Plan for GMAC Corporation (the GMAC Plan; all 
Five Plans Collectively, the GM Plans); The AT&T Pension Plan; and the 
AT&T Management Pension Plan (the AT&T Management Plan; Together, the 
AT&T Plans; all Seven Plans Collectively, the Plans) Located in 
Detroit, Michigan (the GM Plans), and in New York, New York (the AT&T 
Plans)

[Application Nos. D-09964 through D-09968]

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). If the exemption 
is granted, the restrictions of section 406(a) of the Act and the 
sanctions resulting from the application of section 4975 of the Code, 
by reason of section 4975(c)(1)(A) through (D) of the Code, shall not 
apply to (1) the proposed granting to The Industrial Bank of Japan, 
Limited, New York Branch (IBJ), as the representative of lenders (the 
Lenders) participating in a credit facility (the Facility), of security 
interests in limited partnership interests in The Morgan Stanley Real 
Estate Fund II, L.P. (the Partnership) owned by the Plans with respect 
to which some of the Lenders are parties in interest; and (2) the 
proposed agreements by the Plans to honor capital calls made by IBJ in 
lieu of the Partnership's general partner; provided that (a) the 
proposed grants and agreements are on terms no less favorable to the 
Plans than those which the Plans could obtain in arm's-length 
transactions with unrelated parties; and (b) the decisions on behalf of 
each Plan to invest in the Partnership and to execute such grants and 
agreements in favor of IBJ are made by a fiduciary which is not 
included among, and is independent of, the Lenders and IBJ.

Summary of Facts and Representations

    1. The Partnership is a Delaware limited partnership the general 
partner of which is MSREF II, L.P. (the General Partner), a Delaware 
limited partnership the general partner of which is MSREF II, Inc., a 
wholly owned subsidiary of Morgan Stanley Group, Inc. or one or more of 
its affiliates. The Partnership is organized under an agreement (the 
Agreement) dated December 29, 1994. The Partnership has a term expiring 
on December 31, 2004, subject to extension by the General Partner for 
up to three successive one-year terms. The Partnership has been 
organized to make investments, including leveraged equity investments, 
in undervalued or inappropriately capitalized real estate assets and 
portfolios, and corporate real estate. Proceeds from the sale or 
refinancing of properties generally will not be reinvested, but will be 
distributed to the limited partners, so that the Partnership will be 
self-liquidating.
    2. After execution of the Agreement, the General Partner sought 
capital commitments through private placement and has obtained, as a 
result, irrevocable, unconditional capital commitments in excess of 
$350,000,000 from 18 purchasers of limited partnership units (the 
Limited Partners). The Agreement requires Limited Partners to make 
capital contributions upon receipt of notice from the General Partner. 
Under the Agreement, the General Partner may make a call for cash 
contributions, also known as a ``drawdown'', up to the total amount of 
the Limited Partner's capital commitment upon 15 days notice, with some 
limitations. The Partners' capital commitments are structured as 
irrevocable, unconditional and binding commitments to contribute equity 
when capital calls are made by the General Partner. The obligation of 
each Limited Partner to contribute the full amount of its capital 
commitment is secured by a security interest granted to the Partnership 
in the Limited Partner's partnership interest.
    3. In the ordinary course of its business operations, it is 
contemplated that the Partnership will incur indebtedness in connection 
with many of its investments. This on-going need for credit will be 
provided by the Facility, a three-year arrangement for $300 million in 
revolving credit which will enable the Partnership to consummate 
investments quickly without the delay of separate arrangements for 
interim or permanent financing for each investment. The Facility is 
funded by the Lenders, represented by IBJ, which is also a 
participating Lender. IBJ serves as administrative agent for the 
Facility. The Facility is a non-recourse obligation of the Partnership 
which matures November 18, 1998 and which is secured by a security 
interest in the Limited Partners' capital commitments, the General 
Partner's right to make drawdowns and the Partnership's lien and 
security interest in each Limited Partner's partnership interest. As 
additional security, the Facility will require each Limited Partner to 
execute an agreement (the Security Agreement) granting to IBJ, for the 
benefit of each Lender, a security interest and lien in the Limited 
Partner's partnership interest, and covenanting with IBJ, for the 
benefit of the Lenders, that such Limited Partner will unconditionally 
honor any drawdown made by IBJ in accordance with the Agreement in lieu 
of the General Partner to the full extent of the Limited Partner's 
unfunded capital commitment.
    4. The trusts which hold assets of the Plans (the Trusts) own 
limited partnership interests as Limited Partners in the Partnership. 
Some of the Lenders may be parties in interest with respect to some of 
the Plans in the Trusts by virtue of such Lenders' (or their 
affiliates') provisions of fiduciary services to such Plans with 
respect to Trust assets other than the Partnership interests. IBJ is 
requesting an exemption to permit the Trusts to enter into the Security 
Agreements under the terms and conditions described herein. The Plans 
and the other Limited Partners with the largest interests in the 
Partnership and the extent of their respective capital commitments to 
the Partnership are described as follows:
    (a) The GM Hourly Plan, a defined benefit plan with 599,262 
participants as of September 30, 1993, and assets with a total value of 
approximately 21.6 billion dollars on that date. Assets of the GM 
Hourly Plan are held in the Third Plaza Trust (the TP Trust), of which 
Mellon Bank, N.A. is the trustee. Assets of the SIRP (a defined benefit 
plan with 7,178 participants as of September 30, 1993), the SPCRP (a 
defined benefit plan with 1,435 participants as of September 30, 1993), 
and the GMAC Plan (a defined benefit plan with 2,761 participants as of 
June 21, 1994), are also held in the TP Trust. The TP Trust has 
undertaken a total capital commitment of $75,000,000 to the 
Partnership.
    (b) The GM Salaried Plan, a defined benefit pension plan with 
223,262 participants as of September 30, 1993, and assets with a total 
value of approximately 20.8 billion dollars as of [[Page 27130]] that 
date. Assets of the GM Salaried Plan are held in the Fourth Plaza Trust 
(the FP Trust), of which Mellon Bank, N.A. is the trustee. The FP Trust 
has undertaken a total capital commitment of $75,000,000 to the 
Partnership. The fiduciary responsible for authorizing and overseeing 
the GM Plans' investment in the Partnership and, subsequently, for 
monitoring such investment, is the General Motors Investment Management 
Corporation.
    (c) The AT&T Pension Plan, a defined benefit pension plan with 
261,788 participants as of December 31, 1993, and with assets of 
approximately 18.21 billion dollars as of that date, and the AT&T 
Management Plan, with 180,452 participants as of December 31, 1993 and 
with assets of approximately 20.03 billion dollars as of that date. 
Assets of the AT&T Plans are held in the AT&T Master Pension Trust (the 
AT&T Trust), of which State Street Bank and Trust Company is the 
trustee. The AT&T Trust has undertaken a total capital commitment of 
$150,000,000 to the Partnership. The fiduciary responsible for 
reviewing and authorizing the investment in the Partnership by the AT&T 
Plans is David Feldman, Corporate Vice President, American Telephone & 
Telegraph Company Investment Management Organization.
    (d) Limited Partners which are not ERISA-covered plans include:
    (i) Wells Fargo & Company, which has undertaken a total capital 
commitment of $15,000,000.
    (ii) Allstate Insurance Company, which has undertaken a total 
capital commitment of $40,000,000.
    (iii) Morstar Realty, N.V., which has undertaken a total capital 
commitment of $15,000,000.
    5. IBJ represents that the Partnership has obtained an opinion of 
counsel that the Partnership will constitute an ``operating company'' 
under the Department's plan asset regulations [29 CFR 2510.3-101(c)] if 
the Partnership is operated in accordance with the Agreement and the 
offering memorandum (the Offering) distributed in connection with the 
private placement of the limited partnership interests.<SUP>5

    \5\ The Department expresses no opinion herein as to whether the 
Partnership will constitute an operating company under the 
regulations at 29 CFR 2510.3-101.
---------------------------------------------------------------------------

    6. IBJ represents that the Security Agreement constitutes a form of 
credit security which is customary among financing arrangements for 
real estate limited partnerships, wherein the financing institutions do 
not obtain security interests in the real property assets of the 
partnership. IBJ also represents that the obligatory execution of the 
Security Agreement by the Limited Partners for the benefit of the 
Lenders was fully disclosed in the Offering as a requisite condition of 
investment in the Partnership during the private placement of the 
limited partnership interests. IBJ represents that the only direct 
relationship between any of the Limited Partners and any of the Lenders 
is the execution of the Security Agreements. All other aspects of the 
transaction, including the negotiation of all terms of the Facility, 
are exclusively between the Lenders and the Partnership. IBJ represents 
that the proposed executions of the Security Agreements will not affect 
the abilities of the Trusts to withdraw from investment and 
participation in the Partnership. The only Plan assets to be affected 
by the proposed transaction are each Plan's limited partnership 
interests in the Partnership and the related Plan obligations as 
Limited Partners to respond to drawdowns up to the total amount of each 
Plan's capital commitment to the Partnership.
    7. IBJ represents that neither it nor any Lender acts or has acted 
in any fiduciary capacity with respect to any Trust's investment in the 
Partnership and that IBJ is independent of and unrelated to those 
fiduciaries (the Trust Fiduciaries) responsible for authorizing and 
overseeing the Trusts' investments in the Partnership. Each Trust 
Fiduciary represents independently that its authorization of Trust 
investment in the Partnership was free of any influence, authority or 
control by the Lenders. The Trust Fiduciaries represent that the 
Trust's investments in and capital commitments to the Partnership were 
made with the knowledge that each Limited Partner would be required 
subsequently to grant a security interest in the Partnership to the 
Lenders and to honor drawdowns made on behalf of the Lenders without 
recourse to any defenses against the General Partner. Each Trust 
Fiduciary individually represents that it is independent of and 
unrelated to IBJ and the Lenders and that the investment by the Trust 
for which that Trust Fiduciary is responsible continues to constitute a 
favorable investment for the Plans participating in that Trust and that 
the execution of the Security Agreement is in the best interests and 
protective of the participants and beneficiaries of such Plans.
    8. In summary, the applicants represent that the proposed 
transactions satisfy the criteria of section 408(a) of the Act for the 
following reasons: (1) The Plans' investments in the Partnership were 
authorized and are overseen by the Trust Fiduciaries, which are 
independent of the Lenders; (2) None of the Lenders have any influence, 
authority or control with respect to the Plans' investments in the 
Partnership or the Plans' executions of the Security Agreements; and 
(3) The Trust Fiduciaries invested in the Partnership on behalf of the 
Plans with the knowledge that the Security Agreements are required of 
all Limited Partners investing in the Partnership.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
Eaton Corporation Share Purchase and Investment Plan (the Plan) Located 
in Cleveland, Ohio

[Application No. D-09978]

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). If the exemption 
is granted, 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 extension of credit by 
Eaton Corporation (Eaton) to the Plan in the form of loans (the Loans) 
with respect to certain guaranteed investment contracts (collectively, 
the GICs); and (2) the repayment (the Repayments) by the Plan of all or 
a portion of amounts advanced to the Plan by Eaton on the terms 
described in the agreement governing such Loans, provided: (a) All 
terms of such transactions are no less favorable to the Plan than those 
which the Plan could obtain in arm's-length transactions with unrelated 
parties; (b) no interest or other expenses will be incurred by the Plan 
in connection with the Loans; (c) the Loans would be made only when, 
and to the extent needed, to avoid penalties that would otherwise be 
incurred if the liquidation of one or more of the GICs is required, as 
determined by the Corporate Compensation Committee (the Plan 
Committee); (d) Repayments will be made only from payments made to the 
Plan as the GICs mature (the GIC Proceeds); (e) the Repayments will not 
exceed the total amount of the Loans; and (f) the Repayments will be 
waived to the extent that the Loans exceed the GIC Proceeds.

[[Page 27131]] EFFECTIVE DATE: If this proposed exemption is granted, 
it will be effective July 5, 1995.

Summary of Facts and Representations

    1. Eaton, an Ohio corporation headquartered in Cleveland, is the 
Plan sponsor. The Plan is a defined contribution plan that had 
approximately 23,500 participants and assets of $731,839,175 as of 
December 30, 1993. The participants of the Plan are employees of Eaton 
or its subsidiaries. Contributions to the Plan are made by Eaton and by 
participants. Participant contributions are made pursuant to before-tax 
salary reduction agreements and/or after-tax payroll deduction 
agreements. Effective July 5, 1989, the portion of the Plan that is 
attributable to Eaton contributions is designed to be invested 
primarily in Eaton securities and constitutes an employee stock 
ownership plan (ESOP) within the meaning of Act section 407(d)(6). The 
Plan Committee is responsible for the general administration of the 
Plan, and the Plan's Investment Committee (the Investment Committee) 
has the exclusive authority to select the Plan's investment options and 
the underlying investment vehicles.
    2. The Plan allows individual investment direction for that portion 
of participants' accounts which derives from participant contributions. 
Participants may direct the investment of that portion of their 
accounts into one or more of several investment funds maintained by the 
Plan. Currently, the funds available include the Fixed Income Fund, the 
Aggressive Growth Fund, the Balanced Fund, the Equity Fund, the 
International Fund, the Stock Index Fund and the Eaton Common Shares 
Fund (which invests primarily in Eaton securities). Participants may 
transfer their account balances among the investment funds once every 
30 days. The Fixed Income Fund has its assets invested primarily in 
guaranteed investment contracts with insurance companies. The remainder 
of the Fixed Income Fund's assets are invested in government securities 
and corporate debt instruments. As of December 30, 1993, the Fixed 
Income Fund had assets of $127,881,436 and comprised 17.47% of the 
total assets of the Plan. Key Trust Company of Ohio, N.A. (Key Trust) 
currently serves as the trustee holding all assets of the Plan. Key 
Trust has been appointed by the Investment Committee as the Investment 
Manager of the Fixed Income Fund and the Stock Index Fund.
    3. Among the guaranteed investment contracts currently held by the 
Fixed Income Fund are the GICs, which can be described as follows:
    (a) Effective January 20, 1994, the Plan purchased Guaranteed 
Investment Contract No. GA 322 GIC (GIC-1) from Life Insurance Company 
of Georgia. The Plan purchased GIC-1 for $5 million. GIC-1 provides an 
annual guaranteed interest rate of 5.0% and matures on January 20, 
1998.
    (b) Effective November 20, 1992, the Plan purchased Guaranteed 
Investment Contract No. GA 299 GIC (GIC-2) from Life Insurance Company 
of Georgia. The Plan purchased GIC-2 for $10 million. GIC-2 provides an 
annual guaranteed interest rate of 6.15% and matures on November 20, 
1996.
    (c) Effective February 18, 1992, the Plan purchased Guaranteed 
Investment Contract No. GA-5265 (GIC-3) from Allstate Life Insurance 
Company. The Plan purchased GIC-3 for $10 million. GIC-3 provides an 
annual guaranteed interest rate of 7.65% and matures on April 1, 1997.
    (d) Effective August 13, 1990, the Plan purchased Guaranteed 
Investment Contract No. GB 10020 (GIC-4) from Massachusetts Mutual Life 
Insurance Company. The Plan purchased GIC-4 for $20 million. GIC-4 
provides an annual guaranteed interest rate of 9.37% and matures on 
August 16, 1995.
    The GICs are valued at $47,605,741 and constitute 37.23% of the 
Fixed Income Fund's $127,881,436 of assets.<SUP>6 At maturity, the 
current accumulated book value of the GICs (Accumulated Book Value), 
defined as the initial deposit, plus interest at the contract rate, 
less any withdrawals during the term of the GIC, is to be paid to the 
Plan. All of the four GICs provide for a penalty upon early withdrawal. 
Of the Fixed Income Fund's assets, $55,267,367 (43.22%) are invested in 
other guaranteed investment contracts which do not impose penalties for 
early withdrawal.

    \6\ These valuation figures were calculated using the contract 
value of the GICs, i.e., contributions made under the GICs plus 
interest at the contracts' stated rates, less Plan expenses directly 
attributable to the holding of the GICs. The figures were taken from 
the December 30, 1993 audited financial statements and therefore do 
not include the value of GIC-1, which was purchased effective 
January 20, 1994.
---------------------------------------------------------------------------

    4. Eaton has determined that Plan participants should be provided 
expanded investment options under the Plan. Eaton plans to allow each 
participant to transfer all or a portion of his/her account balance 
subject to participant direction into a new money market fund, the 
Money Market Fixed Income Fund, to be selected by the Investment 
Committee. The addition of this fund not only will provide participants 
with an alternative to the Fixed Income Fund, but will provide a 
mechanism for easing the transfer of account balances into and out of 
other funds available under the Plan. There is concern, however, that 
participants may be subject to adverse financial consequences if the 
amount of Plan assets transferred from the Fixed Income Fund exceeds 
the availability of assets in that Fund that can be liquidated without 
penalty. If that situation arises, the Plan would be forced to 
liquidate one or more of the GICs prior to maturity, thus triggering 
financial penalties and causing potential losses to Plan participants.
    5. Accordingly, Eaton proposes to advance funds to the Plan up to 
the Accumulated Book Value of the GICs, as of July 5, 1995 (see rep. 7, 
below), plus additional interest at the contract rate that accrues 
through the date of any Loans that Eaton makes to the Plan. The Plan 
proposes to accept such Loans in order to enable participants to 
transfer their account balances currently invested in the Fixed Income 
Fund into the Money Market Fund, or any other fund, without incurring a 
penalty for premature liquidation of one or more of the GICs. The Loans 
would be non-interest bearing and would be available under a line of 
credit running from Eaton to the Plan. The Loans would be made only 
when, and to the extent, needed to avoid penalties that would otherwise 
be incurred if the liquidation of one or more of the GICs is required, 
as determined by the Plan Committee. The Plan will agree to repay the 
Loans to Eaton, without interest, only from the GIC Proceeds. No 
collateral would be required or given, and no other Plan assets would 
be used to make the Repayments.
    6. To the extent that Eaton and the Plan ultimately recoup less 
than the amount of the Loans, Repayment would be waived. If GIC 
Proceeds remain after full Repayment of the Loans following maturity of 
the affected GICs, those amounts will be allocated on a proportional 
basis to any participant who then has an account in the Plan.
    7. The Investment Committee proposes to add the Money Market Fund 
effective July 5, 1995, and accordingly expects to receive a 
significant quantity of participant requests to transfer into that fund 
as of that date. The Loans may therefore be required as of July 5, 1995 
to avoid adverse financial consequences to participants if the demand 
for transfers out of the Fixed Income Fund for the period commencing 
July 5, 1995 and ending January 20, 1998 (when the last GIC matures) 
exceeds the Fixed [[Page 27132]] Income Fund's access to unrestricted 
assets. Thus, Eaton has requested that the exemption proposed herein be 
made effective July 5, 1995.
    8. In summary, the applicant represents that the proposed 
transactions satisfy the criteria contained in section 408(a) of the 
Act because: (a) All terms of the transactions will be no less 
favorable to the Plan than those obtainable in arm's-length terms with 
unrelated parties; (b) the Plan will pay no interest or other expenses 
in connection with the Loans; (c) the Loans will enable Plan 
participants to transfer their account balances out of the Fixed Income 
Fund without incurring penalties for premature liquidation of the GICs; 
(d) Repayments will be made only from GIC Proceeds; (e) the Repayments 
will not exceed the total amount of the Loans; and (f) the Repayments 
will be made waived to the extent that the Loans exceed the GIC 
Proceeds.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)
Rothschild, Incorporated (Rothschild) Located in New York, New York

[Application No. D-09993]

Proposed Exemption

I. Transactions
    A. The restrictions of sections 406(a) and 407(a) of the Act and 
the taxes imposed by section 4975 (a) and (b) of the Code by reason of 
section 4975(c)(1) (A) through (D) of the Code shall not apply to the 
following transactions involving trusts and certificates evidencing 
interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and an employee benefit plan when the sponsor, 
servicer, trustee or insurer of a trust, the underwriter of the 
certificates representing an interest in the trust, or an obligor is a 
party in interest with respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.A. (1) or (2).

Notwithstanding the foregoing, section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan by any person who has discretionary authority or renders 
investment advice with respect to the assets of that Excluded 
Plan.<SUP>7

    \7\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
---------------------------------------------------------------------------

    B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act 
and the taxes imposed by section 4975 (a) and (b) of the Code by reason 
of section 4975(c)(1)(E) of the Code shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) The plan is not an Excluded Plan;
    (ii) solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) a plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.<SUP>8 For purposes of this 
paragraph B.(1)(iv) only, an entity will not be considered to service 
assets contained in a trust if it is merely a subservicer of that 
trust;

    \8\ For purposes of this exemption, each plan participating in a 
commingled fund (such as a bank collective trust fund or insurance 
company pooled separate account) shall be considered to own the same 
proportionate undivided interest in each asset of the commingled 
fund as its proportionate interest in the total assets of the 
commingled fund as calculated on the most recent preceding valuation 
date of the fund.
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    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that the conditions set forth in paragraphs B.(1) (i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B. (1) or (2).
    C. The restrictions of sections 406(a), 406(b) and 407(a) of the 
Act, and the taxes imposed by section 4975 (a) and (b) of the Code by 
reason of section 4975(c) of the Code, shall not apply to transactions 
in connection with the servicing, management and operation of a trust, 
provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing arrangement; and
    (2) The pooling and servicing agreement is provided to, or 
described in all material respects in the prospectus or private 
placement memorandum provided to, investing plans before they purchase 
certificates issued by the trust.<SUP>9

    \9\ 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.
    Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act or from 
the taxes imposed by reason of section 4975(c) of the Code for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. The restrictions of sections 406(a) and 407(a) of the Act, and 
the taxes imposed by sections 4975 (a) and (b) of the Code by reason of 
sections 4975(c)(1) (A) through (D) of the Code, shall not apply to any 
transactions to which those restrictions or taxes would otherwise apply 
merely because a person is deemed to be a party in interest or 
disqualified person (including a fiduciary) with respect to a plan by 
virtue of providing services to the plan (or by virtue of having a 
relationship to such service provider described in section 3(14) (F), 
(G), (H) or (I) of the Act or section 4975(e)(2) (F), (G), (H) or (I) 
of the Code), solely because of the plan's ownership of certificates.
II. General Conditions
    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as 
[[Page 27133]] favorable to the plan as they would be in an arm's-
length transaction with an unrelated party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating at 
the time of such acquisition that is in one of the three highest 
generic rating categories from either Standard & Poor's Corporation 
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc. 
(D&P) or Fitch Investors Service, Inc. (Fitch);
    (4) The trustee is not an affiliate of any member of the Restricted 
Group. However, the trustee shall not be considered to be an affiliate 
of a servicer solely because the trustee has succeeded to the rights 
and responsibilities of the servicer pursuant to the terms of a pooling 
and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling and servicing agreement and reimbursement of the servicer's 
reasonable expenses in connection therewith; and
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933.
    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 Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.
III. Definitions
    For purposes of this exemption:
    A. ``Certificate'' means:
    (1) a certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; and
    (b) that entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) a certificate denominated as a debt instrument--
    (a) that represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) within the meaning of section 860D(a) of the 
Internal Revenue Code of 1986; and
    (b) that is issued by and is an obligation of a trust;

with respect to certificates defined in (1) and (2) above for which 
Rothschild or any of its affiliates is either (i) the sole underwriter 
or the manager or co-manager of the underwriting syndicate, or (ii) a 
selling or placement agent.
    For purposes of this 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) Secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association);
    (b) Secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T.);
    (c) Obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, multi-family 
residential and commercial real property (including obligations secured 
by leasehold interests on commercial real property);
    (d) Obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U.);
    (e) ``Guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2);
    (f) Fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1);
    (2) Property which had secured any of the obligations described in 
subsection B.(1);
    (3) Undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to made 
to certificateholders; and
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship and other credit support 
arrangements with respect to any obligations described in subsection 
B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) The investment pool consists only of 
assets of the type which have been included in other investment pools, 
(ii) certificates evidencing interests in such other investment pools 
have been rated in one of the three highest generic rating categories 
by S&P's, Moody's, D & P, or Fitch for at least one year prior to the 
plan's acquisition of certificates pursuant to this exemption, and 
(iii) certificates evidencing interests in such other investment pools 
have been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
exemption.
    C. ``Underwriter'' means:
    (1) Rothschild;
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
Rothschild; or
    (3) Any member of an underwriting syndicate or selling group of 
which Rothschild or a person described in (2) is a manager or co-
manager with respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust. [[Page 27134]] 
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services loans contained in the 
trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services loans contained in 
the trust, including the master servicer and any subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;
    (6) Any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this exemption 
applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the 
certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as would 
be the case if the equipment note were secured only by the equipment 
and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust holds a security interest in the lease;
    (2) The trust holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as would be the case if the 
trust consisted of motor vehicle installment loan contracts.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.

Summary of Facts and Representations

    1. Rothschild and its affiliates provide a broad range of financial 
services, including mergers and acquisitions, restructuring, asset 
management and a variety of specialist financial services for both 
domestic and international clients. Rothschild conducts operations from 
its executive office in New York City. The applicant represents that 
several of Rothschild's officers have had extensive experience in the 
fields of mortgage-backed and asset-backed securities.
    When acting as lead managing underwriter or placement agent, 
Rothschild will conduct extensive due diligence with respect to each 
offering of certificates. In general, Rothschild's due diligence 
efforts will concern four basic areas: first, the originator's or 
unrelated lender's underwriting policies and procedures for originating 
or purchasing receivables; second, the validity and enforceability of 
the secured claim or lien on the underlying collateral as represented 
by the receivable; third, the originator's or unrelated lender's 
recordkeeping systems; and fourth, the originator's or unrelated 
lender's documents kept on file with respect to each receivable.
    In general, Rothschild's procedures are as follows: Rothschild 
conducts an extensive examination of the originator [[Page 27135]] or 
unrelated lender's underwriting practices to ensure that they conform 
with stated policies and procedures, and that there are periodic 
reviews of those practices by the originator's or unrelated lender's 
auditors. Rothschild's examination includes a review of written 
materials and interviews with the officers in charge of administrating 
the underwriting policies and procedures. Rothschild and/or its 
attorneys will also review the legal documentation creating the 
security interest in each underlying collateral asset. Rothschild's 
analysts will examine the originator's or unrelated lenders 
recordkeeping systems to verify, among other things, its capabilities 
with respect to the collection of amounts due and payable for the 
receivables sold to investors. In most cases, Rothschild also examines 
receivable files, selected at random, to verify that files are complete 
and the dates in the file conform to the recordkeeping systems.
Trust Assets
    2. Rothschild seeks exemptive relief to permit plans to invest in 
pass-through certificates representing undivided interests in the 
following categories of trusts: (1) single and multi-family residential 
or commercial mortgage investment trusts; <SUP>10 (2) motor vehicle 
receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.<SUP>11

    \10\ The Department notes that PTE 83-1 [48 FR 895, January 7, 
1983], a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-l are 
met. Rothschild requests relief for single-family residential 
mortgages in this exemption because it would prefer one exemption 
for all trusts of similar structure. However, Rothschild has stated 
that it may still avail itself of the exemptive relief provided by 
PTE 83-1.
    \11\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of plan assets 
(29 CFR 2510.3-101(i)) provides that where a plan acquires a 
guaranteed governmental mortgage pool certificate, the plan's assets 
include the certificate and all of its rights with respect to such 
certificate under applicable law, but do not, solely by reason of 
the plan's holding of such certificate, include any of the mortgages 
underlying such certificate. The applicant is requesting exemptive 
relief for trusts containing guaranteed governmental mortgage pool 
certificates because the certificates in the trusts may be plan 
assets.
    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.<SUP>12

    \12\ Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
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Trust Structure
    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee. The sponsor or 
servicer of a trust selects assets to be included in the trust. These 
assets are receivables which may have been originated by a sponsor or 
servicer of the trust, an affiliate of the sponsor or servicer, or by 
an unrelated lender and subsequently acquired by the trust sponsor or 
servicer.
    On or prior to the closing date, the sponsor acquires legal title 
to all assets selected for the trust, establishes the trust and 
designates an independent entity as trustee. On the closing date, the 
sponsor conveys to the trust legal title to the assets, and the trustee 
issues certificates representing fractional undivided interests in the 
trust assets. Rothschild, alone or together with other broker-dealers, 
acts as underwriter or placement agent with respect to the sale of the 
certificates. The majority of the public offerings of certificates made 
to date have been underwritten on an agency basis. However, Rothschild 
may in the future become involved in public offerings of certificates 
underwritten on either a firm commitment or a best efforts basis. In 
addition, Rothschild anticipates that it may privately place 
certificates on both a firm commitment and an agency basis. Rothschild 
may also act as the lead underwriter for a syndicate of securities 
underwriters. Rothschild may also act as the servicer or seller to the 
trust of the receivables or the trust sponsor.
    Certificateholders are entitled to receive monthly, quarterly or 
semi-annually installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificateholders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from obligors by the servicer may be commingled with the 
servicer's assets during the month prior to deposit. Usually, the 
period of time between receipt of funds by the servicer and deposit of 
these funds in a segregated account does not exceed one month. 
Furthermore, in those cases where distributions are made semi-annually, 
the servicer will furnish a report on the operation of the trust to the 
trustee on a monthly basis. At or about the time this report is 
delivered to the trustee, it will be made available to 
certificateholders and delivered to or made available to each rating 
agency that has rated the certificates.
    5. Some of the certificates will be multi-class certificates. 
Rothschild requests exemptive relief for two types of multi-class 
certificates: ``Strip'' certificates and ``fast-pay/slow-pay'' 
certificates. Strip certificates are a type of security in which the 
stream of interest payments on receivables is split from the flow of 
principal payments and separate classes of certificates are 
established, each representing rights to disproportionate payments of 
principal and interest.<SUP>13

    \13\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(1)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this 
exemption.
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    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. In certain transactions of 
this type, interest and/or principal payments received on the 
underlying receivables are distributed first to the class of 
certificates having the earliest stated maturity of principal, 
[[Page 27136]] and/or earlier payment schedule, and only when that 
class of certificates has been paid in full (or has received a 
specified amount) will distributions be made with respect to the second 
class of certificates. Distributions on certificates having later 
stated maturities will proceed in like manner until all the 
certificateholders have been paid in full. The only difference between 
this multi-class pass-through arrangement and a single-class pass-
through arrangement is the order in which distributions are made to 
certificateholders. In each case, certificateholders will have a 
beneficial ownership interest in the underlying assets. In neither case 
will the rights of a plan purchasing a certificate be subordinated to 
the rights of another certificateholder in the event of default on any 
of the underlying obligations. In particular, if the amount available 
for distribution to certificateholders is less than the amount required 
to be so distributed, all senior certificateholders then entitled to 
receive distributions will share in the amount distributed on a pro 
rata basis.<SUP>14

    \14\ If a trust issues subordinated certificates, holders of 
such subordinated certificates may not share in the amount 
distributed on a pro rata basis with the senior certificateholders. 
The Department notes that the exemption does not provide relief for 
plan investment in such subordinated certificates.
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    6. For tax reasons, the trust must be maintained as an essentially 
passive entity. Therefore, both the sponsor's discretion and the 
servicer's discretion with respect to assets included in a trust are 
severely limited. Pooling and servicing agreements provide for the 
substitution of receivables by the sponsor only in the event of defects 
in documentation discovered within a short time after the issuance of 
trust certificates. Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed through to certificateholders.
Parties to Transactions
    7. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a homeowner or automobile 
purchaser, or leases property to the lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their business, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    8. The sponsor will be one of three entities: (i) A special-purpose 
corporation unaffiliated with the servicer, (ii) a special-purpose or 
other corporation affiliated with the servicer, or (iii) the servicer 
itself. Where the sponsor is not also the servicer, the sponsor's role 
will generally be limited to acquiring the receivables to be included 
in the trust, establishing the trust, designating the trustee, and 
assigning the receivables to the trust.
    9. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and as such is 
responsible for enforcing all the rights created thereby in favor of 
certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to Rothschild, the trust sponsor or the servicer. Rothschild 
represents that the trustee will be a substantial financial institution 
or trust company experienced in trust activities. The trustee receives 
a fee for its services, which will be paid by the servicer, sponsor or 
the trust as specified in the pooling and servicing agreement. The 
method of compensating the trustee which is specified in the pooling 
and servicing agreement will be disclosed in the prospectus or private 
placement memorandum relating to the offering of the certificates.
    10. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of 
different originators and deposited in a trust, it is common for the 
receivables to be ``subserviced'' by their respective originators and 
for a single entity to ``master service'' the pool of receivables on 
behalf of the owners of the related series of certificates. Where this 
arrangement is adopted, a receivable continues to be serviced from the 
perspective of the borrower by the local subservicer, while the 
investor's perspective is that the entire pool of receivables is 
serviced by a single, central master servicer who collects payments 
from the local subservicers and passes them through to 
certificateholders.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (though they 
themselves may be related) will be unrelated to Rothschild. In other 
cases, however, affiliates of Rothschild may originate or service 
receivables included in a trust, or may sponsor a trust.
Certificate Price, Pass-Through Rate and Fees
    11. Where the sponsor of a trust is not the originator of 
receivables included in a trust, the sponsor generally purchases the 
receivables in the secondary market, either directly from the 
originator or from another secondary market participant. The price the 
sponsor pays for a receivable is determined by competitive market 
forces, taking into account payment terms, interest rate, quality, and 
forecasts as to future interest rates.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters. In some transactions, the sponsor 
or an affiliate may retain a portion of the certificates for its own 
account. In addition, in some transactions the originator may sell 
receivables to a trust for cash. At the time of the sale, the trustee 
would sell certificates to the public or to underwriters and use the 
cash proceeds of the sale to pay the originator for receivables sold to 
the trust. The transfer of the receivables to the trust by the sponsor, 
the sale of certificates to investors, and the receipt of the cash 
proceeds by the sponsor generally take place simultaneously.
    12. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and [[Page 27137]] expectations 
as to the likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.<SUP>15 This rate is generally determined by the same market forces 
that determine the price of a certificate. The price of a certificate 
and its pass-through, or coupon, rate together determine the yield to 
investors. If an investor purchases a certificate at less than par, 
that discount augments the stated pass-through rate; conversely, a 
certificate purchased at a premium yields less than the stated coupon.

    \15\ The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
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    13. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor, and receive fees for acting in 
that capacity) will retain the difference between payments received on 
the receivables in the trust and payments payable (at the pass-through 
rate) to certificateholders, except that in some cases a portion of the 
payments on receivables may be paid to a third party, such as a fee 
paid to a provider of credit support. The servicer may receive 
additional compensation by having the use of the amounts paid on the 
receivables between the time they are received by the servicer and the 
time they are due to the trust (which time is set forth in the pooling 
and servicing agreement). The servicer may be required to pay the 
administrative expenses of servicing the trust, including the trustee's 
fee, out of its servicing compensation, or it may be reimbursed for all 
or a portion of its expenses by the trust.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid out of the 
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is 
established.
    14. The servicer may be entitled to retain certain administrative 
fees paid by a third party, usually the obligor. These administrative 
fees fall into three categories: (a) Prepayment fees; (b) late payment 
and payment extension fees; and (c) fees and charges associated with 
foreclosure or repossession, or other conversion of a secured position 
into cash proceeds, upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    15. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts maintained with itself or to commingle 
such payments with its own funds prior to the distribution dates. In 
these cases, the servicer would be entitled to the benefit derived from 
the use of the funds between the date of payment on a receivable and 
the pass- through date. Commingled payments may not be protected from 
the creditors of the servicer in the event of the servicer's bankruptcy 
or receivership. In those instances when payments on receivables are 
held in non-interest bearing accounts or are commingled with the 
servicer's own funds, the servicer is required to deposit these 
payments by a date specified in the pooling and servicing agreement 
into an account from which the trustee makes payments to 
certificateholders.
    16. Rothschild and any other participating underwriter will receive 
a fee in connection with the securities underwriting or private 
placement of certificates. In a firm commitment underwriting, this fee 
would normally consist of the difference between what Rothschild 
receives for the certificates that it distributes and what it pays the 
sponsor for those certificates. In a private placement, the fee may 
also take the form of an agency commission paid by the sponsor. Such 
fees are negotiated at arm's-length with the sponsor, originator or 
unrelated lender and are affected by fees in comparable offerings.
Purchase of Receivables by the Servicer
    17. The applicant represents that as the principal amount of the 
receivables in a trust is reduced by payments, the cost of 
administering the trust generally increases, making the servicing of 
the trust prohibitively expensive at some point. Consequently, the 
pooling and servicing agreement generally provides that the servicer 
may purchase the receivables remaining in the trust when the aggregate 
unpaid balance payable on the receivables is reduced to a specified 
percentage (usually 5 to 10 percent) of the initial aggregate unpaid 
balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to: (1) The unpaid 
principal balance on the receivable plus accrued interest, less any 
unreimbursed advances of principal made by the servicer; or (2) the 
greater of (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
certificates in the case of a trust that is not a REMIC.
Certificate Ratings
    18. The certificates will have received one of the three highest 
ratings available from either S&P's, Moody's, D&P or Fitch. Insurance 
or other credit support (such as surety bonds, letters of credit, 
guarantees, or the creation of a class of certificates with 
subordinated cash flow) will be obtained by the trust sponsor to the 
extent necessary for the certificates to attain the desired rating. The 
amount of this credit support is set by the rating agencies at a level 
that is a multiple of the worst historical net credit loss experience 
for the type of obligations included in the issuing trust.
Provision of Credit Support
    19. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) out of liquidation proceeds, (c) from the 
credit support provider (which may be itself) or, (d) in the case of a 
trust that issues subordinated certificates, from amounts otherwise 
distributable to holders of subordinated certificates, and the master 
servicer will advance such funds in a timely manner. When the servicer 
is the provider of the credit support and provides its own funds to 
cover defaulted payments, it will do so either on the initiative of the 
trustee, or on its own initiative on behalf of the trustee, but in 
either event it will provide such funds to cover payments to the full 
extent of its obligations under the credit support mechanism. In some 
cases, however, the master servicer may not be obligated to advance 
funds but instead would be called upon to provide funds to cover 
defaulted payments to the full extent of its obligations as insurer. 
However, a master servicer typically can recover advances either from 
the provider of credit support or from future payments on the affected 
assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to [[Page 27138]] enforce the 
certificateholders' rights, as both a party to the pooling and 
servicing agreement and the owner of the trust estate, including rights 
under the credit support mechanism. Therefore, the trustee, who is 
independent of the servicer, will have the ultimate right to enforce 
the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the servicer out of future payments on receivables held 
by the trust to the extent not covered by credit support. However, 
where the master servicer provides credit support to the trust, there 
are protections in place to guard against a delay in calling upon the 
credit support to take advantage of the fact that the credit support 
declines proportionally with the decrease in the principal amount of 
the obligations in the trust as payments on receivables are passed 
through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;
    (c) As frequently as payments are due on the receivables included 
in the trust (monthly, quarterly or semi-annually, as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all past-due payments 
and the amount of all servicer advances, along with other current 
information as to collections on the receivables and draws upon the 
credit support. Further, the master servicer is required to deliver to 
the trustee annually a certificate of an executive officer of the 
master servicer stating that a review of the servicing activities has 
been made under such officer's supervision, and either stating that the 
master servicer has fulfilled all of its obligations under the pooling 
and servicing agreement or, if the master servicer has defaulted under 
any of its obligations, specifying any such default. The master 
servicer's reports are reviewed at least annually by independent 
accountants to ensure that the master servicer is following its normal 
servicing standards and that the master servicer's reports conform to 
the master servicer's internal accounting records. The results of the 
independent accountants' review are delivered to the trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount thereafter is subject 
to reduction only for actual draws. From the time that the floor amount 
is effective until the end of the life of the trust, there are no 
proportionate reductions in the credit support amount caused by 
reductions in the pool principal balance. Indeed, since the floor is a 
fixed dollar amount, the amount of credit support ordinarily increases 
as a percentage of the pool principal balance during the period that 
the floor is in effect.
Disclosure
    20. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, and any material risk factors with 
respect to the certificates;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets and the trustee's remedy for any breach thereof; 
a description of the procedures for collection of payments on 
receivables and for making distributions to investors, and a 
description of the accounts into which such payments are deposited and 
from which such distributions are made; identification of the servicing 
compensation and any fees for credit enhancement that are deducted from 
payments on receivables before distributions are made to investors; a 
description of periodic statements provided to the trustee, and 
provided to or made available to investors by the trustee; and a 
description of the events that constitute events of default under the 
pooling and servicing contract and a description of the trustee's and 
the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors; and
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates.
    21. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    22. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many trusts obtain, by 
application to the Securities and Exchange Commission, 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 Securities and Exchange Commission's 
interpretation of the periodic reporting requirements is subject to 
change, periodic reports concerning a trust will be filed to the extent 
required under the Securities Exchange Act of 1934.
    23. At or about the time distributions are made to 
certificateholders, a report [[Page 27139]] will be delivered to the 
trustee as to the status of the trust and its assets, including 
underlying obligations. Such report will typically contain information 
regarding the trust's assets, payments received or collected by the 
servicer, the amount of prepayments, delinquencies, servicer advances, 
defaults and foreclosures, the amount of any payments made pursuant to 
any credit support, and the amount of compensation payable to the 
servicer. Such report also will be delivered to or made available to 
the rating agency or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the servicer, 
paying agent or trustee summarizing information regarding the trust and 
its assets. Such statement will include information regarding the trust 
and its assets, including underlying receivables. Such statement will 
typically contain information regarding payments and prepayments, 
delinquencies, the remaining amount of the guaranty or other credit 
support and a breakdown of payments between principal and interest.
Secondary Market Transactions
    24. It is Rothschild's normal policy to facilitate sales, 
including, without limitation, sales made in accordance with Rule 144A 
under the Securities Act of 1933, by investors who purchase 
certificates if Rothschild has acted as agent or principal in the 
original private placement of the certificates and if such investors 
request Rothschild's assistance. In the case of a trust that offers and 
sells certificates in a registered public offering, it is anticipated 
that Rothschild would generally attempt to make a market for securities 
for which it is lead or co-managing underwriter.

Discussion of Proposed Exemption

I. Differences Between Proposed Exemption and Class Exemption PTE 83-1
    The exemptive relief proposed herein is similar to that provided in 
PTE 81-7 [46 FR 7520, January 23, 1981], Class Exemption for Certain 
Transactions Involving Mortgage Pool Investment Trusts, amended and 
restated as PTE 83-1 [48 FR 895, January 7, 1983].
    PTE 83-1 applies to mortgage pool investment trusts consisting of 
interest-bearing obligations secured by first or second mortgages or 
deeds of trust on single-family residential property. The exemption 
provides relief from sections 406(a) and 407 for the sale, exchange or 
transfer in the initial issuance of mortgage pool certificates between 
the trust sponsor and a plan, when the sponsor, trustee or insurer of 
the trust is a party-in-interest with respect to the plan, and the 
continued holding of such certificates, provided that the conditions 
set forth in the exemption are met. PTE 83-1 also provides exemptive 
relief from section 406 (b)(1) and (b)(2) of the Act for the above-
described transactions when the sponsor, trustee or insurer of the 
trust is a fiduciary with respect to the plan assets invested in such 
certificates, provided that additional conditions set forth in the 
exemption are met. In particular, section 406(b) relief is conditioned 
upon the approval of the transaction by an independent fiduciary. 
Moreover, the total value of certificates purchased by a plan must not 
exceed 25 percent of the amount of the issue, and at least 50 percent 
of the aggregate amount of the issue must be acquired by persons 
independent of the trust sponsor, trustee or insurer. Finally, PTE 83-1 
provides conditional exemptive relief from section 406 (a) and (b) of 
the Act for transactions in connection with the servicing and operation 
of the mortgage trust.
    Under PTE 83-1, exemptive relief for the above transactions is 
conditioned upon the sponsor and the trustee of the mortgage trust 
maintaining a system for insuring or otherwise protecting the pooled 
mortgage loans and the property securing such loans, and for 
indemnifying certificateholders against reductions in pass-through 
payments due to defaults in loan payments or property damage. This 
system must provide such protection and indemnification up to an amount 
not less than the greater of one percent of the aggregate principal 
balance of all trust mortgages or the principal balance of the largest 
mortgage.
    The exemptive relief proposed herein differs from that provided by 
PTE 83-1 in the following major respects: (1) The proposed exemption 
provides individual exemptive relief rather than class relief; (2) The 
proposed exemption covers transactions involving trusts containing a 
broader range of assets than single-family residential mortgages; (3) 
Instead of requiring a system for insuring the pooled receivables, the 
proposed exemption conditions relief upon the certificates having 
received one of the three highest ratings available from S&P's, 
Moody's, D&P or Fitch (insurance or other credit support would be 
obtained only to the extent necessary for the certificates to attain 
the desired rating); and (4) The proposed exemption provides more 
limited section 406(b) and section 407 relief for sales transactions.
II. Ratings of Certificates
    After consideration of the representations of the applicant and 
information provided by S&P's, Moody's, D&P and Fitch, the Department 
has decided to condition exemptive relief upon the certificates having 
attained a rating in one of the three highest generic rating categories 
from S&P's, Moody's, D&P or Fitch. The Department believes that the 
rating condition will permit the applicant flexibility in structuring 
trusts containing a variety of mortgages and other receivables while 
ensuring that the interests of plans investing in certificates are 
protected. The Department also believes that the ratings are indicative 
of the relative safety of investments in trusts containing secured 
receivables. The Department is conditioning the proposed exemptive 
relief upon each particular type of asset-backed security having been 
rated in one of the three highest rating categories for at least one 
year and having been sold to investors other than plans for at least 
one year.<SUP>16

    \16\ In referring to different ``types'' of asset-backed 
securities, the Department means certificates representing interests 
in trusts containing different ``types'' of receivables, such as 
single family residential mortgages, multi-family residential 
mortgages, commercial mortgages, home equity loans, auto loan 
receivables, installment obligations for consumer durables secured 
by purchase money security interests, etc. The Department intends 
this condition to require that certificates in which a plan invests 
are of the type that have been rated (in one of the three highest 
generic rating categories by S&P's, D&P, Fitch or Moody's) and 
purchased by investors other than plans for at least one year prior 
to the plan's investment pursuant to the proposed exemption. In this 
regard, the Department does not intend to require that the 
particular assets contained in a trust must have been ``seasoned'' 
(e.g., originated at least one year prior to the plan's investment 
in the trust).
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III. Limited Section 406(b) and Section 407(a) Relief for Sales
    Rothschild represents that in some cases a trust sponsor, trustee, 
servicer, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates may be a pre-existing party 
in interest with respect to an investing plan.<SUP>17 In these cases, a 
direct or indirect sale of certificates by that party in interest to 
the plan would be a prohibited sale or exchange of property under 
section 406(a)(1)(A) of [[Page 27140]] the Act.<SUP>18 Likewise, issues 
are raised under section 406(a)(1)(D) of the Act where a plan fiduciary 
causes a plan to purchase certificates where trust funds will be used 
to benefit a party in interest.

    \17\ In this regard, we note that the exemptive relief proposed 
herein is limited to certificates with respect to which Rothschild 
or any of its affiliates is either (a) the sole underwriter or 
manager or co-manager of the underwriting syndicate, or (b) a 
selling or placement agent.
    \18\ The applicant represents that where a trust sponsor is an 
affiliate of Rothschild, sales to plans by the sponsor may be exempt 
under PTE 75-1, Part II (relating to purchases and sales of 
securities by broker-dealers and their affiliates), if Rothschild is 
not a fiduciary with respect to plan assets to be invested in 
certificates.
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    Additionally, Rothschild represents that a trust sponsor, servicer, 
trustee, insurer, and obligor with respect to receivables contained in 
a trust, or an underwriter of certificates representing an interest in 
a trust may be a fiduciary with respect to an investing plan. 
Rothschild represents that the exercise of fiduciary authority by any 
of these parties to cause the plan to invest in certificates 
representing an interest in the trust would violate section 406(b)(1), 
and in some cases section 406(b)(2), of the Act.
    Moreover, Rothschild represents that to the extent there is a plan 
asset ``look through'' to the underlying assets of a trust, the 
investment in certificates by a plan covering employees of an obligor 
under receivables contained in a trust may be prohibited by sections 
406(a) and 407(a) of the Act.
    After consideration of the issues involved, the Department has 
determined to provide the limited sections 406(b) and 407(a) relief as 
specified in the proposed exemption.

NOTICE TO INTERESTED PERSONS: The applicant represents that because 
those potentially interested participants and beneficiaries cannot all 
be identified, the only practical means of notifying such participants 
and beneficiaries of this proposed exemption is by the publication of 
this notice in the Federal Register. Comments and requests for a 
hearing must be received by the Department not later than 30 days from 
the date of publication of this notice of proposed exemption in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz 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 that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

Signed at Washington, DC, this 17th day of May, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 95-12502 Filed 5-19-95; 8:45 am]
BILLING CODE 4510-29-P