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Friday,

August 15, 2003

Part IV

Department of Labor
Employee Benefits Security
Administration

Proposed Exemptions; Liberty Media


401(k) Savings Plan (the Plan); Notice

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49302 Federal Register / Vol. 68, No. 158 / Friday, August 15, 2003 / Notices

DEPARTMENT OF LABOR Notice to Interested Persons (a) The Rights were acquired pursuant
Notice of the proposed exemptions to Plan provisions for individually-
Employee Benefits Security will be provided to all interested directed investment of such accounts;
Administration (b) The Plan’s receipt of the Rights
persons in the manner agreed upon by
occurred in connection with the Rights
[Application No. D–11170, et al.]
the applicant and the Department
offering made available to all
within 15 days of the date of publication
shareholders of common stock of LMC;
Proposed Exemptions; Liberty Media in the Federal Register. Such notice (c) All decisions regarding the holding
401(k) Savings Plan (the Plan) shall include a copy of the notice of and disposition of the Rights by the Plan
proposed exemption as published in the were made, in accordance with the Plan
AGENCY: Employee Benefits Security Federal Register and shall inform
Administration, Labor. provisions for individually-directed
interested persons of their right to investment of participant accounts, by
ACTION: Notice of Proposed Exemptions. comment and to request a hearing the individual Plan participants whose
(where appropriate). accounts in the Plan received the Rights
SUMMARY: This document contains
SUPPLEMENTARY INFORMATION: The in connection with the offering;
notices of pendency before the proposed exemptions were requested in
Department of Labor (the Department) of (d) The Plan’s acquisition of the
applications filed pursuant to section Rights resulted from an independent act
proposed exemptions from certain of the 408(a) of the Act and/or section
prohibited transaction restrictions of the of LMC as a corporate entity, and all
4975(c)(2) of the Code, and in holders of the Rights, including the
Employee Retirement Income Security accordance with procedures set forth in
Act of 1974 (the Act) and/or the Internal Plan, were treated in the same manner
29 CFR part 2570, subpart B (55 FR with respect to the acquisition; and
Revenue Code of 1986 (the Code). 32836, 32847, August 10, 1990). (e) The Plan received the same
Written Comments and Hearing Effective December 31, 1978, section proportionate number of the Rights as
Requests 102 of Reorganization Plan No. 4 of other owners of Liberty Media Series A
1978, 5 U.S.C. App. 1 (1996), transferred and Series B common stock (the Stock).
All interested persons are invited to
the authority of the Secretary of the This exemption, if granted, will be
submit written comments or requests for
Treasury to issue exemptions of the type effective as of November 25, 2002.
a hearing on the pending exemptions,
requested to the Secretary of Labor.
unless otherwise stated in the Notice of Summary of Facts and Representations
Therefore, these notices of proposed
Proposed Exemption, within 45 days 1. The Plan is a defined contribution
exemption are issued solely by the
from the date of publication of this plan that is intended to satisfy the
Department.
Federal Register Notice. Comments and requirements of Code Sections 401(a)
The applications contain
requests for a hearing should state: (1) and 401(k). As of December 31, 2001,
representations with regard to the
The name, address, and telephone the Plan had approximately 3,466
proposed exemptions which are
number of the person making the participants and total assets of
summarized below. Interested persons
comment or request, and (2) the nature $104,044,000. The shares of LMC
are referred to the applications on file
of the person’s interest in the exemption common stock held by the Plan were
with the Department for a complete
and the manner in which the person valued at $46,265,000 as of December
statement of the facts and
would be adversely affected by the 31, 2001, and comprised approximately
representations.
exemption. A request for a hearing must Liberty Media 401(k) Savings Plan (the 44.8% percent of the total assets in the
also state the issues to be addressed and Plan) Plan.
include a general description of the Located in Englewood, Colorado The Plan permits participants to
evidence to be presented at the hearing. [Application No. D–11170]. contribute a portion of their respective
ADDRESSES: All written comments and annual compensation to the Plan as a
requests for a hearing (at least three Proposed Exemption salary reduction contribution under
copies) should be sent to the Employee The Department is considering Code Section 401(k). LMC makes a
Benefits Security Administration granting an exemption under the matching contribution to the Plan,
(EBSA), Office of Exemption authority of section 408(a) of the Act which differs for different groups of
Determinations, Room N–5649, U.S. and section 4975(c)(2) of the Code and employees. Participant salary reduction
Department of Labor, 200 Constitution in accordance with the procedures set contributions are immediately 100%
Avenue, NW., Washington, DC 20210. forth in 29 CFR part 2570, subpart B (55 vested. The matching contributions are
Attention: Application No. lll, FR 32836, August 10, 1990). If the vested according to a schedule based on
stated in each Notice of Proposed exemption is granted, the restrictions of the years of service each participant has
Exemption. Interested persons are also sections 406(a), 406(b)(1) and (b)(2) and completed. The stock received from
invited to submit comments and/or 407(a) of the Act and the sanctions exercising the Rights will be vested
hearing requests to EBSA via e-mail or resulting from the application of section according to the Plan vesting schedule.
FAX. Any such comments or requests 4975 of the Code, by reason of section 2. The trustee of the Plan is Fidelity
should be sent either by e-mail to: 4975(c)(1)(A) through (E) of the Code, Management Trust Company (the
‘‘moffitt.betty@dol.gov’’, or by FAX to shall not apply, effective November 25, Trustee). The Trustee acts as the
(202) 219–0204 by the end of the 2002, to (1) The acquisition of certain custodian of Plan assets, holding legal
scheduled comment period. The stock rights (the Rights) by the Plan in title to the assets, and executing
applications for exemption and the connection with a Rights offering by investment directions in accordance
comments received will be available for Liberty Media Corporation (LMC), a with the participants’ written
public inspection in the Public party in interest with respect to the instructions. The Plan Administrative
Documents Room of the Employee Plan; (2) the holding of the Rights by the Committee is the fiduciary responsible
Benefits Security Administration, U.S. Plan during the subscription period of for Plan matters. The Plan allows
Department of Labor, Room N–1513, the offering; and (3) the exercise of the participants to direct investments of
200 Constitution Avenue, NW., Rights by the Plan, provided that the their 401(k) contributions into one of 18
Washington, DC 20210. following conditions were met: investment categories, including the

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Federal Register / Vol. 68, No. 158 / Friday, August 15, 2003 / Notices 49303

Liberty Media Common Stock Fund. credited to these Rule 16(b) participant For any Rights sold by the Plan, a
Matching contributions always are accounts as soon as administratively commission of 3.4 cents per Right was
invested in the Liberty Media Common feasible after the receipt and allocation charged to the Plan account from which
Stock Fund. of the Rights to the participant the Right was sold. The commission was
LMC owns interests in a broad range accounts.1 not paid to LMC but to the broker
of video programming, broadband 4. With the exception of those dealer, National Financial Services
distribution, interactive technology reporting persons under Rule 16(b) as (NFS) for the sale transaction. NFS is an
services and communications described above, each participant in the affiliate of Fidelity Management Trust
businesses. LMC and its affiliated Plan may elect to exercise any Company, which serves as a non-
companies operate in the United States, percentage of the Rights granted on the discretionary Trustee for the Plan. The
Europe, South America, and Asia. participant’s Stock allocated to the discretionary fiduciary for the Plan is
3. LMC announced a special rights participant’s account in the Plan. Under the Plan Administrative Committee
offering. Holders of record of the Stock the offering, a participant of the Plan appointed by the Board of Directors of
on October 31, 2002 (the Record Date), could elect to exercise a Right by LMC. The Administrative Committee
each received 0.04 of a transferable speaking to a Fidelity representative at determined, after reasonable
subscription Right for each share of any time prior to 4 p.m. Eastern Time, consideration of the alternatives, that
Series A and Series B common stock November 25, 2002, (the Election Close- the use of NFS was in the best interests
held. Each whole Right entitled the Out Date). Participants had the of the Plan.2
holder to purchase one share of Series opportunity prior to the Election Close- Those participants who elected to
A common stock at a subscription price Out Date to revoke or change exercise only a portion of their Rights
determined by a special pricing instructions to exercise by (1) electing a later could elect to exercise additional
committee of LMC’s board of directors, new percentage; (2) by placing an order Rights if sufficient time existed prior to
which was determined to be $6.00 per to sell; or (3) a combination of both. the Election Close-Out Date. The
share. The dollar amount required to Election Close-Out Date was established
LMC stock is traded on the New York exercise the Rights were exchanged to permit sufficient time for the Trustee
Stock Exchange. Series A common stock from other investments in the to liquidate the other assets in an
is traded under the symbol L and Series participant’s account into the orderly manner so that the necessary
B common stock is traded under the Receivable Fund established under the cash would be available to exercise the
symbol LMC.B. Rights Trust. The required dollar Rights before the Rights offering
The Plan was a holder of record of the amount equals the percentage of Rights expiration date (December 2, 2002). All
Stock on the Record Date. The Plan to be exercised (as elected by the Rights were exercised or sold prior to
established two temporary investment participant) multiplied by the number of the end of the Rights offering period, no
funds under a separate trust called the Rights credited to the participant’s Rights held by the Plan expired. A
‘‘Liberty Media Rights Trust’’ (the Rights account and multiplied by the exercise participant may have elected to sell
Trust). The Rights Holding Fund is a price for the Rights offering. The dollar rather than exercise the Rights allocated
separate fund established under the amount was exchanged from the other to his or her account. In order to do so,
Rights Trust to hold the Rights when investment categories in which the the participant was required to (1)
they are issued. Rights were credited to account is invested on a proportional contact the Fidelity representative; and
participants’ accounts based on their basis by source. The Liberty Media (2) specify the percentage (in whole
respective balances in the Liberty Media Stock Fund was not included unless amounts) of the Rights he desired to
Common Stock Fund on October 31, insufficient funds did not exist in the sell. The selling period for participants
2002. The second fund, the ‘‘Liberty other investment categories under the ran from November 8, 2002, through
Media Receivable Fund’’ (the Receivable participant’s account. For those November 25, 2002.
Fund), following the exercise of Rights individuals with insufficient funds to Participants in the Plan will be in a
as directed by the Plan participants, permit exercise of the entire elected like position with other shareholders
reflected the approximate value of the amount, Fidelity exercised as many who are receiving the Rights with the
Liberty Media Series A shares due from rights as the account balance permitted. sole exception that the Plan participants
the subscription agent. On or about November 29, 2002, the were not entitled to participate in the
With respect to Rights allocated to Rights to be exercised and necessary oversubscription privilege described in
their accounts, Plan participants either funds were submitted to the the prospectus. No expense will be
may elect to (1) exercise the Rights or (2) subscription agent for the purchase of incurred by the Plan from the Rights
sell the Rights. These elections apply to shares. Participant’s balances in the offering, and full disclosure of the
both Stock held in the participant’s Rights Holding Fund were reduced by Rights offering was made in the public
account attributable to 401(k) the number of Rights exercised on a documents filed with the SEC. The
contributions and to matching participant’s behalf. Fidelity sold all Rights offering and the resulting
contributions (including vested and remaining Rights on the open market transactions were in the best interests of
unvested matching contributions). Due between November 29, 2002, and and beneficial to the Plan and its
to securities law restrictions, certain December 2, 2002, at which time the participants and beneficiaries. The
Participants who are reporting persons Rights expired. Upon receipt of the new rights of the participants and
under Rule 16(b) will not have the right shares, the Receivable Fund was closed beneficiaries of the Plan were protected
to instruct Fidelity to either Sell or and the newly received shares were
in the Rights offering and subsequent
Exercise the Rights credited to their transferred into the Liberty Media Stock
transactions. All involved participants
account. Liberty Media provided Fund and allocated to the participant’s
were notified in advance of the Rights
Fidelity with a list of those Participants. accounts.
offering of the procedure for instructing
Fidelity established the appropriate the Trustee of the participant’s desires
restrictions to prevent these participants 1 The Rights issued to the Plan that were sold

from exercising or selling the Rights from the Plan were sold to unrelated third parties
on the open market. Those Rights were traded on 2 The Department provides no opinion as to
credited to their accounts. As provided the New York Stock Exchange under the symbol whether the selection of the broker dealer meets the
by the Plan, Fidelity sold the Rights ‘‘LMC.RT’’. conditions set forth under section 408(b)(2).

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49304 Federal Register / Vol. 68, No. 158 / Friday, August 15, 2003 / Notices

for exercise or sale under the Rights and section 4975 of the Code, in receivables contained in the Issuer, or
offering, and all instructions given by accordance with the procedures set (b) an affiliate or a person described in
the involved participants to the Trustee forth in 29 CFR part 2570, subpart B (55 (a); if (i) The plan is not an Excluded
were properly executed. FR 32836, 32847, August 10, 1990). Plan;
All actions by the Trustee with (ii) Solely in the case of an acquisition
I. Transactions of Securities in connection with the
respect to the Rights offering were made
pursuant to express instructions except A. Effective for transactions occurring initial issuance of the Securities, at least
when the involved participant failed to on or after April 18, 2003, the 50 percent of each class of Securities in
act or acted in violation of the published restrictions of section 406(a) and 407(a) which plans have invested is acquired
procedures, in which case the Rights of the Employee Retirement Income by persons independent of the members
were placed on the open market for sale Security Act of 1974, as amended (the of the Restricted Group, and at least 50
and any unsold rights were allowed to Act), and the taxes imposed by section percent of the aggregate interest in the
expire unexercised. These instructions 4975(a) and (b) of the Internal Revenue Issuer is acquired by persons
as to the disposition of the Rights upon Code of 1986, as amended (the Code), by independent of the Restricted Group;
the failure of the involved participant to reason of section 4975(c)(1)(A) through (iii) A plan’s investment in each class
act or to give valid instructions were (D) of the Code, shall not apply to the of Securities does not exceed 25 percent
fully disclosed in the procedural following transactions involving Issuers of all of the Securities of that class
instructions given to the involved and Securities evidencing interests outstanding at the time of the
participants. These instructions are therein: acquisition; and
consistent with the nature of (1) The direct or indirect sale, (iv) Immediately after the acquisition
participant-directed investments under exchange or transfer of Securities in the of the Securities, no more than 25
the Plan. initial issuance of Securities between percent of the assets of a plan with
5. In summary, it is represented that the Sponsor or Underwriter and an respect to which the person has
the proposed transaction meets the employee benefit plan when the discretionary authority or renders
Sponsor, Servicer, Trustee or Insurer of investment advice are invested in
statutory criteria of section 408(a) of the
an Issuer, the Underwriter of the Securities representing an interest in a
Act because:
Securities representing an interest in the Issuer containing assets sold or serviced
(a) The Rights were acquired pursuant
Issuer, or an Obligor is a party in by the same entity.4 For purposes of this
to Plan provisions for individually-
interest with respect to such plan; paragraph B.(1)(iv) only, an entity will
directed investment of such accounts; (2) The direct or indirect acquisition not be considered to service assets
(b) The Plan’s receipt of the Rights or disposition of Securities by a plan in contained in an Issuer if it is merely a
occurred in connection with the Rights the secondary market for such Subservicer of that Issuer;
offering made available to all Securities; and (2) The direct or indirect acquisition
shareholders of common stock of LMC; (3) The continued holding of or disposition of Securities by a plan in
(c) All decisions regarding the holding Securities acquired by a plan pursuant the secondary market for such
and disposition of the Rights by the Plan to subsection I.A.(1) or (2). Securities, provided that conditions set
were made, in accordance with the Plan Notwithstanding the foregoing, forth in paragraphs B.(1)(i), (iii) and (iv)
provisions for individually-directed section I.A. does not provide an are met; and
investment of participant accounts, by exemption from the restrictions of (3) The continued holding of
the individual Plan participants whose sections 406(a)(1)(E), 406(a)(2) and 407 Securities acquired by a plan pursuant
accounts in the Plan received the Rights of the Act for the acquisition or holding to subsection I.B.(1) or (2).
in connection with the offering; of a Security on behalf of an Excluded C. Effective for transactions occurring
(d) The Plan’s acquisition of the Plan, by any person who has on or after April 18, 2003, the
Rights resulted from an independent act discretionary authority or renders restrictions of sections 406(a), 406(b)
of LMC as a corporate entity; and investment advice with respect to the and 407(a) of the Act and the taxes
(e) The Plan received the same assets of that Excluded Plan.3 imposed by section 4975(a) and (b) of
proportionate number of the Rights as B. Effective for transactions occurring the Code by reason of section 4975(c) of
other owners of the Stock. on or after April 18, 2003, the the Code, shall not apply to transactions
Notice to Interested Persons: Notice of restrictions of sections 406(b)(1) and in connection with the servicing,
the proposed exemption shall be given 406(b)(2) of the Act and the taxes management and operation of an Issuer,
to all interested persons in the manner imposed by section 4975(a) and (b) of including the use of any Eligible Swap
agreed upon by the Employer and the Code by reason of section transaction; or the defeasance of a
Department within 15 days of the date 4975(c)(1)(E) of the Code shall not apply mortgage obligation held as an asset of
of publication in the Federal Register. to: the Issuer through the substitution of a
Comments and requests for a hearing are (1) The direct or indirect sale, new mortgage obligation in a
due forty-five (45) days after publication exchange or transfer of Securities in the commercial mortgage-backed
of the notice in the Federal Register. initial issuance of Securities between Designated Transaction, provided:
FOR FURTHER INFORMATION CONTACT: the Sponsor or Underwriter and a plan (1) Such transactions are carried out
Khalif Ford of the Department, when the person who has discretionary in accordance with the terms of a
telephone (202) 219–8883 (this is not a authority or renders investment advice binding Pooling and Servicing
toll-free number). with respect to the investment of plan Agreement;
RBC Dain Rauscher, Inc. (RBC–DR) assets in the Securities is (a) an obligor
4 For purposes of this exemption, each plan
Located in Minneapolis, Minnesota with respect to 5 percent or less of the
participating in a commingled fund (such as a bank
[Application No. D–11189] fair market value of obligations or collective trust fund or insurance company pooled
separate account) shall be considered to own the
Proposed Exemption 3 Section I.A. provides no relief from sections same proportionate undivided interest in each asset
406(a)(1)(E), 406(a)(2) and 407 of the Act for any of the commingled fund as its proportionate interest
The Department is considering person rendering investment advice to an Excluded in the total assets of the commingled fund as
granting an exemption under the Plan within the meaning of section 3(21)(A)(ii) and calculated on the most recent preceding valuation
authority of section 408(a) of the Act, regulation 29 CFR 2510.3–21(c). date of the fund.

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(2) The Pooling and Servicing plan as such terms would be in an reasonable expenses in connection
Agreement is provided to, or described arm’s-length transaction with an therewith;
in all material respects in the prospectus unrelated party; (6) The plan investing in such
or private placement memorandum (2) The rights and interests evidenced Securities is an ‘‘accredited investor’’ as
provided to, investing plans before they by the Securities are not subordinated to defined in Rule 501(a)(1) of Regulation
purchase Securities issued by the the rights and interests evidenced by D of the Securities and Exchange
Issuer; 5 and other Securities of the same Issuer, Commission (SEC) under the Securities
(3) The defeasance of a mortgage unless the Securities are issued in a Act of 1933; and
obligation and the substitution of a new Designated Transaction; (7) In the event that the obligations
mortgage obligation in a commercial (3) The Securities acquired by the used to fund an Issuer have not all been
mortgage-backed Designated plan have received a rating from Rating transferred to the Issuer on the Closing
Transaction meet the terms and Agency at the time of such acquisition Date, additional obligations as specified
conditions for such defeasance and that is in one of the three (or in the case in subsection III.B.(1) may be transferred
substitution as are described in the of Designated Transactions, four) to the Issuer during the Pre-Funding
prospectus or private placement highest generic rating categories. Period in exchange for amounts credited
memorandum for such Securities, (4) The Trustee is not an Affiliate of to the Pre-Funding Account, provided
which terms and conditions have been any member of the Restricted Group, that:
approved by a Rating Agency and does other than an Underwriter. For purposes (a) The Pre-Funding Limit is not
not result in the Securities receiving a of this requirement: exceeded;
(a) The Trustee shall not be (b) All such additional obligations
lower credit rating from the Rating
considered to be an Affiliate of a meet the same terms and conditions for
Agency than the current rating of the
Servicer solely because the Trustee has eligibility as the original obligations
Securities.
succeeded to the rights and used to create the Issuer (as described in
Notwithstanding the foregoing,
responsibilities of the Servicer pursuant the prospectus or private placement
section I.C. does not provide an
to the terms of a Pooling and Servicing memorandum and/or Pooling and
exemption from the restrictions of
Agreement providing for such Servicing Agreement for such
section 406(b) of the Act or from the
succession upon the occurrence of one Securities), which terms and conditions
taxes imposed by reason of section
or more events of default by the have been approved by a Rating Agency.
4975(c) of the Code for the receipt of a Notwithstanding the foregoing, the
Servicer; and
fee by the Servicer of the Issuer from a (b) Subsection II.A.(4) will be deemed terms and conditions for determining
person other than the Trustee or satisfied notwithstanding a Servicer the eligibility of an obligation may be
Sponsor, unless such fee constitutes a becoming an Affiliate of the Trustee as changed if such changes receive prior
‘‘Qualified Administrative Fee.’’ a result of a merger or acquisition approval either by a majority vote of the
D. Effective for transactions occurring involving the Trustee, such Servicer outstanding securityholders or by a
on or after April 18, 2003, the and/or their Affiliates which occurs Rating Agency;
restrictions of sections 406(a) and 407(a) after the initial issuance of the (c) The transfer of such additional
of the Act, and the taxes imposed by Securities provided that: obligations to the Issuer during the Pre-
sections 4975(a) and (b) of the Code by (i) Such Servicer ceases to be an Funding Period does not result in the
reason of sections 4975(c)(1)(A) through Affiliate of the Trustee no later than six Securities receiving a lower credit rating
(D) of the Code shall not apply to any months after the date such Servicer from a Rating Agency, upon termination
transactions to which those restrictions became an Affiliate of the Trustee; and of the Pre-Funding Period than the
or taxes would otherwise apply merely (ii) Such Servicer did not breach any rating that was obtained at the time of
because a person is deemed to be a party of its obligations under the Pooling and the initial issuance of the Securities by
in interest or disqualified person Servicing Agreement, unless such the Issuer;
(including a fiduciary) with respect to a breach was immaterial and timely cured (d) The weighted average annual
plan by virtue of providing services to in accordance with the terms of such percentage interest rate (the average
the plan (or by virtue of having a agreement, during the period from the interest rate) for all of the obligations in
relationship to such service provider closing date of such merger or the Issuer at the end of the Pre-Funding
described in section 3(14)(F), (G), (H) or acquisition transaction through the date Period will not be more than 100 basis
(I) of the Act or section 4975(e)(2)(F), the Servicer ceased to be an Affiliate of points lower than the average interest
(G), (H) or (I) of the Code), solely the Trustee; rate for the obligations which were
because of the plan’s ownership of (5) The sum of all payments made to transferred to the Issuer on the Closing
Securities. and retained by the Underwriters in Date;
II. General Conditions connection with the distribution or (e) In order to ensure that the
placement of Securities represents not characteristics of the receivables
A. The relief provided under section more than Reasonable Compensation for actually acquired during the Pre-
I is available only if the following underwriting or placing the Securities; Funding Period are substantially similar
conditions are met: the sum of all payments made to and to those which were acquired as of the
(1) The acquisition of Securities by a retained by the Sponsor pursuant to the Closing Date, the characteristics of the
plan is on terms (including the Security assignment of obligations (or interests additional obligations will either be
price) that are at least as favorable to the therein) to the Issuer represents not monitored by a credit support provider
5 In the case of a private placement memorandum,
more than the fair market value of such or other insurance provider which is
such memorandum must contain substantially the
obligations (or interests); and the sum of independent of the Sponsor or an
same information that would be disclosed in a all payments made to and retained by independent accountant retained by the
prospectus if the offering of the Securities were the Servicer represents not more than Sponsor will provide the Sponsor with
made in a registered public offering under the Reasonable Compensation for the a letter (with copies provided to the
Securities Act of 1933. In the Department’s view,
the private placement memorandum must contain
Servicer’s services under the Pooling Rating Agency, the Underwriter and the
sufficient information to permit plan fiduciaries to and Servicing Agreement and Trustee) stating whether or not the
make informed investment decisions. reimbursement of the Servicer’s characteristics of the additional

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obligations conform to the until after the Securities have been paid; within a specified period after such
characteristics of such obligations and rating withdrawal or reduction:
described in the prospectus, private (c) Prior to the issuance by the Issuer (i) Obtain a replacement swap
placement memorandum and/or Pooling of any Securities, a legal opinion is agreement with an Eligible Swap
and Servicing Agreement. In preparing received which states that either: Counterparty, the terms of which are
such letter, the independent accountant (i) A ‘‘true sale’’ of the assets being substantially the same as the current
will use the same type of procedures as transferred to the Issuer by the Sponsor swap agreement (at which time the
were applicable to the obligations which has occurred and that such transfer is earlier swap agreement shall terminate);
were transferred on the Closing Date; not being made pursuant to a financing or
(f) The Pre-Funding Period shall be of the assets by the Sponsor; or (ii) Cause the swap counterparty to
described in the prospectus or private (ii) In the event of insolvency or post collateral with the Trustee in an
placement memorandum provided to receivership of the Sponsor, the assets amount equal to all payments owed by
investing plans; and transferred to the Issuer will not be part the counterparty if the swap transaction
(g) The Trustee of the Trust (or any of the estate of the Sponsor; were terminated; or
agent with which the Trustee contracts (9) If a particular class of Securities (iii) Terminate the swap agreement in
to provide Trust services) will be a held by any plan involves a Ratings accordance with its terms; and
substantial financial institution or trust Dependent or Non-Ratings Dependent (e) Shall not require the Issuer to
company experienced in trust activities Swap entered into by the Issuer, then make any termination payments to the
and familiar with its duties, each particular swap transaction counterparty (other than a currently
responsibilities, and liabilities as a relating to such Securities: scheduled payment under the swap
fiduciary under the Act. The Trustee, as (a) Shall be an Eligible Swap; agreement) except from Excess Spread
(b) Shall be with an Eligible Swap or other amounts that would otherwise
the legal owner of the obligations in the
Counterparty; be payable to the Servicer or the
Trust or the holder of a security interest (c) In the case of a Ratings Dependent
in the obligations held by the Issuer, Sponsor;
Swap, shall provide that if the credit (10) Any class of Securities, to which
will enforce all the rights created in rating of the counterparty is withdrawn one or more swap agreements entered
favor of securityholders of such Issuer, or reduced by any Rating Agency below into by the Issuer applies, may be
including employee benefit plans a level specified by the Rating Agency, acquired or held in reliance upon this
subject to the Act; the Servicer (as agent for the Trustee) Underwriter Exemption only by
(8) In order to insure that the assets shall, within the period specified under Qualified Plan Investors; and
of the Issuer may not be reached by the Pooling and Servicing Agreement: (11) Prior to the issuance of any debt
creditors of the Sponsor in the event of (i) Obtain a replacement swap securities, a legal opinion is received
bankruptcy or other insolvency of the agreement with an Eligible Swap which states that the debt holders have
Sponsor: Counterparty which is acceptable to the a perfected security interest in the
(a) The legal documents establishing Rating Agency and the terms of which Issuer’s assets.
the Issuer will contain: are substantially the same as the current B. Neither any Underwriter, Sponsor,
(i) Restrictions on the Issuer’s ability swap agreement (at which time the Trustee, Servicer, Insurer, nor any
to borrow money or issue debt other earlier swap agreement shall terminate); Obligor, unless it or any of its Affiliates
than in connection with the or has discretionary authority or renders
securitization; (ii) Cause the swap counterparty to investment advice with respect to the
(ii) Restrictions on the Issuer merging establish any collateralization or other plan assets used by a plan to acquire
with another entity, reorganizing, arrangement satisfactory to the Rating Securities, shall be denied the relief
liquidating or selling assets (other than Agency such that the then current rating provided under Part I, if the provision
in connection with the securitization); by the Rating Agency of the particular in subsection II.A.(6) above is not
(iii) Restrictions limiting the class of Securities will not be satisfied with respect to acquisition or
authorized activities of the Issuer to withdrawn or reduced. holding by a plan of such Securities,
activities relating to the securitization; In the event that the Servicer fails to provided that (1) such condition is
(iv) If the Issuer is not a Trust, meet its obligations under this disclosed in the prospectus or private
provisions for the election of at least one subsection II.A.(9)(c), plan placement memorandum; and (2) in the
independent director/partner/member securityholders will be notified in the case of a private placement of
whose affirmative consent is required immediately following Trustee’s Securities, the Trustee obtains a
before a voluntary bankruptcy petition periodic report which is provided to representation of each initial purchaser
can be filed by the Issuer; and securityholders, and sixty days after the which is a plan that it is in compliance
(v) If the Issuer is not a Trust, receipt of such report, the exemptive with such condition, and obtains a
requirements that each independent relief provided under section I.C. will covenant from each initial purchaser to
director/partner/member must be an prospectively cease to be applicable to the effect that, so long as such initial
individual that does not have a any class of Securities held by a plan purchaser (or any transferee of such
significant interest in, or other which involves such Ratings Dependent initial purchaser’s Securities) is
relationships with, the Sponsor or any Swap; provided that in no event will required to obtain from its transferee a
of its Affiliates; such plan securityholders be notified representation regarding compliance
(b) The Pooling and Servicing any later than the end of the second with the Securities Act of 1933, any
Agreement and/or other agreements month that begins after the date on such transferees will be required to
establishing the contractual which such failure occurs. make a written representation regarding
relationships between the parties to the (d) In the case of a Non-Ratings compliance with the condition set forth
securitization transaction will contain Dependent Swap, shall provide that, if in section II.A.(6).
covenants prohibiting all parties thereto the credit rating of the counterparty is
from filing an involuntary bankruptcy withdrawn or reduced below the lowest III. Definitions
petition against the Issuer or initiating level specified in section III.GG., the For purposes of this proposed
any other form of insolvency proceeding Servicer (as agent for the Trustee) shall exemption:

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A. ‘‘Security’’ means: (f) Fractional undivided interests in (ii) Are credited to a Capitalized
(1) A pass-through certificate or trust any of the obligations described in Interest Account; and
certificate that represents a beneficial clauses (a)–(e) of this subsection B.(1);7 (iii) Are held by the Issuer for a period
ownership interest in the assets of an Notwithstanding the foregoing, ending no later than the first
Issuer which is a Trust and which residential and home equity loan distribution date to securityholders
entitles the holder to pass-through receivables issued in Designated occurring after the end of the Pre-
payments of principal, interest, and/or Transactions may be less than fully Funding Period.
other payments made with respect to secured, provided that (i) the rights and For purposes of this clause (c) of
the assets of such Trust; or interests evidenced by the Securities subsection III.B.(3), the term ‘‘permitted
issued in such Designated Transactions investments’’ means investments which
(2) A Security which is denominated are not subordinated to the rights and are either (i) Direct obligations of, or
as a debt instrument that is issued by interests evidenced by Securities of the obligations fully guaranteed as to timely
and is an obligation of an Issuer; with same Issuer; (ii) such Securities payment of principal and interest by,
respect to which the Underwriter is acquired by the plan have received a the United States or any agency or
either (i) the sole underwriter or the rating from a Rating Agency at the time instrumentality thereof, provided that
manager or co-manager of the of such acquisition that is in one of the such obligations are backed by the full
underwriting syndicate, or (ii) a selling two highest generic rating categories; faith and credit of the United States, or
or placement agent. and (iii) any obligation included in the (ii) have been rated (or the Obligor has
B. ‘‘Issuer’’ means an investment pool, corpus or assets of the Issuer must be been rated) in one of the three highest
the corpus or assets of which are held secured by collateral whose fair market generic rating categories by a Rating
in trust (including a grantor or owner value on the Closing Date of the Agency; are described in the Pooling
Trust) or whose assets are held by a Designated Transaction is at least equal and Servicing Agreement; and are
partnership, special purpose to 80% of the sum of: (I) The permitted by the Rating Agency.
corporation or limited liability company outstanding principal balance due (4) Rights of the Trustee under the
(which Issuer may be a Real Estate under the obligation which is held by Pooling and Servicing Agreement, and
Mortgage Investment Conduit (REMIC) the Issuer and (II) the outstanding rights under any insurance policies,
or a Financial Asset Securitization principal balance(s) of any other third-party guarantees, contracts of
Investment Trust (FASIT) within the obligation(s) of higher priority (whether suretyship, Eligible Yield Supplement
meaning of section 860D(a) or section or not held by the Issuer) which are Agreements, Eligible Swap Agreements
860L, respectively, of the Code); and the secured by the same collateral. meeting the conditions of subsection
corpus or assets of which consist solely (2) Property which had secured any of II.A.(9) or other credit support
of: the obligations described in subsection arrangements with respect to any
(1)(a) Secured consumer receivables III.B.(1); obligations described in section III.B.(1).
that bear interest or are purchased at a (3)(a) Undistributed cash or temporary Notwithstanding the foregoing, the
discount (including, but not limited to, investments made therewith maturing term ‘‘Issuer’’ does not include any
home equity loans and obligations no later than the next date on which investment pool unless: (i) The assets of
secured by shares issued by a distributions are to be made to the type described in paragraphs (a)–(f)
cooperative housing association); and/or securityholders; and/or of subsection III.B.(1) which are
(b) Secured credit instruments that (b) Cash or investments made contained in the investment pool have
bear interest or are purchased at a therewith which are credited to an been included in other investment
discount in transactions by or between account to provide payments to pools, (ii) Securities evidencing
business entities (including, but not securityholders pursuant to any Eligible interests in such other investment pools
limited to, Qualified Equipment Notes Swap Agreement meeting the conditions have been rated in one of the three (or
Secured by Leases); and/or of subsection I.A.(9) or pursuant to any in the case of Designated Transactions,
Eligible Yield Supplement Agreement, four) highest generic rating categories by
(c) Obligations that bear interest or are and/or a Rating Agency for at least one year
purchased at a discount and which are (c) Cash transferred to the Issuer on prior to the plan’s acquisition of
secured by single-family residential, the Closing Date and permitted Securities pursuant to this exemption,
multi-family residential and/or investments made therewith which: and (iii) Securities evidencing interests
commercial real property (including (i) Are credited to a Pre-Funding in such other investment pools have
obligations secured by leasehold Account established to purchase been purchased by investors other than
interests on residential or commercial additional obligations with respect to plans for at least one year prior to the
real property); and/or which the conditions set forth in clauses plan’s acquisition of Securities pursuant
(d) Obligations that bear interest or (a)–(g) of subsection II.A.(7) are met; to this exemption.
are purchased at a discount and which and/or C. ‘‘Underwriter’’ means.
are secured by motor vehicles or (1) RBC–DR;
equipment, or Qualified Motor Vehicle 7 It is the Department’s view that the definition
(2) Any person directly or indirectly,
Leases; and/or of ‘‘Issuer’’ contained in section III.B. includes a
two-tier structure under which Securities issued by
through one or more intermediaries,
(e) Guaranteed governmental the first Issuer, which contains a pool of receivables controlling, controlled by or under
mortgage pool certificates, as defined in described above, are transferred to a second Issuer common control with such investment
29 CFR § 2510.3–101(1)(2)6 and/or which issues Securities that are sold to plans. banking firm; and
However, the Department is of the further view that,
since the exemption generally provides relief for the
(3) Any member of an underwriting
6 In Advisory Opinion 99–05A (Feb. 22, 1999), direct or indirect acquisition or disposition of syndicate or selling group of which such
the Department expressed its view that mortgage Securities that are not subordinated, no relief would firm or person described in subsections
pool certificates guaranteed and issued by the be available if the Securities held by the second III.C.(1) or (2) above is a manager or co-
Federal Agricultural Mortgage Corporation Issuer were subordinated to the rights and interests
(‘‘Farmer Mac’’) meet the definition of a guaranteed evidenced by other Securities issued by the first
manager with respect to the Securities.
governmental mortgage pool certificate as defined Issuer, unless such Securities were issued in a D. ‘‘Sponsor’’ means the entity that
in 29 CFR 2510.3–101(i)(2). Designated Transaction. organizes an Issuer by depositing

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obligations therein in exchange for (1) Each Underwriter; optional contracts (which give one party
Securities. (2) Each Insurer; the right but not the obligation to
E. ‘‘Master Servicer’’ means the entity (3) The Sponsor; deliver Securities to, or demand
that is a party to the Pooling and (4) The Trustee; delivery of Securities from, the other
Servicing Agreement relating to assets of (5) Each Servicer; party).
the Issuer and is fully responsible for (6) Any Obligor with respect to S. ‘‘Reasonable Compensation’’ has
servicing, directly or through obligations or receivables included in the same meaning as that term is
Subservicers, the assets of the Issuer. the Issuer constituting more than 5 defined in 29 CFR 2550.408c–2.
F. ‘‘Subservicer’’ means an entity percent of the aggregate unamortized T. ‘‘Qualified Administrative Fee’’
which, under the supervision of and on principal balance of the assets in the means a fee which meets the following
behalf of the Master Servicer, services Issuer, determined on the date of the criteria:
loans contained in the Issuer, but is not initial issuance of Securities by the (1) The fee is triggered by an act or
a party to the Pooling and Servicing Issuer; failure to act by the Obligor other than
Agreement. (7) Each counterparty in an Eligible the normal timely payment of amounts
G. ‘‘Servicer’’ means any entity which Swap Agreement; or owing in respect of the obligations;
services loans contained in the Issuer, (8) Any Affiliate of a person described (2) The Servicer may not charge the
including the Master Servicer and any in (1)–(7) above. fee absent the act or failure to act
Subservicer. N. ‘‘Affiliate’’ of another person referred to in (1);
H. ‘‘Trust’’ means an Issuer which is includes: (3) The ability to charge the fee, the
a trust (including an owner trust, (1) Any person, directly or indirectly, circumstances in which the fee may be
grantor trust or a REMIC or FASIT through one or more intermediaries, charged, and an explanation of how the
which is organized as a Trust. controlling, controlled by or under fee is calculated are set forth in the
I. ‘‘Trustee’’ means the trustee of any common control with such other Pooling and Servicing Agreement; and
Trust which issues Securities and also person; (4) The amount paid to investors in
includes an Indenture Trustee. (2) Any officer, director, partner, the Issuer will not be reduced by the
‘‘Indenture Trustee’’ means the Trustee employee, relative (as defined in section amount of any such fee waived by the
appointed under the indenture pursuant 3(15) of the Act), a brother, a sister, or Servicer.
to which the subject Securities are a spouse of a brother or sister of such U. ‘‘Qualified Equipment Note
issued, the rights of holders of the other person; and Secured by a Lease’’ means an
Securities are set forth and a security (3) Any corporation or partnership of equipment note:
interest in the Trust assets in favor of which such other person is an officer, (1) Which is secured by equipment
the holders of the Securities is created. director or partner. which is leased;
The Trustee or the Indenture Trustee is O. ‘‘Control’’ means the power to (2) Which is secured by the obligation
also a party to or beneficiary of all the exercise a controlling influence over the of the lessee to pay rent under the
documents and instruments transferred management or policies of a person equipment lease; and
to the Trust, and as such, has both the other than an individual. (3) With respect to which the Issuer’s
authority to, and the responsibility for, P. A person will be ‘‘independent’’ of security interest in the equipment is at
enforcing all the rights created thereby another person only if: least as protective of the rights of the
in favor of holders of the Securities, (1) Such person is not an Affiliate of Issuer as would be the case if the
including those rights arising in the that other person; and equipment note were secured only by
event of default by the servicer. (2) The other person, or an Affiliate the equipment and not the lease.
J. ‘‘Insurer’’ means the insurer or thereof, is not a fiduciary who has V. ‘‘Qualified Motor Vehicle Lease’’
guarantor of, or provider of other credit investment management authority or means a lease of a motor vehicle where:
support for, an Issuer. Notwithstanding renders investment advice with respect (1) The Issuer owns or holds a
the foregoing, a person is not an Insurer to assets of such person. security interest in the lease;
solely because it holds securities Q. ‘‘Sale’’ includes the entrance into (2) the Issuer owns or holds a security
representing an interest in an Issuer a Forward Delivery Commitment, interest in the leased motor vehicle; and
which are of a class subordinated to provided: (3) the Issuer’s security interest in the
Securities representing an interest in the (1) The terms of the Forward Delivery leased motor vehicle is at least as
same Issuer. Commitment (including any fee paid to protective of the Issuer’s rights as the
K. ‘‘Obligor’’ means any person, other the investing plan) are no less favorable Issuer would receive under a motor
than the Insurer, that is obligated to to the plan than they would be in an vehicle installment loan contract.
make payments with respect to any arm’s-length transaction with an W. ‘‘Pooling and Servicing
obligation or receivable included in the unrelated party; Agreement’’ means the agreement or
Issuer. Where an Issuer contains (2) The prospectus or private agreements among a Sponsor, a Servicer
Qualified Motor Vehicle Leases or placement memorandum is provided to and the Trustee establishing a Trust.
Qualified Equipment Notes secured by an investing plan prior to the time the ‘‘Pooling and Servicing Agreement’’ also
Leases, ‘‘Obligor’’ shall also include any plan enters into the Forward Delivery includes the indenture entered into by
owner of property subject to any Lease Commitment; and the Issuer and the Indenture Trustee.
included in the Issuer, or subject to any (3) At the time of the delivery, all X. ‘‘Rating Agency’’ means Standard &
Lease securing an obligation included in conditions of this exemption applicable Poor’s Ratings Services, a division of
the Issuer. to sales are met. The McGraw-Hill Companies, Inc.,
L. ‘‘Excluded Plan’’ means any plan R. ‘‘Forward Delivery Commitment’’ Moody’s Investors Service, Inc., Fitch,
with respect to which any member of means a contact for the purchase or sale Inc. or any successors thereto.
the Restricted Group is a ‘‘plan sponsor’’ of one or more Securities to be delivered Y. ‘‘Capitalized Interest Account’’
within the meaning of section 3(16)(B) at an agreed future settlement date. The means an Issuer account (i) which is
of the Act. term includes both mandatory contracts established to compensate
M. ‘‘Restricted Group’’ with respect to (which contemplate obligatory delivery securityholders for shortfalls, if any,
a class of Securities means: and acceptance of the Securities) and between investment earnings on the Pre-

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Funding Account and the pass-through to any class of Securities held by any categories, or one of the two highest
rate payable under the Securities; and plan is dependent on the terms and short-term credit rating categories,
(ii) which meets the requirements of conditions of the swap and the rating of utilized by at least one of the Rating
clause (c) of subsection III.B.(3). the counterparty, and if such Security Agencies rating the Securities; provided
Z. ‘‘Closing Date’’ means the date the rating is not dependent on the existence that, if a swap Counterparty is relying
Issuer is formed, the Securities are first of the swap and rating of the on its short-term rating to establish
issued and the Issuer’s assets (other than counterparty, such swap or cap shall be eligibility under the Underwriter
those additional obligations which are referred to as a ‘‘Non-Ratings Dependent Exemption, such swap Counterparty
to be funded from the Pre-Funding Swap’’. With respect to a Non-Ratings must either have a long-term rating in
Account pursuant to subsection Dependent Swap, each Rating Agency one of the three highest long-term rating
III.A.(7)) are transferred to the Issuer. rating the Securities must confirm, as of categories or not have a long-term rating
AA. ‘‘Pre-Funding Account’’ means the date of issuance of the Securities by from the applicable Rating Agency, and
an Issuer account (i) which is the Issuer, that entering into an Eligible provided further that if the class of
established to purchase additional Swap with such counterparty will not Securities with which the swap is
obligations, which obligations meet the affect the rating of the Securities. associated has a final maturity date of
conditions set forth in clauses (a)-(g) of FF. ‘‘Eligible Swap’’ means a Ratings more than one year from the date of
subsection II.A.(7); and (ii) which meets Dependent or Non-Ratings Dependent issuance of the Securities, and such
the requirements of clause (c) of Swap: swap is a Ratings Dependent Swap, the
subsection III.B.(3). (1) Which is denominated in U.S. swap Counterparty is required by the
BB. ‘‘Pre-Funding Limit’’ means a dollars; terms of the swap agreement to establish
percentage or ratio of the amount (2) Pursuant to which the Issuer pays any collateralization or other
allocated to the Pre-Funding Account, or receives, on or immediately prior to arrangement satisfactory to the Rating
as compared to the total principal the respective payment or distribution Agencies in the event of a ratings
amount of the Securities being offered date for the class of Securities to which downgrade of the swap Counterparty.
which is less than or equal to 25 the swap relates, a fixed rate of interest, HH. ‘‘Qualified Plan Investor’’ means
percent. or a floating rate of interest based on a a plan investor or group of plan
CC. ‘‘Pre-Funding Period’’ means the publicly available index (e.g., the investors on whose behalf the decision
period commencing on the Closing Date London Interbank Offered Rate (LIBOR) to purchase Securities is made by an
and ending no later than the earliest to or the U.S. Federal Reserve’s Cost of appropriate independent fiduciary that
occur of (i) the date the amount on Funds Index (COFI)), with the Issuer is qualified to analyze and understand
deposit in the Pre-Funding Account is receiving such payments on at least a the terms and conditions of any swap
less than the minimum dollar amount quarterly basis and obligated to make transaction used by the Issuer and the
specified in the Pooling and Servicing separate payments no more frequently effect such swap would have upon the
Agreement; (ii) the date on which an than the counterparty, with all credit ratings of the Securities. For
event of default occurs under the simultaneous payments being netted; purposes of the Underwriter Exemption,
Pooling and Servicing Agreement; or (3) Which has a notional amount that such a fiduciary is either:
(iii) the date which is the later of three does not exceed either: (i) The principal (1) A ‘‘qualified professional asset
months or 90 days after the Closing balance of the class of Securities to manager’’ (QPAM),8 as defined under
Date. which the swap relates, or (ii) the Part V(a) of PTE 84–14, 49 FR 9494,
DD. ‘‘Designated Transaction’’ means portion of the principal balance of such 9506 (March 13, 1984);
a securitization transaction in which the class represented solely by those types (2) An ‘‘in-house asset manager’’
assets of the Issuer consist of secured of corpus or assets of the Issuer referred (INHAM),9 as defined under part IV(a)
consumer receivables, secured credit to in subsections III.B.(1), (2) and (3); of PTE 96–23, 61 FR 15975, 15982
instruments or secured obligations that (4) Which is not leveraged (i.e., (April 10, 1996); or
bear interest or are purchased at a payments are based on the applicable (3) A plan fiduciary with total assets
discount and are: (i) Motor vehicle, notional amount, the day count under management of at least $100
home equity and/or manufactured fractions, the fixed or floating rates million at the time of the acquisition of
housing consumer receivables; and/or designated in subsection III.EE.(2), and such Securities.
(ii) motor vehicle credit instruments in the difference between the products II. ‘‘Excess Spread’’ means, as of any
transactions by or between business thereof, calculated on a one to one ratio day funds are distributed from the
entities; and/or (iii) single-family and not on a multiplier of such Issuer, the amount by which the interest
residential, multi-family residential, difference);
8 PTE 84–14 provides a class exemption for
home equity, manufactured housing (5) Which has a final termination date
transactions between a party in interest with respect
and/or commercial mortgage obligations that is either the earlier of the date on to an employee benefit plan and an investment fund
that are secured by single-family which the Issuer terminates or the (including either a single customer or pooled
residential, multi-family residential, related class of securities is fully repaid; separate account) in which the plan has an interest,
commercial real property or leasehold and and which is managed by a QPAM, provided
certain conditions are met. QPAMs (e.g., banks,
interests therein. For purposes of this (6) Which does not incorporate any insurance companies, registered investment
section III.CC., the collateral securing provision which could cause a advisers with total client assets under management
motor vehicle consumer receivables or unilateral alteration in any provision in excess of $50 million) are considered to be
motor vehicle credit instruments may described in subsections III.EE.(1) experienced investment managers for plan investors
that are aware of their fiduciary duties under
include motor vehicles and/or Qualified through (4) without the consent of the ERISA.
Motor Vehicle Leases. Trustee. 9 PTE 96–23 permits various transactions
EE. ‘‘Ratings Dependent Swap’’ means GG. ‘‘Eligible Swap Counterparty’’ involving employee benefit plans whose assets are
an interest rate swap, or (if purchased means a bank or other financial managed by an INHAM, an entity which is
by or on behalf of the Issuer) an interest institution which has a rating, at the generally a subsidiary of an employer sponsoring
the plan which is a registered investment adviser
rate cap contract, that is part of the date of issuance of the Securities by the with management and control of total assets
structure of a class of Securities where Issuer, which is in one of the three attributable to plans maintained by the employer
the rating assigned by the Rating Agency highest long-term credit rating and its affiliates which are in excess of $50 million.

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allocated to Securities exceeds the and other major securities exchanges, as services, including deposit accounts,
amount necessary to pay interest to well as the Securities Investor investments and mutual funds, financial
securityholders, servicing fees and Protection Corporation. RBC–DR advice, credit and debit cards, business
expenses. engages in the purchase and sale of and personal loans, insurance,
JJ. ‘‘Eligible Yield Supplement securities for the account of its residential and commercial mortgages.
Agreement’’ means any yield customers, which include individual Its deposits are insured by the Federal
supplement agreement, similar yield and institutional accounts. It also Deposit Insurance Corporation (FDIC).
maintenance arrangement or, if purchases and sells securities for its RBC Centura offers personal and
purchased by or on behalf of the Issuer, own proprietary trading accounts and commercial customers banking services
an interest rate cap contract to for the accounts of its affiliates. RBC–DR through more than 240 banking centers
supplement the interest rates otherwise engages in trading mortgage-related and located in five Southeastern states.
payable on obligations described in other securities, including pass-through Through its division, RBC Builder
subsection III.B.(1). Such an agreement certificates issued by the Government Finance (‘‘RBC–BF’’), headquartered in
or arrangement may involve a notional National Mortgage Association (GNMA), Houston, Texas, RBC Centura engages in
principal contract provided that: the Federal National Mortgage lending activity designed to fund single-
(1) It is denominated in U.S. dollars; Association (FNMA) and the Federal family construction loans, residential
(2) The Issuer receives on, or Home Loan Mortgage Corporation land acquisition and development
immediately prior to the respective (FHLMC), callable agency debt, and loans, including finished lot facilities,
payment date for the Securities covered collateralized mortgage obligations for and participating debt loans. The RBC–
by such agreement or arrangement, a the account of its customers and for its BF division targets professional, middle-
fixed rate of interest or a floating rate of own accounts. RBC–DR similarly trades market, residential homebuilders and
interest based on a publicly available certificates of deposit issued by banks, developers in major metropolitan
index (e.g., LIBOR or COFI), with the the deposits of which are insured by the markets throughout the United States.
Issuer receiving such payments on at Bank Insurance Fund. Through its Loan production offices are located in
least a quarterly basis; division ‘‘RBC Capital Markets,’’ RBC– the District of Columbia and 16 states,
(3) It is not ‘‘leveraged’’ as described DR also conducts similar business. primarily in the South and West. RBC
in subsection III.EE.(4); RBC–DR maintains its principal office Centura (including its division RBC–BF)
(4) It does not incorporate any at 60 South Sixth Street, Minneapolis, may participate as an issuer, servicer or
provision which would cause a Minnesota 55402–4422. It maintains trustee in securitizations underwritten
unilateral alteration in any provision branch sales offices in 39 states and the by RBC–DR or one of its Affiliates.
described in subsections III.II.(1)–(3) District of Columbia. 4. Other Affiliates. For purposes of
without the consent of the Trustee; 2. RBC Mortgage Company (RBC this application, the term ‘‘Affiliate’’
(5) It is entered into by the Issuer with Mortgage) is an Illinois corporation shall mean any U.S.-domiciled
an Eligible Swap Counterparty; and organized on June 22, 1992 and is a corporation, partnership, or other
(6) It has a notional amount that does wholly-owned subsidiary of Royal Bank business entity controlled by Royal
not exceed either: of Canada, the ultimate parent Bank of Canada. The term ‘‘Applicant’’
(i) The principal balance of the class corporation to the RBC–DR. RBC herein shall be used to denote RBC–DR
of Securities to which such agreement Mortgage, formerly known as Prism and its Affiliates.
or arrangement relates, or (ii) the Mortgage Company, is engaged 5. RBC–DR seeks exemptive relief to
portion of the principal balance of such primarily in the mortgage banking permit plans to invest in pass-through
class represented solely by those types business, and originates, purchases, certificates representing undivided
of corpus or assets of the Issuer referred sells and services prime mortgage loans, interests in the following categories of
to in subsections III.B.(1), (2) and (3). sub-prime mortgage loans and home trusts: (1) Single and multi-family
The Department notes that this equity loans. It originates mortgage residential or commercial mortgage
proposed exemption is included within loans through a retail branch system and investment trusts;10 (2) motor vehicle
the meaning of the term ‘‘Underwriter through mortgage loan brokers and receivable investment trusts; (3)
Exemption’’ as it is defined in section purchases loans originated by consumer or commercial receivables
V(h) of Prohibited Transaction correspondents nationwide. It also investment trusts; and (4) guaranteed
Exemption 95–60 (60 FR 35925, July 12, conducts this business through its governmental mortgage pool certificate
1995), the Class Exemption for Certain affiliated entities Lenders Mortgage investment trusts.11 For purposes of the
Transactions Involving Insurance Services, LLC (Illinois), Mortgage
Company General Accounts at (see 60 Market Inc. (Oregon), and Pacific 10 PTE 83–1 (48 F.R. 895, January 7, 1983), a class

FR 35932). Guaranty Mortgage Corporation exemption for mortgage pool investment trusts,
would generally apply to trusts containing single-
Effective Date: This exemption is (California). It sells substantially all family residential mortgages, provided that the
effective for all transactions described loans that it originates or purchases. In applicable conditions of PTE 83–1 are met. RBC–
herein which occurred on or after April the calendar year ending 2001, RBC DR requests relief for single-family residential
18, 2003. Mortgage originated over $17 billion in mortgages in this exemption because it would
prefer one exemption for all trusts of similar
loans. The principal executive offices of structure, and because the relief in PTE 83–1 is
Summary of Facts and Representations RBC Mortgage are located at 440 North narrower than that in the requested exemption.
1. RBC–DR is a Minnesota corporation Orleans, Chicago, Illinois 60610. RBC However, RBC–DR may still avail itself of the
organized on December 29, 1981 and is Mortgage may participate as an issuer or exemptive relief provided by PTE 83–1.
11 Guaranteed governmental mortgage pool
a wholly-owned subsidiary of RBC Dain servicer in securitizations underwritten
certificates are mortgage-backed securities with
Rauscher Corporation which is a by RBC–DR or one of its Affiliates. respect to which interest and principal payable is
wholly-owned subsidiary of Royal Bank 3. RBC Centura Bank (RBC Centura) is guaranteed by GNMA, FHLMC, or FNMA. The
of Canada. RBC–DR is a registered a state chartered banking corporation Department’s regulation relating to the definition of
broker-dealer, a registered investment organized under the laws of North plan assets (29 CFR 2510.3–101(i)) provides that
where a plan acquires a guaranteed governmental
adviser and a member of the New York Carolina on February 14, 1990. It is a mortgage pool certificate, the plan’s assets include
Stock Exchange, the National wholly-owned subsidiary of Royal Bank the certificate and all of its rights with respect to
Association of Securities Dealers, Inc., of Canada. RBC Centura offers financial such certificate under applicable law, but do not,

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following discussion, the term ‘‘trust’’ managing underwriter for a syndicate of representing rights to disproportionate
includes partnerships, special purpose securities underwriters. payments of principal and interest.12
corporations or limited liability Certificateholders will be entitled to ‘‘Senior/subordinate’’ certificates
companies. The term ‘‘certificate’’ receive monthly, quarterly or semi- involve the issuance of classes of
includes a security which is either a certificates having different stated
annual installments of principal and/or
pass-through certificate or a security maturities or the same maturities with
interest, or lease payments due on the
denominated as a debt security that is different payment schedules. Interest
receivables, adjusted, in the case of
issued by one of the above-enumerated and/or principal payments received on
payments of interest, to a specified
entities. the underlying receivables are
rate—the pass-through rate—which may
Securitization transactions in which distributed first to the class of
the assets of the securitization vehicle be fixed or variable. certificates having the earliest stated
reflect the following categories of When installments or payments are maturity of principal, and/or earlier
receivables (all of which are also made on a semi-annual basis, funds are payment schedule, and only when that
described in more detail below) are not permitted to be commingled with class of certificates has been paid in full
referred to herein as ‘‘Designated the servicer’s assets for longer than (or has received a specified amount)
Transactions’’: (1) Automobile and other would be permitted for a monthly-pay will distributions be made with respect
motor vehicle loans, (2) residential and security. A segregated account is to the second class of certificates.
home equity loans (which may have established in the name of the trustee Distributions on certificates having later
high loan-to value (HLTV) ratios in (on behalf of certificateholders) to hold stated maturities will proceed in like
excess of 100%), (3) manufactured funds received between distribution manner until all the certificateholders
housing loans and (4) commercial dates. The account is under the sole have been paid in full. The only
mortgages. control of the trustee, who invests the difference between this multi-class pass-
Trust Structure account’s assets in short-term securities through arrangement and a single-class
(i.e., permissible investments), which pass-through arrangement is the order in
6. Each trust is established under a have received a rating comparable to the which distributions are made to
pooling and servicing agreement rating assigned to the certificates. In certificateholders. In each case,
between a sponsor, a servicer and a some cases, the servicer may be certificateholders will have a beneficial
trustee. Prior to the closing date under permitted to make a single deposit into ownership interest in the underlying
the pooling and servicing agreement, the the account once a month. When the assets. Except as permitted in a
sponsor or servicer of a trust establishes servicer makes such monthly deposits, Designated Transaction, the rights of a
the trust, designates an entity as trustee, payments received from obligors by the plan purchasing a certificate will not be
and, except to the extent a pre-funding subordinated to the rights of another
servicer may be commingled with the
account, as described below, will be certificateholder in the event of default
servicer’s assets during the month prior
used, selects assets to be included in the on any of the underlying obligations. In
to deposit. Usually, the period of time
trust. The assets are receivables, which particular, unless the certificates are
between receipt of funds by the servicer
may have been originated by a sponsor issued in a Designated Transaction, if
or servicer of the trust, an affiliate of the and deposit of these funds in a
segregated account does not exceed one the amount available for distribution to
sponsor or servicer, or by an unrelated certificateholders is less than the
lender and subsequently acquired by the month.
amount required to be so distributed, all
trust sponsor or servicer. Furthermore, in those cases where
senior certificateholders then entitled to
Typically, on or prior to the closing distributions are made semiannually,
receive distributions will share in the
date, the sponsor acquires legal title to the servicer will furnish a report on the
all assets selected for the trust. In some amount distributed on a pro rata basis.13
operation of the trust to the trustee on 8. For tax reasons, the trust will be
cases, legal title to some or all of such a monthly basis. At or about the time maintained as an essentially passive
assets continues to be held by the this report is delivered to the trustee, it entity. Therefore, both the sponsor’s
originator of the receivable until the will be made available to discretion and the servicer’s discretion
closing date. On the closing date, the certificateholders and delivered to, or with respect to assets included in a trust
sponsor and/or the originator of the made available to, each rating agency are severely limited. Pooling and
receivables conveys to the trust legal that has rated the certificates. servicing agreements provide for the
title to the assets, and the trustee issues The trust may elect to be treated as a substitution of receivables by the
certificates representing fractional real estate mortgage investment conduit sponsor only in the event of defects in
undivided interests in the trust assets. (‘‘REMIC’’) or a financial asset documentation discovered within a
RBC–DR, alone or together with other securitization investment trust
broker-dealers, acts as underwriter or (‘‘FASIT’’), or may be treated as a 12 When a plan invests in REMIC ‘‘residual’’
placement agent with respect to the sale grantor trust or a partnership, for federal interest certificates to which this exemption
of the certificates. RBC–DR currently income tax purposes. applies, some of the income received by the plan
anticipates that the public offerings of as a result of such investment may be considered
certificates will be underwritten by it on 7. Some of the certificates will be unrelated business taxable income to the plan,
multi-class certificates. RBC–DR which is subject to federal income tax under the
a firm commitment basis. In addition, Code. The prudence requirement of section
RBC–DR anticipates that it may requests exemptive relief for two types 404(a)(1)(B) of the Act would require plan
privately place certificates on both a of multi-class certificates: ‘‘strip’’ fiduciaries to carefully consider this and other tax
firm commitment and an agency basis. certificates and ‘‘senior/subordinate’’ consequences prior to causing plan assets to be
(also sometimes referred to as ‘‘fast pay/ invested in certificates pursuant to this exemption.
RBC–DR may also act as the lead or co- 13 If a trust issues subordinated certificates,
slow pay’’) certificates. Strip certificates holders of such subordinated certificates may not
solely by reason of the plan’s holding of such are a type of security in which the share in the amount distributed on a pro rata basis
certificate, include any of the mortgages underlying stream of interest payments on with the senior certificateholders. The Department
such certificate. The Applicant is requesting receivables is split from the flow of notes that the proposed exemption does not provide
exemptive relief for trusts containing guaranteed relief for plan investments in such subordinated
governmental mortgage pool certificates because the
principal payments and separate classes certificates, unless such certificates are issued in a
certificates in such trusts may be plan assets. of certificates are established, each Designated Transaction.

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short time after the issuance of investor securityholder would be paid a total of earliest to occur of (i) The date on which
certificates (within 120 days, except in 9% per annum. The interest to be paid the amount on deposit in the pre-
the case of obligations having an by the contract provider to the trust funding account is less than a specified
original term of 30 years, in which case under the yield supplement agreement dollar amount, (ii) the date on which an
the period will not exceed two years). is usually calculated based on a notional event of default occurs under the related
Any receivable so substituted is principal balance which may mirror the pooling and servicing agreement 14 or
required to have characteristics principal balances of those classes of (iii) the date which is the later of three
substantially similar to the replaced certificates to which the yield months or ninety days after the closing
receivable and will be at least as supplement agreement relates or some date. If pre-funding is used, the sponsor
creditworthy as the replaced receivable. other fixed amount. This notional or originator will transfer to the trust on
In some cases, the affected receivable amount will not exceed either: (i) The the closing date cash sufficient to
would be repurchased, with the principal balance of the class of purchase the receivables to be
purchase price applied as a payment on certificates to which such agreement or transferred after the closing date. During
the affected receivable and passed- arrangement relates, or (ii) the portion of the pre-funding period, such cash and
through to certificateholders. the principal balance of such class temporary investments, if any, made
Interest Rate Swaps represented solely by those types of therewith will be held in a pre-funding
corpus or assets of the trust referred to account and used to purchase the
9. RBC–DR requests relief for both in subsections III.B. (1), (2) and (3) of additional receivables, the
ratings dependent and non-ratings the proposed exemption. In all cases, characteristics of which will be
dependent swaps as described in the trust makes no payments other than substantially similar to the
Prohibited Transaction Exemption the fixed purchase price for the yield characteristics of the receivables
2000–58 (65 FR 67765, November 13, supplement agreement and may, transferred to the trust on the closing
2000) (PTE 2000–58), subject to the therefore, be distinguished from an date. Certain specificity and monitoring
same terms and conditions regarding interest rate swap agreement, requirements must be met and will be
interest rate swaps contained in that notwithstanding that both types of disclosed in the pooling and servicing
exemption. agreements may use an International agreement and/or the prospectus 15 or
Conditions to Interest Rate Swaps Swaps and Derivatives Association, Inc. private placement memorandum.16
(‘‘ISDA’’) form of contract.
10. Any class of certificates to which The Applicant notes that no ‘‘plan Capitalized Interest Accounts
one or more swap agreements entered assets’’ within the meaning of the plan 13. When a pre-funding account is
into by the trust applies will be acquired asset regulation (under 29 CFR 2510–3– used, the sponsor and/or originator may
or held only by qualified plan investors. 101) are utilized in the purchase of the also transfer to the trust additional cash
Qualified plan investors will be plan yield supplement agreement, as the on the closing date, to be deposited in
investors represented by an appropriate sponsor or some other third party funds a capitalized interest account and used
independent fiduciary that is qualified such arrangement with an up-front during the pre-funding period to
to analyze and understand the terms single-sum payment. The trust’s only compensate the certificateholders for
and conditions of any swap transaction obligation is to receive payments from any shortfall between the investment
relating to the class of certificates to be the counterparty if interest rate earnings on the pre-funding account and
purchased and the effect such swap fluctuations require them under the the pass-through interest rate payable
would have upon the credit rating of the terms of the contract and to pass them under the certificates.
certificates to which the swap relates. through to securityholders. The rating Because the certificates are supported
agencies examine the creditworthiness by the receivables in the trust and the
Yield Supplement Agreements
of the counterparty in a ratings earnings on the pre-funding account, the
11. A yield supplement agreement is dependent yield supplement agreement. capitalized interest account is needed
a contract under which the trust makes The Applicant suggests that the relief when the investment earnings on the
a single cash payment to the contract for yield supplement agreements should pre-funding account and the interest
provider in return for the contract be subject to the same conditions as for paid on the receivables are less than the
provider promising to make certain interest rate swaps, to the extent interest payable on the certificates. The
payments to the trust in the event of relevant. These conditions would capitalized interest account funds are
market fluctuations in interest rates. For include that the yield supplement paid out periodically to the
example, if a class of certificates agreement must be denominated in U.S. certificateholders as needed on
promises an interest rate which is the dollars, the agreement must not be distribution dates to support the pass-
greater of 7% per annum or LIBOR and leveraged, any changes in these through rate. In addition, a portion of
LIBOR increases significantly, the yield conditions must be subject to the such funds may be returned to the
supplement agreement might obligate consent of the trustee, and the
the contract provider to pay to the trust counterparty must be subject to the
14 The minimum dollar amount is generally the

the excess of LIBOR over 7% per dollar amount below which it becomes too
same eligibility requirements as an uneconomical to administer the pre-funding
annum. In some circumstances, the interest rate swap counterparty. account. An event of default under the pooling and
contract provider’s obligation may be servicing agreement generally occurs when: (i) A
capped at a certain aggregate maximum Pre-Funding Accounts breach of a covenant or a breach of a representation
dollar liability under the contract. 12. Although many transactions occur and warranty concerning the sponsor, the servicer,
or certain other parties occurs which is not cured;
Alternatively, a cap could be placed on as described above, it is also common (ii) a required payment to certificateholders is not
the supplemental interest that would be for other transactions to be structured made; or (iii) the servicer becomes insolvent.
paid to a securityholder from monies using a pre-funding account and/or a 15 References to the term ‘‘prospectus’’ herein

paid under the yield supplement capitalized interest account as described shall include any prospectus supplement related
agreement. For example, the yield thereto, pursuant to which certificates are offered to
below. investors.
supplement agreement would provide The pre-funding period for any trust 16 See the Proposal to PTE 2000–58 (August 23,
the difference between LIBOR and 7% will be defined as the period beginning 2000, 65 FR 51454, at page 51463) for a fuller
but only to the extent that the on the closing date and ending on the explanation of pre-funding accounts.

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sponsor from time to time as the certificates. The types of permitted funding period will not result in the
receivables are transferred into the trust investments will be described in the certificates receiving a lower credit
and the need for the capitalized interest pooling and servicing agreement. rating from the rating agency upon
account diminishes. Any amounts held The ordering of interest payments to termination of the pre-funding period
in the capitalized interest account be made from the pre-funding and than the rating that was obtained at the
generally will be returned to the sponsor capitalized interest accounts is pre- time of the initial issuance of the
and/or originator either at the end of the established and set forth in the pooling certificates by the trust;
pre-funding period or periodically as and servicing agreement. The only (iv) The weighted average annual
receivables are transferred and the principal payments which will be made percentage interest rate (the average
proportionate amount of funds in the from the pre-funding account are those interest rate) for all of the obligations in
capitalized interest account can be made to acquire the receivables during the trust at the end of the pre-funding
reduced. Generally, the capitalized the pre-funding period and those period will not be more than 100 basis
interest account terminates no later than distributed to the certificateholders in points lower than the average interest
the end of the pre-funding period. the event that the entire amount in the rate for the obligations which were
However, there may be some cases pre-funding account is not used to transferred to the trust on the closing
where the capitalized interest account acquire receivables. The only principal date; and
remains open until the first date payments which will be made from the (v) The trustee of the trust (or any
distributions are made to capitalized interest account are those agent with which the trustee contracts
certificateholders following the end of made to certificateholders if necessary to provide trust services) will be a
the pre-funding period. to support the certificate pass-through substantial financial institution or trust
In other transactions, a capitalized rate or those made to the sponsor either company experienced in trust activities
interest account is not necessary periodically as they are no longer and familiar with its duties,
because the interest paid on the needed or at the end of the pre-funding responsibilities, and liabilities as a
receivables exceeds the interest payable period when the capitalized interest fiduciary under ERISA. The trustee, as
on the certificates at the applicable account is no longer necessary. the legal owner of the obligations in the
interest rate and the fees payable by the trust, will enforce all the rights created
The Characteristics of the Receivables in favor of certificateholders of such
issuer. Such excess is sufficient to make
Transferred During the Pre-Funding trust, including employee benefit plans
up any shortfall resulting from the pre-
Period subject to ERISA.
funding account earning less than the
interest rate payable on the certificates. 15. In order to ensure that there is In order to ensure that the
In certain of these transactions, this sufficient specificity as to the characteristics of the receivables
occurs because the aggregate principal representations and warranties of the actually acquired during the pre-
amount of receivables exceeds the sponsor regarding the characteristics of funding period are substantially similar
aggregate principal amount of the receivables to be transferred after the to receivables that were acquired as of
certificates. closing date: the closing date, the characteristics of
(i) The pre-funding limit will not be the additional obligations subsequently
Pre-Funding Account and Capitalized exceeded; acquired will either be monitored by a
Interest Account Payments and (ii) All such receivables will meet the credit support provider or other
Investments same terms and conditions for eligibility insurance provider which is
14. Pending the acquisition of as those of the original receivables used independent of the sponsor or an
additional receivables during the pre- to create the trust corpus (as described independent accountant retained by the
funding period, it is expected that in the prospectus or private placement sponsor will provide the sponsor with a
amounts in the pre-funding account and memorandum and/or pooling and letter (with copies provided to the rating
the capitalized interest account will be servicing agreement for such agency, the underwriter and the
invested in certain permitted certificates), which terms and trustees) stating whether or not the
investments or will be held uninvested. conditions have been approved by a characteristics of the additional
Pursuant to the pooling and servicing rating agency. However, the terms and obligations acquired after the closing
agreement, all permitted investments conditions for determining the date conform to the characteristics of
must mature prior to the date the actual eligibility of a receivable may be such obligations described in the
funds are needed. The permitted types changed if such changes receive prior prospectus, private placement
of investments in the pre-funding approval either by a majority vote of the memorandum and/or pooling and
account and capitalized interest account outstanding certificateholders or by a servicing agreement. In preparing such
are investments which either: (i) Are rating agency; 17 letter, the independent accountant will
direct obligations of, or obligations fully (iii) The transfer to the trust of the use the same type of procedures as were
guaranteed as to timely payment of receivables acquired during the pre- applicable to the obligations which were
principal and interest by, the United transferred as of the closing date.
States or any agency or instrumentality 17 In some transactions, the insurer and/or credit Each prospectus, private placement
thereof, provided that such obligations support provider may have the right to veto the memorandum and/or pooling and
inclusion of receivables, even if such receivables
are backed by the full faith and credit otherwise satisfy the underwriting criteria. This
servicing agreement will set forth the
of the United States or (ii) have been right usually takes the form of a requirement that terms and conditions for eligibility of
rated (or the obligor has been rated) in the sponsor obtain the consent of these parties the receivables to be included in the
one of the three highest generic rating before the receivables can be included in the trust. trust as of the related closing date, as
The insurer and/or credit support provider may,
categories (or four, in the case of therefore, reject certain receivables or require that
well as those to be acquired during the
Designated Transactions) by a rating the sponsor establish certain trust reserve accounts pre-funding period, which terms and
agency, as set forth in the pooling and as a condition of including these receivables. conditions will have been agreed to by
servicing agreement and as required by Virtually all trusts which have insurers or other the rating agencies which are rating the
credit support providers are structured to give such
the rating agencies. The credit grade veto rights to these parties. The percentage of trusts
applicable certificates as of the closing
quality of the permitted investments is that have insurers and/or credit support providers, date. Also included among these
generally no lower than that of the and accordingly feature such veto rights, varies. conditions is the requirement that the

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trustee be given prior notice of the that the trustee will be a substantial A servicer’s default is treated in the
receivables to be transferred, along with financial institution or trust company same manner whether or not the issuer
such information concerning those experienced in trust activities. The is a trust. The original servicer can be
receivables as may be requested. Each trustee receives a fee for its services, replaced, and the entity replacing the
prospectus or private placement which will be paid from cash flows in servicer varies from transaction to
memorandum will describe the amount the trust. The method of compensating transaction. In certain cases, it may be
to be deposited in, and the mechanics the trustee, which is specified in the the trustee (or indenture trustee if the
of, the pre-funding account and will pooling and servicing agreement, will be issuer is not a trust) or it may be a third
describe the pre-funding period for the disclosed in the prospectus or private party satisfactory to the rating agencies
trust. placement memorandum relating to the and/or credit support provider. In
Parties to Transactions offering of the certificates. addition, there are transactions where
The rights and obligations of the the trustee or indenture trustee will
16. The originator of a receivable is indenture trustee are no different than assume the servicer’s responsibilities on
the entity that initially lends money to those of the trustee of an issuer which a temporary basis until the permanent
a borrower (obligor), such as a is a trust. The indenture trustee is replacement takes over. In all cases, the
homeowner or automobile purchaser, or obligated to oversee and administer the replacement entity must be capable of
leases property to a lessee. The activities of all of the ongoing parties to satisfying all of the duties and
originator may either retain a receivable the transaction and possesses the responsibilities of the original servicer
in its portfolio or sell it to a purchaser, authority to replace those entities, sue and must be an entity that is satisfactory
such as a trust sponsor. Originators of
them, liquidate the collateral and to the rating agencies.
receivables included in the trusts will
perform all necessary acts to protect the If, after the initial issuance of
be entities that originate receivables in
interests of the debt holders. If debt is certificates, a servicer of receivables
the ordinary course of their business,
issued in a transaction, there may not be held by a trust which has issued
including finance companies for whom
a pooling and servicing agreement. certificates in reliance upon the
such origination constitutes the bulk of
Instead, there is a sales agreement and Underwriter Exemptions (or an affiliate
their operations, financial institutions
servicing agreement (or these two
for whom such origination constitutes a thereof) merges with or is acquired by
agreements are sometimes combined
substantial part of their operations, and (or acquires) the trustee of such trust (or
into a single agreement). The
any kind of manufacturer, merchant, or an affiliate thereof), and thereby
agreement(s) set(s) forth, among other
service enterprise for whom such becomes an affiliate of the trustee, the
things, the duties and responsibilities of
origination is an incidental part of its requirement that the trustee not be an
the parties to the transaction relating to
operations. The originator of the affiliate of the restricted group (other
the administration of the Issuer. The
receivables may also function as the than the underwriter) will not be
indenture trustee is often a party to
trust sponsor or servicer. Each trust may violated, provided that: (i) Such servicer
these agreements. At a minimum, the
contain assets of one or more ceases to be an affiliate of the trustee no
indenture trustee acknowledges its
originators. later than six months after the date such
17. The sponsor will be one of three rights and responsibilities in these
servicer became an affiliate of the
entities: (i) A special-purpose or other agreements or they are contractually set
trustee; and (ii) such servicer did not
corporation unaffiliated with the forth in the indenture agreement
breach any of its obligations under the
servicer, (ii) a special-purpose or other pursuant to which the indenture trustee
pooling and servicing agreement, unless
corporation affiliated with the servicer, is appointed.
such breach was immaterial and timely
or (iii) the servicer itself. Where the 19. The servicer of a trust administers cured in accordance with the terms of
sponsor is not also the servicer, the the receivables on behalf of the such agreement, during the period from
sponsor’s role will generally be limited certificateholders. The servicer’s the closing date of such merger or
to acquiring the receivables to be functions typically involve, among other acquisition transaction through the date
included in the trust, establishing the things, notifying borrowers of amounts the servicer ceased to be an affiliate of
trust, designating the trustee, and due on receivables, maintaining records the trustee.
assigning the receivables to the trust. of payments received on receivables and
instituting foreclosure or similar 20. The underwriter will be a
18. The trustee of a trust (or the issuer registered broker-dealer that acts as
if it is not a trust) is the legal owner of proceedings in the event of default. In
cases where a pool of receivables has underwriter or placement agent with
the obligations in the trust and would respect to the sale of the certificates.
hold a security interest in the collateral been purchased from a number of
different originators and deposited in a Public offerings of certificates are
securing such obligations. The trustee is generally made on a firm commitment
also a party to or beneficiary of all the trust, the receivables may be
‘‘subserviced’’ by their respective basis. Private placements of certificates
documents and instruments deposited may be made on a firm commitment or
in the trust, and as such is responsible originators and a single entity may
‘‘master service’’ the pool of receivables agency basis. It is anticipated that the
for enforcing all the rights created lead and co-managing underwriters will
thereby in favor of certificateholders. on behalf of the owners of the related
series of certificates. Where this make a market in certificates offered to
The trustee generally will be an the public.
independent entity, although that the arrangement is adopted, a receivable
trustee may be related to the continues to be serviced from the In most cases, the originator and
Applicant.18 The Applicant represents perspective of the borrower by the local servicer of receivables to be included in
subservicer, while the investor’s a trust and the sponsor of the trust
18 See Prohibited Transaction Exemption 2002–41 perspective is that the entire pool of (although they may themselves be
(67 FR 54487, August 22, 2002), an amendment to receivables is serviced by a single, related) will be unrelated to RBC-DR. In
the prior individual exemptions granted for central master servicer who collects other cases, however, affiliates of RBC-
mortgage-backed and other asset-backed securities
(the Underwriter Exemptions), which permits the
payments from the local subservicers DR may originate or service receivables
trustee of the trust to be an affiliate of the and passes them through to included in a trust or may sponsor a
underwriter of the certificates. certificateholders. trust.

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Certificate Price, Interest Rate and Fees The servicer is also compensated to would sell certificates in a public
21. As compensation for the the extent it may provide credit offering on an agency basis, the
receivables transferred to the trust, the enhancement to the trust or otherwise underwriter would receive an agency
sponsor receives certificates arrange to obtain credit support from commission rather than a fee based on
representing the entire beneficial another party. This ‘‘credit support fee’’ the difference between the price at
interest in the trust, or the cash may be aggregated with other servicing which the certificates are sold to the
proceeds of the sale of such certificates. fees, and is either paid out of the public and what it pays the sponsor. In
If the sponsor receives certificates from interest income received on the some private placements, the
the trust, the sponsor sells all or a receivables in excess of the pass-through underwriter may buy certificates as
portion of these certificates for cash to rate or paid in a lump sum at the time principal, in which case its
investors or securities underwriters. the trust is established. compensation would be the difference
22. The price of the certificates, both 24. The servicer may be entitled to between what it receives for the
in the initial offering and in the retain certain administrative fees paid certificates that it sells and what it pays
secondary market, is affected by market by a third party, usually the obligor. the sponsor for these certificates.
forces, including investor demand, the These administrative fees fall into three
categories: (a) Prepayment fees; (b) late Certificate Ratings
specified interest rate on the certificates
in relation to the rate payable on payment and payment extension fees; 27. The certificates for which
investments of similar types and and (c) expenses, fees and charges exemptive relief is requested will have
quality, expectations as to the effect on associated with foreclosure or received one of the three highest ratings
yield resulting from prepayment of repossession, or other conversion of a (four, in the case of Designated
underlying receivables, and secured position into cash proceeds, Transactions) available from the rating
expectations as to the likelihood of upon default of an obligation. agency. Insurance or other credit
timely payment. Compensation payable to the servicer support (such as surety bonds, letters of
The interest rate for certificates is will be set forth or referred to in the credit, guarantees, or
typically equal to the interest rate on pooling and servicing agreement and overcollateralization) will be obtained
receivables included in the trust minus described in reasonable detail in the by the trust sponsor to the extent
a specified servicing fee.19 This rate is prospectus or private placement necessary for the certificates to attain
generally determined by the same memorandum relating to the certificates. the desired rating. The amount of this
market forces that determine the price of 25. Payments on receivables may be credit support is set by the rating
a certificate. The price of a certificate made by obligors to the servicer at agencies at a level that is a multiple of
and its interest, or coupon, rate together various times during the period the worst historical net credit loss
determine the yield to investors. If an preceding any date on which pass- experience for the type of obligations
investor purchases a certificate at less through payments to the trust are due. included in the issuing trust.
than par, that discount augments the In some cases, the pooling and servicing
Subordination
stated interest rate; conversely, a agreement may permit the servicer to
place these payments in non-interest 28. The market has now evolved to
certificate purchased at a premium
bearing accounts maintained with itself the point where asset-backed securities/
yields less than the stated coupon.
or to commingle such payments with its mortgage-backed securities (‘‘ABS/
23. As compensation for performing
own funds prior to the distribution MBS’’) offerings typically include
its servicing duties, the servicer (who
dates. In these cases, the servicer would multiple tranches of senior and
may also be the sponsor or an affiliate
be entitled to the benefit derived from subordinated investment-grade
thereof, and receive fees for acting in
the use of the funds between the date of securities. The Applicant believes that
that capacity) will retain the difference
payment on a receivable and the pass- rating agencies can rate subordinated
between payments received on the
receivables in the trust and payments through date. Commingled payments classes of securities with a high level of
payable (at the interest rate) to may not be protected from the creditors expertise, thereby ensuring the safety of
certificateholders, except that in some of the servicer in the event of the these investments for plans through the
cases a portion of the payments on servicer’s bankruptcy or receivership. In use of other credit support (including
receivables may be paid to a third party, those instances when payments on increased levels of non-investment-
such as a fee paid to a provider of credit receivables are held in non-interest grade securities). The subordination of a
support. The servicer may receive bearing accounts or are commingled security, while factored into the
additional compensation by having the with the servicer’s own funds, the evaluation made by the rating agencies
use of the amounts paid on the servicer is required to deposit these in their assessment of credit risk, is not
receivables between the time they are payments by a date specified in the indicative of whether a security is more
received by the servicer and the time pooling and servicing agreement into an or less safe for investors. In fact, there
they are due to the trust (which time is account from which the trustee makes are ‘‘AAA’’ rated subordinated
set forth in the pooling and servicing payments to certificateholders. securities.20 Subordination is simply
26. The underwriter will receive a fee another form of credit support. The
agreement). The servicer typically will
in connection with the securities rating agencies, after determining the
be required to pay the administrative
underwriting or private placement of level of credit support required to
expenses of servicing the trust,
certificates. In a firm commitment achieve a given rating level, are
including in some cases the trustee’s
underwriting, this fee would consist of essentially indifferent as to how these
fee, out of its servicing compensation.
the difference between what the credit support requirements are
19 The interest rate on certificates representing underwriter receives for the certificates implemented— whether through
interests in trusts holding leases is determined by that it distributes and what it pays the
breaking down lease payments into ‘‘principal’’ and sponsor for those certificates. In a 20 For example, a transaction may have two

‘‘interest’’ components based on an implicit interest private placement, the fee normally classes of ‘‘AAA’’ rated securities and one is
rate. Certificates issued by trusts that are classified subordinated to the other. The subordinated class
as REMICs for federal income tax purposes may use
takes the form of an agency commission would be required to have more credit support to
different formulas for setting the specified interest paid by the sponsor. In a best efforts qualify for the ‘‘AAA’’ rating than the more senior
rate with respect to certificates. underwriting in which the underwriter ‘‘AAA’’ rated class.

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subordination or other means. If certain types of credit support are not provider that will bear the ultimate risk
subordination is used, however, the relevant to certain asset types. For of loss.
subordinated class will have no greater example, there is generally little or no Internal Credit Support
credit risks or fewer legal protections in excess spread available in residential or
comparison with other credit-supported CMBS transactions because the interest 31. Internal credit support relies upon
classes that possesses the same rating. rates on the obligations being some combination of utilization of
There is much benefit to plan securitized are relatively low. Third, the excess interest generated by the
investors in having subordinated ratings agencies may require certain receivables, specified levels of
securities eligible for exemptive relief. types of credit support in a particular overcollateralization and/or
First, credit support provided through subordination of junior classes of
transaction. In this regard, the selection
third-party credit providers is more certificates. Transactions that look
of the types and amounts of the various
expensive than an equal amount of almost exclusively to the underlying
kinds of credit support for any given
credit support provided through pooled assets for cash payments (or
transaction are usually a product of ‘‘senior/subordinated’’ transactions) will
subordination. As a result, the ability to
negotiations between the underwriter of contain multiple classes of certificates,
use subordinated tranches to provide
the securities and the ratings agencies. some of which bear losses prior to
credit support for the more senior
For example, the underwriter might others and, therefore, support more
classes (which may or may not
themselves be subordinated) creates propose using excess spread and senior certificates. A subordinate
economic savings for all the parties to subordination as the types of credit certificate will absorb realized losses
the transaction which, in turn, can support for a particular transaction and from the asset pool, and have its
allow greater returns to investors. In the rating agency might require cash principal amount ‘‘written down’’ to
addition, if the credit rating of a third- reserve accounts funded up front by the zero, before any losses will be allocated
party credit support provider is sponsor, excess spread and a smaller to the more senior classes. In this way,
downgraded, the rating of the securities sized subordinated tranche than that the more senior classes will receive
is also downgraded. Second, the yields proposed by the underwriter. In higher rating classifications than the
available on subordinated securities are addition, market forces can affect the more subordinate classes. However, the
often higher than those paid on types of credit support. For example, rating agencies require cash flow
comparably rated non-subordinated there may not be a market for modeling of all senior/subordinated
securities because investors expect to subordinated tranches because the structures. These cash flows must be
receive higher returns for subordinated transaction cannot generate sufficient sufficient so that all rated classes,
securities. Third, subordinated cash flow to pay a high enough interest including the subordinated classes, will
securities are usually paid after other rate to compensate investors for the receive timely payment of interest and
more senior securities, which results in subordination feature, or the market ultimate repayment of principal by the
their having longer terms to maturity. may demand an insurance wrap on a maturity date. The cash flow models are
This is appealing to many investors who class of securities before it will purchase tested assuming a variety of stressed
are looking for medium-term fixed certain classes of securities. All of these prepayment speeds, declining weighted
income investments to diversify their considerations interact to dictate which average interest payments and loss
portfolios. The combination of these particular combination of credit support assumptions. Other structural
factors benefits investors by making will be used in a particular transaction. mechanisms to assure payment to
available securities which can provide subordinated classes are to allow
higher yields for longer periods. It External Credit Support collections held in the reserve account
should be noted that as the rating of a for the next payment date to be used if
30. In the case of external credit necessary to pay current interest to the
security generally addresses the
probability of all interest being timely support, credit enhancement for subordinated class or to create a
paid and all principal being paid by principal and interest repayments is separate interest liquidity reserve. The
maturity under various stress scenarios, provided by a third party so that if collections held in the reserve account
the rating agencies are particularly required collections on the pooled are from principal and interest paid on
concerned with the ability of the pool to receivables fall short due to greater than the underlying mortgages or other
generate sufficient cash flow to pay all anticipated delinquencies or losses, the receivables held in the trust and are not
amounts due on subordinated tranches, credit enhancement provider will pay from the securities issued by the
and several features of the credit the securityholders the shortfall. issuer.22 Also, some structures allow
support mechanisms discussed below Examples of such external credit
are designed to protect subordinated support features include: insurance 22 A collections reserve account is established for

classes of securities. policies from ‘‘AAA’’ rated monoline 21 almost all transactions to hold interest and
principal payments on the mortgages or receivables
insurance companies (referred to as as they are collected until the necessary amounts
Types of Credit Support ‘‘wrapped’’ transactions), corporate are paid to securityholders on the next periodic
29. Credit support consists of two guarantees, letters of credit and cash distribution date. In some transactions, the rating
general varieties: external credit support collateral accounts. In the case of agencies or other interested parties may require, in
order to protect the interests of the securityholders,
and internal credit support. The wrapped or other credit supported that excess interest in amount(s) equal to a specified
Applicant notes that the choice of the transactions, the Insurer or other credit number of future period anticipated collections be
type of credit support depends on many provider will usually take a lead role in retained in the collection account. This protects
factors. Internal credit support which is both senior and subordinated securityholders in
negotiating with the sponsor concerning situations where there are shortfalls in collections
generated by the operation of the Issuer levels of overcollateralization and on the underlying obligations because it provides
is preferred because it is less expensive selection of receivables for inclusion an additional source of funds from which these
than external credit support which must into the pool as it is the Insurer or credit securityholders can be paid their current
be purchased from outside third parties. distributions before the holders of the residual or
more subordinated securities receive their periodic
In addition, there is a limited number of 21 The term ‘‘monoline’’ is used to describe such distributions, if any. Accordingly, any reference to
appropriately rated third-party credit insurance companies because writing these types of ‘‘collections’’ from principal and interest paid on
support providers available. Further, insurance policies is their sole business activity. the mortgages is intended to describe such excess

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Federal Register / Vol. 68, No. 158 / Friday, August 15, 2003 / Notices 49317

both principal and interest to be applied spread prior to payment of any principal however, the master servicer may not be
to all payments to securityholders and, to the more subordinated classes. As obligated to advance funds but instead
in others, principal can be used to pay overcollateralization grows, the pool of would be called upon to provide funds
interest to the subordinate tranches. loans can withstand a larger dollar to cover defaulted payments to the full
Interest which is received but is not amount of losses without resulting in extent of its obligations as insurer.
required to make monthly payments to losses on the senior certificates. This Moreover, a master servicer typically
securityholders (or to pay servicing or also has the effect of increasing the can recover advances either from the
other administrative fees or expenses) amount of funds available to pay the provider of credit support or from future
can be used as credit support. This more subordinated classes as an ever- payments on the affected assets.
excess interest is known as ‘‘excess decreasing portion of the principal cash If the master servicer fails to advance
spread’’ or ‘‘excess servicing’’ and may flow is needed to pay the more senior funds, fails to call upon the credit
be paid out to holders of certain classes. Excess interest is used to pay support mechanism to provide funds to
securities, returned to the sponsor or down the more senior certificate cover delinquent payments, or
used to build up overcollateralization or balances until a specific dollar amount otherwise fails in its duties, the trustee
a loss reserve. The credit given to excess of overcollateralization is achieved. This would be required and would be able to
spread is conservatively evaluated to is referred to as the overcollateralization enforce the certificateholders’ rights, as
ensure sufficient cash flow at any one target amount required by the rating both a party to the pooling and servicing
point in time to cover losses. The rating agencies. Typically, the targeted amount agreement and the owner of the trust
agencies reduce the credit given to is set to ensure that even in a worst-case estate, including rights under the credit
excess spread as credit support to take loss scenario commensurate with the support mechanism. Therefore, the
into account the risk of higher coupon assigned rating level, all trustee, who is independent of the
loans prepaying first, higher than securityholders, including holders of servicer, will have the ultimate right to
expected total prepayments, timing subordinated classes, will receive timely enforce the credit support arrangement.
mismatching of losses with excess payment of interest and ultimate When a master servicer advances
spread collections and the amounts payment of principal by the applicable funds, the amount so advanced is
allowed to be returned to the sponsor maturity date. In these transactions, the recoverable by the master servicer out of
once minimum overcollateralization targeted amount is usually set as a future payments on receivables held by
targets are met (thereby reducing the percentage of the original pool balance. the trust to the extent not covered by
amounts available for credit support). It may be reduced after a fixed number credit support. However, where the
‘‘Overcollateralization’’ is the of years after the closing date, subject to master servicer provides credit support
difference between the outstanding the satisfaction of certain loss and to the trust, there are protections in
principal balance of the pool of assets delinquency triggers. These triggers place to guard against a delay in calling
and the outstanding principal balance of ensure that overcollateralization upon the credit support to take
the certificates backed by such pool of continues to be available if pool advantage of the fact that the credit
assets. This results in a larger principal performance begins to deteriorate. In a support declines proportionally with
balance of underlying assets than the senior/subordinated structure, every the decrease in the principal amount of
amount needed to make all required investment-grade class (whether or not the obligations in the trust as payments
payments of principal to investors. In all subordinated) is protected by either a on receivables are passed through to
senior/subordinated transactions, the lower rated subordinated class or investors.23
requisite level of overcollateralization classes or other credit support.
and the amount of principal that may be Description of Designated Transactions
paid to holders of the more Provision of Credit Support Through
Servicer Advancing 33. The Applicant requests relief for
subordinated certificates before the senior and/or subordinated investment-
more senior securities are retired (since 32. In some cases, the master servicer, grade certificates with respect to a
once such amounts are paid, they are or an affiliate of the master servicer, limited number of asset categories:
unavailable to absorb future losses) is may provide credit support to the trust. Motor vehicles, residential/home equity,
determined by the rating agencies and In these cases, the master servicer, in its manufactured housing and commercial
varies from transaction to transaction, capacity as servicer, will first advance mortgage backed securities.
depending on the type of assets, quality funds to the full extent that it Accordingly, set forth below are
of the assets, the term of the certificates determines that such advances will be separate profiles of a typical transaction
and other factors. recoverable (a) Out of late payments by for each asset category. Each profile
The senior/subordinated structure the obligors, (b) from the credit support describes specifically how each type of
often combines the use of subordinated provider (which may be the master transaction generally is structured.
tranches with overcollateralization that servicer or an affiliate thereof) or (c) in Information on the due diligence that
builds over time from the application of the case of a trust that issues the rating agencies conduct before
excess interest to pay principal on more subordinated certificates, from amounts assigning a rating to a particular class of
senior classes. This is often referred to otherwise distributable to holders of such securities, the calculations that are
as a ‘‘turbo’’ structure. The credit subordinated certificates; and the master performed to determine projected cash
enhancement for each more senior class servicer will advance such funds in a flows, loss frequency and loss severity
is provided by the aggregate dollar timely manner. When the servicer is the and the manner in which credit support
amount of the respective subordinated provider of the credit support and requirements are determined for each
classes, plus overcollateralization that provides its own funds to cover rating class is not included because
results from the payment of principal to defaulted payments, it will do so either such information has been provided
the more senior classes using excess on the initiative of the trustee, or on its previously to the Department in
own initiative on behalf of the trustee, connection with PTE 2000–58. The
interest or principal not required to cover current but in either event it will provide such
payments to the senior and subordinated class funds to cover payments to the full
eligible to be purchased by plans. Thus, this 23 See the Proposal to PTE 2000–58 (August 23,

mechanism is not harmful to the interests of senior extent of its obligations under the credit 2000, 65 FR 51454, at page 51475) for a fuller
securityholders. support mechanism. In some cases, explanation of these safeguards.

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49318 Federal Register / Vol. 68, No. 158 / Friday, August 15, 2003 / Notices

motor vehicle, residential/home equity, subordinated certificates might into a reserve fund which provides the
manufactured housing and commercial constitute 3%. The total level of credit credit support for the subordinated
mortgage backed transactions, as enhancement from all sources averages tranches. In still other cases, credit
described in this section, are about 13% in order to obtain ‘‘AAA’’ support is provided to an investment-
collectively referred to herein as rated certificates, 10% for an ‘‘AA’’ grade subordinated tranche through a
‘‘Designated Transactions.’’ rating, 7% for an ‘‘A’’ rating and 3% for junior subordinated tranche which
a ‘‘BBB’’ rating. receives principal only after the more
Motor Vehicle Loan Transactions In a typical HLTV ratio (i.e., above senior subordinated tranches are paid.
34. In a typical motor vehicle 100%) second-lien loan transaction, Sponsor guarantees are also used as
transaction, ‘‘AAA’’ rated senior ‘‘AAA’’ rated senior certificates might credit support.
certificates are issued that might be issued which represent
represent approximately 90% or more of approximately 76% of the principal Commercial Mortgage-Backed Securities
the principal balances of the certificates, balances of the certificates; ‘‘AA’’ rated (CMBS)
with ‘‘A’’ rated subordinated certificates subordinated certificates might 37. In a typical CMBS transaction, two
issued that might represent the comprise 10%; ‘‘A’’ rated subordinated classes of ‘‘AAA’’ rated certificates
remaining 10% or less of the principal 3%; ‘‘BBB’’ rated subordinated 4% and might be issued which represent
balance of the certificates. The total junior subordinated certificates might approximately 78% of the principal
level of credit enhancement from all constitute 7%. The total level of credit balances of the certificates (one such
sources, including excess spread, enhancement from all sources averages ‘‘AAA’’ class will be issued with a
typically averages approximately 7% of about 24% in order to obtain ‘‘AAA’’ shorter, and the other ‘‘AAA’’ class with
the initial principal balance of rated certificates, 14% for an ‘‘AA’’ a longer, expected maturity); ‘‘AA’’
certificates issued by prime issuers and rating, 10% for an ‘‘A’’ rating and 7% rated subordinated certificates might
14% for subprime issuers in order to for a ‘‘BBB’’ rating. Typical types of represent 5%; ‘‘A’’ rated subordinated
obtain an ‘‘AAA’’ rated certificate. credit support used in home equity 5%; ‘‘BBB’’ rated subordinated 5% and
Credit support equaling 3% for prime transactions are subordination, reserve junior subordinated certificates 7%. The
issuers is usually required in order to accounts, excess spread, total level of credit enhancement from
obtain an ‘‘A’’ or better rating on the overcollateralization and in transactions all sources averages about 23% in order
subordinated certificates. Typical types which do not use subordination, to obtain ‘‘AAA’’ rated certificates, 18%
of credit support used in auto financial guarantees from ‘‘AAA’’ rated for an ‘‘AA’’ rating, 13% for an ‘‘A’’
transactions are subordination, reserve monoline insurance companies or rating and 7% for a ‘‘BBB’’ rating.
accounts, excess spread and financial highly rated sponsors. Subordination is generally the only type
guarantees from ‘‘AAA’’ rated monoline of credit support used in CMBS
insurance companies. Transactions with Manufactured Housing Transactions transactions.
subprime sponsors generally use surety 36. In a typical manufactured housing The servicer function in a CMBS
bonds as credit enhancement, so there is transaction, ‘‘AAA’’ rated senior transaction is particularly important
no subordinated class. certificates might be issued which because not only does the servicer or
represent approximately 80% of the servicers fulfill the normal functions of
Residential/Home Equity Mortgage principal balances of the certificates; collecting and remitting loan payments
Transactions ‘‘AA’’ rated subordinated certificates from borrowers to securityholders and
35. In a typical prime residential might comprise 6%; ‘‘A’’ rated advancing funds for such purposes, but
mortgage transaction, ‘‘AAA’’ rated subordinated 5%; ‘‘BBB’’ rated the servicer may also become
senior Securities might be issued which subordinated 5% and junior responsible for activities relating to
represent approximately 95% of the subordinated certificates might defaulted or potentially defaulting loans
principal balances of the Securities; constitute 4%. The total level of credit (which are more likely to be
‘‘AA’’ rated subordinated Securities enhancement from all sources including restructured than in non-commercial
might comprise 2%; ‘‘A’’ rated excess spread averages about 15%–16% transactions where the loans are usually
subordinated 1%; ‘‘BBB’’ rated in order to obtain ‘‘AAA’’ rated liquidated). If a servicer advances funds,
subordinated 1% and junior certificates, 10%–11% for an ‘‘AA’’ its credit rating cannot be more than one
subordinated Securities might constitute rating, 7.5%–8.5% for an ‘‘A’’ rating and rating category below the highest rated
1%. The total level of credit 3.5%–9% for a ‘‘BBB’’ rating. Typical tranche in the securitization and no less
enhancement from all sources averages types of credit support used in than ‘‘BBB’’ unless it has a qualifying
about 4% in order to obtain ‘‘AAA’’ manufactured housing transactions are back-up advancer. All entities servicing
rated Securities, 2% for an ‘‘AA’’ rating, subordination, reserve accounts, excess CMBS transactions must be approved by
1.5% for an ‘‘A’’ rating and 1% for a spread, overcollateralization and the rating agencies.
‘‘BBB’’ rating. Subordination is the financial guarantees from ‘‘AAA’’ rated An additional responsibility of the
predominant type of credit support used monoline insurance companies or servicer is ensuring that insurance is
in traditional prime residential mortgage highly rated sponsors. maintained by each borrower covering
transactions. Overcollateralization is also used as each mortgaged property in accordance
In a typical ‘‘B&C home/equity loan’’ credit support for the subordinated with the applicable mortgage
transaction (loans made primarily to B certificates once the seniors have been documents. Insurance coverage
and C quality borrowers for paid. Because the coupon rate on typically includes, at a minimum, fire
consolidating credit card and other manufactured housing loans is and casualty, general liability and rental
consumer debt or refinancing mortgage substantially higher than that charged interruption insurance but may include
loans), ‘‘AAA’’ rated senior certificates on traditional residential mortgages, flood and earthquake coverage
might be issued which represent 80% of there is a large amount of excess spread depending on the location of a
the principal balances of the certificates; (typically more than 300 bps) that can particular mortgaged property. If a
‘‘AA’’ rated subordinated certificates be used for credit support of both senior borrower fails to maintain the required
might comprise 11%; ‘‘A’’ rated and subordinated tranches. In other insurance coverage or the mortgaged
subordinated 6%; ‘‘BBB’’ or lower rated structures, the excess spread is trapped property defaults and becomes an asset

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of the trust, the servicer is obligated to protection is also provided to trust for the loss of interest payable on
obtain insurance which, in pool subordinated classes through the the mortgage loan.
transactions, may be provided by a concept of a ‘‘directing class’’ which has Another mechanism, referred to as
blanket policy covering all pool evolved to give those holders of rated ‘‘defeasance’’, assures stability of cash
properties. Generally, the blanket policy subordinated certificates in the first loss flow and operates as follows. If a
must be provided by an insurance position some control over the servicing borrower wishes to have the mortgage
provider with a rating of at least ‘‘BBB.’’ and realization on defaulted mortgage lien released on the property (for
Each servicer, special servicer and loans. In a typical transaction, the example, where it is being sold), the
subservicer is required to maintain a servicer might be required to obtain the original obligation either remains an
fidelity bond and a policy of insurance consent of the directing class before asset of the trust and is assumed by a
covering loss occasioned by the errors proceeding with any of the following: third party, or a new obligation with the
and omissions of its officers and any modification, consent or forgiveness same outstanding principal balance,
employees in connection with its of principal or interest with respect to interest rate, periodic payment dates,
servicing obligations unless the rating a defaulted mortgage loan; any proposed maturity date and default provisions is
agency allows self-insurance. All foreclosure or acquisition of a entered into with such third party. The
fidelity bonds and policies of errors and mortgaged property by deed-in-lieu of new obligation replicates the cash flows
omissions insurance must be issued in foreclosure; any proposed sale of a over the remaining term of the original
favor of the trustee or other issuer by defaulted mortgage loan and any obligor’s obligation. In either case, the
insurance carriers which are rated by decision to conduct environmental property or assets originally
the rating agency with a claims-paying clean up or remediation. The directing collateralizing the obligation are
ability rating no lower than two replaced by collateral consisting of
class might also have the right to
categories below the highest rated United States Treasury securities or any
remove a servicer, with or without
certificates in the transaction but no less other security guaranteed as to principal
cause, subject to the rating agency’s
than ‘‘BBB.’’ Subservicers may not make and interest by the United States, or by
confirmation that appointment of the
important servicing decisions (such as a person controlled or supervised by
modifications of the mortgage loans or successor servicer would not result in a and acting as an instrumentality of the
the decision to foreclose) without the qualification, withdrawal or downgrade Government of the United States
involvement of the master servicer or of the then-applicable rating assigned to (referred to herein as ‘‘government
special servicer, and the trustee or any the rated certificates, compliance with securities’’).
successor servicer may be permitted to the terms and conditions of the pooling Defeasance generally operates so that,
terminate the subservicing agreement and servicing agreement and payment pursuant to an assumption and release
without cause and without cost or by the directing class of any and all or similar arrangement valid under
further obligation to the issuer or the termination or other fees relating to applicable state law, the original obligor
holders of the rated certificates. such removal. Holders of CMBS enjoy is replaced with a new obligor.
Loans secured by credit tenant leases additional protection, in that the master The new obligor is generally a
require special analysis. Credit servicer or servicer occupies a first-loss bankruptcy-remote special purpose
enhancement for credit tenant loans is position and usually holds an equity entity (SPE), the assets of which consist
based on an analysis of the probability stake in the offering, which gives it an of government securities. In the
that the lessee will file bankruptcy, and incentive to maximize recoveries on defeasance of a mortgage loan held in a
the likelihood that the lessee will defaulted loans. The master servicer and CMBS pool, a new entity must be
disaffirm the lease and loan structures servicer are in a first loss position created (the SPE) which becomes the
that may present a risk other than that because they hold the most obligor on the mortgage loan and holds
of the lessee filing bankruptcy. subordinated equity position interest(s) the government securities being
Environmental reports for each in the trust. Accordingly, they absorb substituted for the original collateral
property are generally required. A losses before any other classes of securing the mortgage loan. This newly
reserve is usually required for any securityholders. formed entity is required by the rating
reported remediation costs, and any Additional cash flow stability is agencies to be an SPE in order to assure
actions covenanted must be completed created through call protection features that the owner of the securities to be
within a specified period. Risks that pledged has no liabilities or creditors
on the commercial mortgages held in
cannot be quantified or that have not other than the CMBS pool trustee, has
the trust. Call protection prevents the
been mitigated through either no assets or business other than the
borrowers from prepaying the mortgage
remediation or reserves are assumed to ownership of the government securities
loans during a fixed ‘‘lock-out period.’’
pose a risk to the trust and are reflected and is not susceptible to substantive
In certain transactions, under the terms consolidation with the original mortgage
in the credit enhancement requirements.
of the mortgage agreement, the borrower borrower in the event of the original
Properties with certain types of asbestos
problems, or those that are assumed to is only allowed to prepay the loan at the mortgage borrower’s bankruptcy. Such
have such problems given their date of end of the lock-out period if it provides an SPE is purely passive and does not
construction, are assumed to have ‘‘yield maintenance’’24 whereby it is engage in any activities other than the
higher losses due to the clean-up costs required to contribute a cash payment ownership of securities. Although there
and increased difficulty or cost in derived from a formula which is is no prescribed market requirement as
leasing or selling the asset. Seasoned or calculated based on current interest to ownership of the SPE, the
acquired pools that may not have rates and is intended to offset the securitization sponsor (e.g., the original
current reports for each property are borrower’s refinancing incentive. This mortgage lender) is usually its owner,
also assumed to have higher amount also effectively compensates the except that in certain circumstances the
environmental losses. original mortgage borrower may own the
24 The Applicant represents that the yield
In general, although there are other SPE for a variety of reasons; e.g., to be
maintenance provision in the mortgage agreement
types of credit support available, would meet the definition of a ‘‘yield supplement
entitled to any excess value of securities
subordination is the only type of credit agreement’’ currently permitted under section pledged as collateral at maturity of the
support used in CMBS. However, III.B.(3)(b) of the Underwriter Exemptions. new defeasance note over the amount

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due at such time. As a condition to payments made pursuant to any credit into prior to the date exemptive relief
defeasance, all fees and expenses are support, and the amount of may be granted.
paid at the substitution of the compensation payable to the servicer.
Summary
government securities for the mortgage Such report also will be delivered to or
lien. made available to the rating agency or 42. In summary, the Applicant
Mechanically, the government agencies that have rated the trust’s represents that the transactions for
securities are transferred to a custodian certificates. which exemptive relief is requested
which holds then as collateral for the In addition, promptly after each satisfy the statutory criteria of section
securitization trust. The payments on distribution date, certificateholders will 408(a) of the Act due to the following:
the government securities are actually receive a statement prepared by the (a) The Issuers contain ‘‘fixed pools’’
made directly to the trust so that the servicer, paying agent or trustee of assets. There is little discretion on the
SPE does not receive any payments or summarizing information regarding the part of the sponsor to substitute
make any payments. trust and its assets. Such statement will receivables contained in the Issuer once
Whether the original mortgage include information regarding the trust the Issuer has been formed;
obligation is replaced with a new and its assets, including underlying (b) In the case where a pre-funding
securitized obligation or the original receivables. Such statement will account is used, the characteristics of
obligation remains an asset of the trust, typically contain information regarding the receivables to be transferred to the
is usually dictated by how the payments and prepayments, Issuer during the pre-funding period
transaction is treated for mortgage delinquencies, the remaining amount of must be substantially similar to the
recording tax purposes under state law. the guaranty or other credit support and characteristics of those transferred to the
Both call protection and defeasance are a breakdown of payments between Issuer on the closing date thereby giving
intended to protect investors from the principal and interest. the sponsor and/or originator little
risk of prepayments of the loans. discretion over the selection process,
Forward Delivery Commitments and compliance with this requirement
Disclosure 39. To date, no forward delivery will be assured by the specificity of the
38. In connection with the original commitments have been entered into by characteristics and monitoring
issuance of certificates, the prospectus RBC–DR in connection with the offering mechanisms contemplated under the
or private placement memorandum will of any certificates, but RBC–DR may exemptive relief proposed. In addition,
be furnished to investing plans. The contemplate entering into such certain cash accounts will be
prospectus or private placement commitments. The utility of forward established to support the certificate
memorandum will contain information delivery commitments has been interest rate and such cash accounts will
material to a fiduciary’s decision to recognized with respect to offering be invested in short-term, conservative
invest in the certificates.25 similar certificates backed by pools of investments; the pre-funding period will
Reports indicating the amount of residential mortgages, and RBC–DR may be of a reasonably short duration; a pre-
payments of principal and interest are find it desirable in the future to enter funding limit will be imposed; and any
provided to certificateholders at least as into such commitments for the purchase Internal Revenue Service requirements
frequently as distributions are made to of certificates. with respect to pre-funding intended to
certificateholders. Certificateholders preserve the passive income character of
Secondary Market Transactions the Issuer will be met. Thus, the
will also be provided with periodic
information statements setting forth 40. It is the Applicant’s normal policy fiduciary of the plans making the
material information concerning the to attempt to make a market for decision to invest in securities will be
underlying assets, including, where certificates for which it is lead or co- fully apprised of the nature of the
applicable, information as to the amount managing underwriter, and it is the receivables which will be held in the
and number of delinquent and defaulted Applicant’s intention to make a market Issuer and will have sufficient
loans or receivables. for any certificates for which the information to make a prudent
In the case of a trust that offers and Applicant is a lead or co-managing investment decision;
sells certificates in a registered public underwriter, although it will have no (c) Securities for which exemptive
offering, the trustee, the servicer or the obligation to do so. At times the relief is requested will have been rated
sponsor will file periodic reports in the Applicant will facilitate sales by in one of the three highest rating
form and to the extent required under investors who purchase certificates if categories (or four in the case of
the Securities Exchange Act of 1934 and the Applicant has acted as agent or Designated Transactions) by a rating
current interpretations thereof. principal in the original private agency. The rating agency, in assigning
At or about the time distributions are placement of the certificates and if such a rating to such securities, will take into
made to certificateholders, a report will investors request the Applicant’s account the fact that Issuers may hold
be delivered to the trustee as to the assistance. interest rate swaps or yield supplement
status of the trust and its assets, agreements with notional principal
Retroactive Relief amounts or, in Designated Transactions,
including underlying obligations. Such
41. RBC–DR represents that it has not securities may be issued by Issuers
report will typically contain information
assumed that retroactive relief would be holding residential and home equity
regarding the trust’s assets (including
granted prior to the date of its loans with LTV ratios in excess of
those purchased by the trust from any
application, and therefore has not 100%. Credit support will be obtained
pre-funding account), payments
engaged in transactions related to to the extent necessary to attain the
received or collected by the servicer, the
mortgage-backed and asset-backed desired rating;
amount of prepayments, delinquencies,
securities based on such an assumption. (d) Securities will be issued by Issuers
servicer advances, defaults and
However, RBC–DR requests the whose assets will be protected from the
foreclosures, the amount of any
exemptive relief granted to be claims of the sponsor’s creditors in the
25 See the Proposal to PTE 2000–58 (August 23, retroactive to the date of its application, event of bankruptcy or other insolvency
2000, 65 FR 51454, at page 51486) for a description and would like to rely on such of the sponsor, and both equity and debt
of types of disclosure. retroactive relief for transactions entered securityholders will have a beneficial or

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Federal Register / Vol. 68, No. 158 / Friday, August 15, 2003 / Notices 49321

security interest in the receivables held disclose the availability of the (2) Before an exemption may be
by the Issuer. In addition, an exemption. granted under section 408(a) of the Act
independent trustee will represent the Comments and requests for a hearing and/or section 4975(c)(2) of the Code,
securityholders’ interests in dealing must be received by the Department not the Department must find that the
with other parties to the transaction; later than 45 days from the date of exemption is administratively feasible,
and publication of this notice of proposed in the interests of the plan and of its
(e) All transactions for which RBC–DR exemption in the Federal Register. participants and beneficiaries, and
seeks exemptive relief will be governed FOR FURTHER INFORMATION CONTACT: Gary protective of the rights of participants
by the pooling and servicing agreement, Lefkowitz of the Department, telephone and beneficiaries of the plan;
which is summarized in the prospectus (202) 693–8546. (This is not a toll-free (3) The proposed exemptions, if
or private placement memorandum and number.) granted, will be supplemental to, and
distributed to plan fiduciaries for their General Information not in derogation of, any other
review prior to the plan’s investment in provisions of the Act and/or the Code,
The attention of interested persons is including statutory or administrative
securities.
directed to the following: exemptions and transitional rules.
Notice to Interested Persons: RBC–DR (1) The fact that a transaction is the Furthermore, the fact that a transaction
represents that any securities offered in subject of an exemption under section is subject to an administrative or
reliance upon the proposed exemption 408(a) of the Act and/or section statutory exemption is not dispositive of
prior to the date the final exemption is 4975(c)(2) of the Code does not relieve whether the transaction is in fact a
published in the Federal Register shall a fiduciary or other party in interest or prohibited transaction; and
disclose in the offering memorandum or disqualified person from certain other
prospectus: (a) The availability of the (4) The proposed exemptions, if
provisions of the Act and/or the Code,
proposed exemption; (b) the right of granted, will be subject to the express
including any prohibited transaction
potentially interested plan fiduciaries to condition that the material facts and
provisions to which the exemption does
comment on the proposed exemption; representations contained in each
not apply and the general fiduciary
and (c) information on how an responsibility provisions of section 404 application are true and complete, and
interested plan fiduciary can obtain a of the Act, which, among other things, that each application accurately
copy of the proposed exemption (once require a fiduciary to discharge his describes all material terms of the
it is available) from RBC–DR. Once this duties respecting the plan solely in the transaction which is the subject of the
proposed exemption is granted, a copy interest of the participants and exemption.
of the exemption published in the beneficiaries of the plan and in a Signed at Washington, DC, this 11th day of
Federal Register shall be distributed to prudent fashion in accordance with August, 2003.
any current or prospective plan investor section 404(a)(1)(b) of the Act; nor does Ivan Strasfeld,
in a security offered in reliance upon it affect the requirement of section Director of Exemption Determinations,
the exemption upon request of such 401(a) of the Code that the plan must Employee Benefits Security Administration,
investor. Each offering memorandum or operate for the exclusive benefit of the Department of Labor.
prospectus offering securities in reliance employees of the employer maintaining [FR Doc. 03–20766 Filed 8–14–03; 8:45 am]
upon the exemption shall describe and the plan and their beneficiaries; BILLING CODE 4510–29–P

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