[Federal Register: September 19, 2000 (Volume 65, Number 182)]
[Notices]               
[Page 56707-56738]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19se00-111]                         


[[Page 56707]]

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Part IV





Department of Labor





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Pension and Welfare Benefits Administration



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Proposed Exemptions; Deutsche Bank AG and Its Affiliates (Collectively, 
Deutsche Bank or the Applicants); Notice


[[Page 56708]]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10770, et al.]

 
Proposed Exemptions; Deutsche Bank AG and its Affiliates 
(Collectively, Deutsche Bank or the Applicants)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
request for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) the name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ______, stated in each Notice of 
Proposed Exemption. The applications for exemption and the comments 
received will be available for public inspection in the Public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-5638, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Deutsche Bank AG and its Affiliates (Collectively, Deutsche Bank or 
the Applicants) Located in Frankfurt, Germany

[Application No. D-10770]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act, section 4975(c)(2) of the Code, 
and section 8477(c)(3) of FERSA, in accordance with the procedures set 
forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 
1990).

Section I--Retroactive Exemption for the Acquisition, Holding and 
Disposition of Deutsche Bank AG Stock

    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, and the sanctions 
resulting from the application of section 4975 of the Code by reason of 
section 4975(c)(1)(D) and (E) of the Code, shall not apply, as of June 
4, 1999 until the date this proposed exemption is granted, to the 
acquisition, holding and disposition of the common stock of Deutsche 
Bank AG (the Deutsche Bank AG Stock) by Index and Model-Driven Funds 
managed by Deutsche Bank, provided that the following conditions and 
the general conditions in Section III are met:
    (a) The acquisition or disposition of the Deutsche Bank AG Stock is 
for the sole purpose of maintaining strict quantitative conformity with 
the relevant index upon which the Index or Model-Driven Fund is based, 
and does not involve any agreement, arrangement or understanding 
regarding the design or operation of the Fund acquiring the Deutsche 
Bank AG Stock which is intended to benefit Deutsche Bank or any party 
in which Deutsche Bank may have an interest.
    (b) All aggregate daily purchases of Deutsche Bank AG Stock by the 
Funds do not exceed on any particular day the greater of:
    (1) 15 percent of the average daily trading volume for the Deutsche 
Bank AG Stock occurring on the applicable exchange and automated 
trading system (as described in paragraph (c) below) for the previous 
five (5) business days, or
    (2) 15 percent of the trading volume for Deutsche Bank AG Stock 
occurring on the applicable exchange and automated trading system on 
the date of the transaction, as determined by the best available 
information for the trades occurring on that date.
    (c) All purchases and sales of Deutsche Bank AG Stock occur either 
(i) on a recognized securities exchange as defined in Section IV(k) 
below, (ii) through an automated trading system (as defined in Section 
IV(j) below) operated by a broker-dealer independent of Deutsche Bank 
that is subject to regulation and supervision by the Deutsche 
Bundesbank and the Bundesaufsichtsamt fuer das Kreditwesen (the BAK), 
the Bundesaufsichtsamt fur den Wertpapierhandel (the BAWe), or another 
applicable regulatory authority (pursuant to the applicable securities 
laws) that provides a mechanism for customer orders to be matched on an 
anonymous basis without the participation of a broker-dealer, or (iii) 
in a direct, arms-length transaction entered into on a principal basis 
with a broker-dealer, in the ordinary course of its business, where 
such broker-dealer is independent of Deutsche Bank and is either 
registered under the Securities Exchange Act of 1934 (the `34 Act), and 
thereby subject to regulation by the U.S. Securities and Exchange 
Commission (SEC), or subject to regulation and supervision by the BAK, 
the BAWe, or another applicable regulatory authority.
    (d) No transactions by a Fund involve purchases from, or sales to, 
Deutsche Bank (including officers, directors, or employees thereof), or 
any party in interest that is a fiduciary with discretion to invest 
plan assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption).

[[Page 56709]]

    (e) No more than five (5) percent of the total amount of Deutsche 
Bank AG Stock issued and outstanding at any time is held in the 
aggregate by Index and Model-Driven Funds managed by Deutsche Bank.
    (f) Deutsche Bank AG Stock constitutes no more than three (3) 
percent of any independent third party index on which the investments 
of an Index or Model-Driven Fund are based.
    (g) A plan fiduciary independent of Deutsche Bank authorizes the 
investment of such plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds Deutsche Bank AG Stock, pursuant to the 
procedures described in this notice of proposed exemption, other than 
in the case of an employee benefit plan sponsored or maintained by 
Deutsche Bank and/or an Affiliate for its own employees (a Deutsche 
Bank Plan).
    (h) A fiduciary independent of Deutsche Bank directs the voting of 
the Deutsche Bank AG Stock held by an Index or Model-Driven Fund on any 
matter in which shareholders of Deutsche Bank AG Stock are required or 
permitted to vote.
    (i) No more than ten (10) percent of the assets of any Fund that 
acquires and holds Deutsche Bank AG Stock is comprised of assets of any 
Deutsche Bank Plan(s) for which Deutsche Bank exercises investment 
discretion.

Section II--Prospective Exemption for the Acquisition, Holding and 
Disposition of Deutsche Bank Stock

    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, section 8477(c)(2)(A) 
and (B) of FERSA, and the sanctions resulting from the application of 
section 4975 of the Code by reason of section 4975(c)(1)(D) and (E) of 
the Code, shall not apply to the acquisition, holding and disposition 
of Deutsche Bank AG Stock or the common stock of an affiliate of 
Deutsche Bank AG (Deutsche Bank Affiliate Stock) by Index and Model-
Driven Funds managed by Deutsche Bank, provided that the following 
conditions and the general conditions in Section II are met:
    (a) The acquisition or disposition of Deutsche Bank AG Stock or 
Deutsche Bank Affiliate Stock (collectively, Deutsche Bank Stock) is 
for the sole purpose of maintaining strict quantitative conformity with 
the relevant index upon which the Index or Model-Driven Fund is based, 
and does not involve any agreement, arrangement or understanding 
regarding the design or operation of the Fund acquiring the Deutsche 
Bank Stock which is intended to benefit Deutsche Bank or any party in 
which Deutsche Bank may have an interest.
    (b) Whenever Deutsche Bank Stock is initially added to an index on 
which an Index or Model-Driven Fund is based, or initially added to the 
portfolio of an Index or Model-Driven Fund, all acquisitions of 
Deutsche Bank Stock necessary to bring the Fund's holdings of such 
Stock either to its capitalization-weighted or other specified 
composition in the relevant index, as determined by the independent 
organization maintaining such index, or to its correct weighting as 
determined by the model which has been used to transform the index, 
occur in the following manner:
    (1) Purchases are from, or through, only one broker or dealer on a 
single trading day;
    (2) Based on the best available information, purchases are not the 
opening transaction for the trading day;
    (3) Purchases are not effected in the last half hour before the 
scheduled close of the trading day;
    (4) Purchases are at a price that is not higher than the lowest 
current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
    (5) Aggregate daily purchases do not exceed 15 percent of the 
average daily trading volume for the security, as determined by the 
greater of either (i) the trading volume for the security occurring on 
the applicable exchange and automated trading system on the date of the 
transaction, or (ii) an aggregate average daily trading volume for the 
security occurring on the applicable exchange and automated trading 
system for the previous five (5) business days, both based on the best 
information reasonably available at the time of the transaction;
    (6) All purchases and sales of Deutsche Bank Stock occur either (i) 
on a recognized securities exchange (as defined in Section IV(k) 
below), (ii) through an automated trading system (as defined in Section 
IV(j) below) operated by a broker-dealer independent of Deutsche Bank 
that is either registered under the '34 Act, and thereby subject to 
regulation by the SEC, or subject to regulation and supervision by the 
BAK, the BAWe, or another applicable regulatory authority, which 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer, or (iii) through an 
automated trading system (as defined in Section IV(j) below) that is 
operated by a recognized securities exchange (as defined in Section 
IV(k) below), pursuant to the applicable securities laws, and provides 
a mechanism for customer orders to be matched on an anonymous basis 
without the participation of a broker-dealer; and
    (7) If the necessary number of shares of Deutsche Bank Stock cannot 
be acquired within 10 business days from the date of the event which 
causes the particular Fund to require Deutsche Bank Stock, Deutsche 
Bank appoints a fiduciary which is independent of Deutsche Bank to 
design acquisition procedures and monitor Deutsche Bank's compliance 
with such procedures.
    (c) Subsequent to acquisitions necessary to bring a Fund's holdings 
of Deutsche Bank Stock to its specified weighting in the index or model 
pursuant to the restrictions described in paragraph (b) above, all 
aggregate daily purchases of Deutsche Bank Stock by the Funds do not 
exceed on any particular day the greater of:
    (1) 15 percent of the average daily trading volume for the Deutsche 
Bank Stock occurring on the applicable exchange and automated trading 
system (as defined below) for the previous five (5) business days, or
    (2) 15 percent of the trading volume for Deutsche Bank Stock 
occurring on the applicable exchange and automated trading system (as 
defined below) on the date of the transaction, as determined by the 
best available information for the trades that occurred on such date.
    (d) All transactions in Deutsche Bank Stock not otherwise described 
in paragraph (b) above are either: (i) Entered into on a principal 
basis in a direct, arms-length transaction with a broker-dealer, in the 
ordinary course of its business, where such broker-dealer is 
independent of Deutsche Bank and is either registered under the '34 
Act, and thereby subject to regulation by the SEC, or subject to 
regulation and supervision by the BAK, the BAWe, or another applicable 
regulatory authority, (ii) effected on an automated trading system (as 
defined in Section IV(j) below) operated by a broker-dealer independent 
of Deutsche Bank that is subject to regulation by either the SEC, the 
BAK, the BAWe, or another applicable regulatory authority, or an 
automated trading system operated by a recognized securities exchange 
(as defined in Section IV(k) below) which, in either case, provides a 
mechanism for customer orders to be matched on an anonymous basis 
without the participation of a broker-dealer, or (iii) effected through 
a recognized securities exchange (as defined in Section IV(k) below) so 
long as the broker is acting on an agency basis.
    (e) No transactions by a Fund involve purchases from, or sales to, 
Deutsche

[[Page 56710]]

Bank (including officers, directors, or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption).
    (f) No more than five (5) percent of the total amount of either 
Deutsche Bank AG Stock or any Deutsche Bank Affiliate Stock, that is 
issued and outstanding at any time, is held in the aggregate by Index 
and Model-Driven Funds managed by Deutsche Bank.
    (g) Deutsche Bank Stock constitutes no more than five (5) percent 
of any independent third party index on which the investments of an 
Index or Model-Driven Fund are based.
    (h) A plan fiduciary independent of Deutsche Bank authorizes the 
investment of such plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds Deutsche Bank Stock, pursuant to the procedures 
described herein, other than with respect to a Deutsche Bank Plan.
    (i) A fiduciary independent of Deutsche Bank directs the voting of 
the Deutsche Bank Stock held by an Index or Model-Driven Fund on any 
matter in which shareholders of Deutsche Bank Stock are required or 
permitted to vote.
    (j) No more than ten (10) percent of the assets of any Fund that 
acquires and holds Deutsche Bank Stock is comprised of assets of 
Deutsche Bank Plan(s) for which Deutsche Bank exercises investment 
discretion.

Section III--General Conditions

    (a) Deutsche Bank maintains or causes to be maintained for a period 
of six years from the date of the transaction the records necessary to 
enable the persons described in paragraph (b) of this Section to 
determine whether the conditions of this exemption have been met, 
except that (1) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of Deutsche Bank, 
the records are lost or destroyed prior to the end of the six-year 
period, and (2) no party in interest other than Deutsche Bank shall be 
subject to the civil penalty that may be assessed under section 502(i) 
of the Act or to the taxes imposed by section 4975(a) and (b) of the 
Code if the records are not maintained or are not available for 
examination as required by paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) and notwithstanding 
any provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (a) of this Section are unconditionally 
available at their customary location for examination during normal 
business hours by--
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of 
the plan, or any duly authorized employee or representative of such 
fiduciary,
    (C) Any contributing employer to any plan participating in an Index 
or Model-Driven Fund or any duly authorized employee or representative 
of such employer, and
    (D) Any participant or beneficiary of any plan participating in an 
Index or Model-Driven Fund, or a representative of such participant or 
beneficiary.
    (2) None of the persons described in subparagraphs (B) through (D) 
of this paragraph (b) shall be authorized to examine trade secrets of 
Deutsche Bank or commercial or financial information which is 
considered confidential.

Section IV--Definitions

    (a) The term ``Index Fund'' means any investment fund, account or 
portfolio sponsored, maintained, trusteed, or managed by Deutsche Bank, 
in which one or more investors invest, and--
    (1) Which is designed to track the rate of return, risk profile and 
other characteristics of an independently maintained securities Index, 
as described in Section IV(c) below, by either (i) replicating the same 
combination of securities which compose such Index or (ii) sampling the 
securities which compose such Index based on objective criteria and 
data;
    (2) For which Deutsche Bank does not use its discretion, or data 
within their control, to affect the identity or amount of securities to 
be purchased or sold;
    (3) That contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and,
    (4) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund which is intended to 
benefit Deutsche Bank or any party in which Deutsche Bank may have an 
interest.
    (b) The term ``Model-Driven Fund'' means any investment fund, 
account or portfolio sponsored, maintained, trusteed, or managed by 
Deutsche Bank, in which one or more investors invest, and--
    (1) Which is composed of securities the identity of which and the 
amount of which are selected by a computer model that is based on 
prescribed objective criteria using independent third party data, not 
within the control of Deutsche Bank, to transform an independently 
maintained Index, as described in Section IV(c) below;
    (2) Which contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and
    (3) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund or the utilization of any 
specific objective criteria which is intended to benefit Deutsche Bank 
or any party in which Deutsche Bank may have an interest.
    (c) The term ``Index'' means a securities index that represents the 
investment performance of a specific segment of the public market for 
equity or debt securities in the United States and/or foreign 
countries, but only if--
    (1) The organization creating and maintaining the index is--
    (A) engaged in the business of providing financial information, 
evaluation, advice or securities brokerage services to institutional 
clients,
    (B) a publisher of financial news or information, or
    (C) a public stock exchange or association of securities dealers; 
and,
    (2) The index is created and maintained by an organization 
independent of Deutsche Bank; and,
    (3) The index is a generally accepted standardized index of 
securities which is not specifically tailored for the use of Deutsche 
Bank.
    (d) The term ``opening date'' means the date on which investments 
in or withdrawals from an Index or Model-Driven Fund may be made.
    (e) The term ``Buy-up'' means an acquisition of Deutsche Bank Stock 
by an Index or Model-Driven Fund in connection with the initial 
addition of such Stock to an independently maintained index upon which 
the Fund is based or the initial investment of a Fund in such Stock.
    (f) The term ``Deutsche Bank'' refers to Deutsche Bank AG or an 
Affiliate, as defined below in paragraph (g)
    (g) The term ``Affiliate'' means, with respect to Deutsche Bank AG, 
an entity which, directly or indirectly, through one or more 
intermediaries, is controlled by Deutsche Bank AG.
    (h) An ``affiliate'' of Deutsche Bank includes:
    (1) Any person, directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
the person;
    (2) Any officer, director, employee or relative of such person, or 
partner of any such person; and

[[Page 56711]]

    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (i) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (j) The term ``automated trading system'' means an electronic 
trading system that functions in a manner intended to simulate a 
securities exchange by electronically matching orders on an agency 
basis from multiple buyers and sellers, such as an ``alternative 
trading system'' within the meaning of the SEC's Reg. ATS [17 CFR Part 
242.300], as such definition may be amended from time to time, or an 
``automated quotation system'' as described in Section 3(a)(51)(A)(ii) 
of the '34 Act [15 U.S.C. 78c(a)(51)(A)(ii)].
    (k) The term ``recognized securities exchange'' means a U.S. 
securities exchange that is registered as a ``national securities 
exchange'' under Section 6 of the `34 Act (15 U.S.C. 78f), or a 
designated offshore securities market, as defined in Regulation S of 
the SEC [17 CFR Part 230.902(b)], as such definition may be amended 
from time to time, which performs with respect to securities the 
functions commonly performed by a stock exchange within the meaning of 
definitions under the applicable securities laws (e.g., 17 CFR Part 
240.3b-16).

EFFECTIVE DATE: The proposed exemption, if granted, will be effective 
as of June 4, 1999, for those transactions described in Section I 
above, and as of the date the final grant is published in the Federal 
Register for those transactions described in Section II above.

Summary of Facts and Representations

    1. Deutsche Bank AG is a bank organized under the laws of Germany 
and is the largest bank in the world in terms of assets. Bankers Trust 
Company, its wholly-owned subsidiary, is a New York banking corporation 
and a leading commercial bank, providing a wide range of banking, 
fiduciary, custodial, brokerage and investment services to 
corporations, institutions, governments, employee benefit plans, 
governmental retirement plans and private investors worldwide. Deutsche 
Bank indirectly owns all of the equity interest of Bankers Trust 
Company, a New York banking corporation and a member bank of the 
Federal Reserve system. Bankers Trust Company is one of the largest 
trustees of ERISA plans and a large manager of passively-managed funds. 
Other Deutsche Bank asset managers (together with Bankers Trust 
Company, ``DB Asset Managers'') may also manage ERISA assets in 
passively-managed styles in the future. As of June 30, 1999, Deutsche 
Bank AG and its Affiliates had consolidated assets of $847,658,000,000 
and total stockholders' equity of $33.9 billion.
    2. The DB Asset Managers manage different collective investment 
funds in various ways to enable plan assets to be diversified to reduce 
risk and to be invested in the types of investments that an independent 
fiduciary believes is appropriate at a particular time. Index Funds and 
Model-Driven Funds (the ``Funds'' or the ``Indexed Accounts'') are two 
examples of the Affiliates' collective investment funds which include 
plan investors.
    An Index Fund, as defined supra, may be a separately managed 
account or a collective investment fund, the objective of which is the 
replication of the performance of an independently maintained stock or 
bond index representing the performance of a specific segment of the 
public market for equity or debt securities. Index Funds are passively 
managed, in that the choice of stocks or bonds purchased and sold, and 
the volume purchased and sold, are made according to predetermined 
third party indices rather than according to active evaluation of the 
investments.
    A Model-Driven Fund, as defined supra, may be a separately managed 
account or a collective investment fund, the performance of which is 
based on computer models using prescribed objective criteria to 
transform an independently-maintained stock or bond index representing 
the performance of a specific segment of the public market for equity 
or debt securities. The portfolio of a Model-Driven Fund is determined 
by the details of the computer model, which examines structural aspects 
of the stock or bond market rather than the underlying values of such 
securities. An example of a Model-Driven Fund would include a fund 
which ``transforms'' an index, making investments according to a 
computer model which uses such data as earnings, dividends and price-
earning ratios for common stocks included in the index.
    The process for the establishment and operation of all Indexed 
Accounts that are model-driven is disciplined. Objective rules are 
established for each model. Since the Model-Driven Funds operate 
pursuant to pre-specified computer programs, the rules and programs are 
changed only infrequently. In this regard, there have been three (3) 
Funds holding ERISA assets that, since June 4, 1999, have acquired, 
held and/or disposed of Deutsche Bank AG Stock.\1\
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    \1\ The Applicants state that acquisitions of Deutsche Bank AG 
Stock have been made only by Funds that already held such Stock in 
their portfolios as of June 4, 1999. Thus, there have been no new 
acquisitions of Deutsche Bank AG Stock by any Funds as a result of 
an initial addition of such Stock to their portfolios since that 
time. Such initial additions of Deutsche Bank AG Stock will only be 
made by a Fund once this proposed exemption is granted, under the 
conditions required herein for a ``Buy-up'' period.
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    The Applicants request that the exemption proposed herein be 
retroactively effective as of June 4, 1999, to permit such transactions 
by these Funds. The Applicants are not requesting any retroactive 
relief for the acquisition, holding or disposition of the common stock 
of any Affiliates of Deutsche Bank (i.e., Deutsche Bank Affiliate 
Stock). The Applicants represent that no Index or Model-Driven Funds 
containing ``plan assets'' covered by the Act have held such Stock.\2\ 
The Applicants also request that any exemptive relief for cross-trades 
of securities by Index and Model-Driven Funds maintained by DB Asset 
Managers be considered separately.\3\
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    \2\ See 29 CFR 2510.3-101; Definition of ``plan assets''-plan 
investments.
    \3\ In this regard, the Department directs interested persons to 
the Proposed Class Exemption for Cross-Trades of Securities by Index 
and Model-Driven Funds (the Cross-Trading Proposal) which was 
published in the Federal Register on December 15, 1999 (64 FR 
70057).
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    3. The Applicants represent that they provide investment advisory 
and management services to ERISA-covered plans through separately 
managed accounts and through collective investment vehicles. The 
Applicants' investment management services include indexed, 
quantitative, and structured investment strategies. In addition to 
ERISA-covered plans, the Applicants' clients include retirement plans 
with non-U.S. participants, governmental entities, governmental plans, 
church plans, mutual funds, and other institutional investors.
    4. In their capacity as fiduciary of an employee benefit plan, the 
Applicants may be directed by an independent plan fiduciary or a plan 
participant that has the ability to direct investments for his/her plan 
account under the plan document. Alternatively, in those cases in which 
the Applicants manage investments made for the plan, the Applicants 
represent that their discretionary authority over whether the plan 
invests in particular Funds is restricted by an independent plan 
fiduciary.
    5. The Applicants request that Index and Model-Driven Funds be 
permitted to invest in Deutsche Bank Stock if such

[[Page 56712]]

Stock is included among the securities listed in the index utilized by 
the Fund. The Applicants have identified over forty-two (42) indices 
that currently include either Deutsche Bank AG Stock or Deutsche Bank 
Affiliate Stock. Among the Indexes which include Deutsche Bank Stock 
are the DAX Index,\4\ the FT-SE Eurotop 100 Index, the MSCI Euro 
Index,\5\ the FTSE Eurotop 300 Index, the FTSE E300 Financial Index, 
and the Bloomberg Europe Index. These indexes are compiled by financial 
information agencies, such as Standard & Poor's, Financial Times Ltd., 
and Morgan Stanley & Company International. These agencies are engaged 
in the provision of financial information or securities brokerage 
services to institutional investors and/or are publishers of financial 
information. In each instance, the indexes are compiled by 
organizations that are independent of Deutsche Bank and are generally 
accepted standardized indices of securities that are not tailored for 
the use of Deutsche Bank. While many of these indexes are not currently 
utilized by DB Asset Managers for their Index and Model-Driven Funds, 
there is a possibility that Funds holding assets of ERISA-covered plans 
will be established in the future that are based on these indexes. 
However, since June 4, 1999, DB Asset Managers have excluded Deutsche 
Bank Stock from the portfolios of any new Index and Model-Driven Funds 
even though such Stock is included in independently maintained indexes 
upon which such Funds are based. For those Index Funds whose goal is to 
replicate the rate of return of the index by tracking the 
capitalization-weighted or other specified composition of securities 
listed in the index, such exclusions of Deutsche Bank Stock create 
tracking errors which must be accounted for by re-weighting other 
securities in the index. For Model-Driven Funds that transform an index 
in a model-prescribed way, such exclusions of Deutsche Bank Stock 
create operational inefficiencies and strategic uncertainties that 
affect the criteria and data necessary to achieve the desired rates of 
return.
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    \4\ The DAX (Deutsche Aktienindex) is maintained by the Deutsche 
Bourse, a German stock exchange.
    \5\ Morgan Stanley maintains the MSCI (i.e., Morgan Stanley 
Composite Index), which contains various indices of foreign 
securities.
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    6. The Applicants state that the proposed exemption is necessary to 
allow Funds holding ``plan assets'' to purchase and hold Deutsche Bank 
Stock in order to replicate the capitalization-weighted or other 
specified composition of Deutsche Bank Stock in an independently 
maintained third party index used by an Index Fund or to achieve the 
desired transformation of an index used to create a portfolio for a 
Model-Driven Fund.\6\
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    \6\ The Applicants are not requesting any relief from sections 
406 or 407(a) of the Act in connection with the acquisition and 
holding of Deutsche Bank Stock by the Deutsche Bank Plans which 
invest in the Applicants' Index Funds. In this regard, such 
transactions may be covered by the statutory exemption under section 
408(e) of the Act, if the conditions of that exemption are met. 
However, the Department is not providing an opinion in this proposed 
exemption as to whether the conditions of section 408(e) of the Act 
are met.
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    In addition, the Applicants represent that there will be instances, 
once this proposed exemption is granted, when Deutsche Bank Stock will 
be added to an index on which a Fund is based or will be added to the 
portfolio of a Fund which seeks to track an index that includes such 
Stock. These instances will be referred to hereafter as a ``Buy-
up''.\7\ In such instances, acquisitions of Deutsche Bank Stock will be 
necessary to bring the Fund's holdings of such Stock either to its 
capitalization-weighted or other specified composition in the index, as 
determined by the independent organization maintaining such index, or 
to the correct weighting for such Stock as determined by the computer 
model which has been used to transform the index. If the Index or 
Model-Driven Fund holds ``plan assets,'' the Applicants represent that 
all acquisitions of Deutsche Bank Stock by such Fund will comply with 
the ``Buy-up'' conditions of this proposed exemption. These conditions 
are as follows:
---------------------------------------------------------------------------

    \7\ The Applicants anticipate that generally acquisitions of 
Deutsche Bank Stock by an Index or Model-Driven Fund in a ``Buy-up'' 
will occur within 10 business days from the date of the event which 
causes the particular Fund to require Deutsche Bank Stock. Deutsche 
Bank does not anticipate that the amounts of Deutsche Bank Stock 
acquired by any Fund in a ``Buy-up'' will be significant. In this 
regard, the Department notes that the conditions required herein are 
designed to minimize the market impact of purchases made by the 
Funds in any ``Buy-up'' of Deutsche Bank Stock.
---------------------------------------------------------------------------

    (A) Purchases will be from or through only one broker or dealer on 
a single trading day;
    (B) Based on the best available information, purchases will not be 
the opening transaction for the trading day;
    (C) Purchases will not be effected in the last half hour before the 
scheduled close of the trading day;
    (D) Purchases will be at a price that is not higher than the lowest 
current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
    (E) Purchases will not exceed 15 percent of the daily trading 
volume for the security, as determined by the greater of either (i) the 
trading volume for the security occurring on the applicable exchange 
and automated trading system on the date of the transaction, or (ii) an 
aggregate average daily trading volume for the security occurring on 
the applicable exchange and automated trading system for the previous 
five (5) business days, both based on the best information reasonably 
available at the time of the transaction;
    (F) All purchases and sales of Deutsche Bank Stock will occur 
either (i) on a recognized securities exchange (as defined in Section 
IV(k)), (ii) through an automated trading system (as defined in Section 
IV(j)) operated by a broker-dealer that is either registered under the 
Securities Exchange Act of 1934 (the '34 Act) and thereby subject to 
regulation by the SEC, or subject to regulation and supervision by the 
BAK, the BAWe, or another applicable regulatory authority, which 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer, or (iii) through an 
automated trading system (as defined in Section IV(j) above) that is 
operated by a recognized securities exchange (as defined in Section 
IV(k)), pursuant to the applicable securities laws which provide a 
mechanism for customer orders to be matched on an anonymous basis 
without the participation of a broker-dealer; and
    (G) If the necessary number of shares of Deutsche Bank Stock cannot 
be acquired within 10 business days from the date of the event which 
causes the particular Fund to require Deutsche Bank Stock, Deutsche 
Bank will appoint a fiduciary which is independent of Deutsche Bank to 
design acquisition procedures and monitor DB Asset Managers' compliance 
with such procedures.\8\
---------------------------------------------------------------------------

    \8\ In this regard, all Funds holding Deutsche Bank AG Stock as 
of June 4, 1999, which have continued to acquire, hold and dispose 
of Deutsche Bank AG Stock in order to track indexes including 
Deutsche Bank AG Stock will not need to have daily transactions 
involving such Stock directed by an independent fiduciary. Deutsche 
Bank states that the amount of Deutsche Bank AG Stock involved in 
such transactions has been and continues to be determined by the 
independent organization which created and maintains the relevant 
index, and all other conditions required under this proposed 
exemption have been met.
---------------------------------------------------------------------------

    The independent fiduciary and its principals will be completely 
independent from the Applicants. The independent fiduciary will also be 
experienced in developing and operating investment strategies for 
individual and collective investment vehicles that track third-party 
indices.

[[Page 56713]]

Furthermore, the independent fiduciary will not act as the broker for 
any purchases or sales of Deutsche Bank Stock and will not receive any 
commissions as a result of this initial acquisition program.
    The independent fiduciary will have as its primary goal the 
development of trading procedures that minimize the market impact of 
purchases made pursuant to the initial acquisition program by the 
Funds. The Applicants would expect that, under the trading procedures 
established by the independent fiduciary, the trading activities will 
be conducted in a low-profile, mechanical, non-discretionary manner and 
would involve a number of small purchases over the course of each day, 
randomly timed. The Applicants further expect that such a program will 
allow the Applicants to acquire the necessary shares of Deutsche Bank 
Stock for the Funds with minimum impact on the market and in a manner 
that will be in the best interests of any employee benefit plans that 
participate in such Funds.
    The independent fiduciary will also be required to monitor the 
Applicants' compliance with the trading program and procedures 
developed for the initial acquisition of Deutsche Bank Stock. During 
the course of any initial acquisition program, the independent 
fiduciary will be required to review the activities weekly to determine 
compliance with the trading procedures and notify the Applicants should 
any non-compliance be detected. Should the trading procedures need 
modifications due to unforeseen events or consequences, the independent 
fiduciary will be required to consult with the Applicants and must 
approve in advance any alteration of the trading procedures.
    7. Subsequent to initial acquisitions necessary to bring a Fund's 
holdings of Deutsche Bank Stock to its specified weighting in the index 
or model pursuant to the restrictions described above, all aggregate 
daily purchases of Deutsche Bank Stock by the Funds will not exceed on 
any particular day the greater of:
    (i) 15 percent of the average daily trading volume for the Deutsche 
Bank Stock occurring on the applicable exchange and automated trading 
system (as described herein) for the previous five (5) business days, 
or
    (ii) 15 percent of the trading volume for Deutsche Bank Stock 
occurring on the applicable exchange and automated trading system (as 
described herein) on the date of the transaction, as determined by the 
best available information for the trades that occurred on such date.
    8. Deutsche Bank represents that as of June 4, 1999 until the date 
this proposed exemption is granted, all purchases and sales of Deutsche 
Bank Stock by the Funds have occurred and will continue to occur in one 
of the following ways: (i) through the Frankfurt Stock Exchange, a 
recognized securities exchange as defined in Section IV(k) above; (ii) 
through an automated trading system (as defined in Section IV(j) above) 
operated by a broker-dealer that is subject to regulation by the BAK, 
the BAWe, or another applicable regulatory authority (pursuant to the 
applicable securities laws), that provides a mechanism for customer 
orders to be matched on an anonymous basis without the participation of 
a broker-dealer; or (iii) through a direct, arms-length transaction 
entered into on a principal basis with a broker-dealer that is either 
registered under the `34 Act, and thereby subject to regulation by the 
SEC, or subject to regulation and supervision by the BAK, the BAWe, or 
another applicable regulatory authority.\9\
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    \9\ The Department notes that no relief is being provided herein 
for purchases and sales of securities between a Fund and a broker-
dealer, acting as a principal, which may be considered prohibited 
transactions as a result of such broker-dealer being a party in 
interest, under section 3(14) of the Act, with respect to any plans 
that are investors in the Fund. However, such transactions may be 
covered by one or more of the Department's existing class 
exemptions. For example, PTE 84-14 (49 FR 9497, March 13, 1984) 
permits, under certain conditions, parties in interest to engage in 
various transactions with plans whose assets are invested in an 
investment fund managed by a ``qualified professional asset 
manager'' (QPAM) who is independent of the parties in interest (with 
certain limited exceptions) and meets specified financial standards.
---------------------------------------------------------------------------

    In addition, Deutsche Bank states that as of the date this proposed 
exemption is granted, all future transactions by the Funds involving 
Deutsche Bank Stock which do not occur in connection with a Buy-up of 
such Stock by a Fund, as described above, will be either: (i) Entered 
into on a principal basis with a broker-dealer that is either 
registered under the '34 Act, and thereby subject to regulation by the 
SEC, or subject to regulation and supervision by the BAK, the BAWe, or 
another applicable regulatory authority; (ii) effected on an automated 
trading system (as defined in Section IV(j) above) operated by a 
broker-dealer subject to regulation by either the SEC, the BAK, the 
BAWe, or another applicable regulatory authority, or on an automated 
trading system operated by a recognized securities exchange (as defined 
in Section IV(k) above) which, in either case, provides a mechanism for 
customer orders to be matched on an anonymous basis without the 
participation of a broker-dealer; or (iii) effected through a 
recognized securities exchange (as defined in Section IV(k) above) so 
long as the broker is acting on an agency basis.
    9. With respect to all acquisitions and dispositions of Deutsche 
Bank AG Stock by the Funds since June 4, 1999, the Applicants state 
that no such transactions have involved purchases from or sales to 
Deutsche Bank (including officers, directors, or employees thereof), or 
any party in interest that is a fiduciary with discretion to invest 
plan assets into the Fund. The Applicants represent that all future 
acquisitions and dispositions of either Deutsche Bank AG Stock or 
Deutsche Bank Affiliate Stock by any Index or Model-Driven Funds 
maintained by Deutsche Bank will also not involve any purchases from or 
sales to Deutsche Bank (including officers, directors, or employees 
thereof), or any party in interest that is a fiduciary with discretion 
to invest plan assets into the Fund (unless the transaction by the Fund 
with such party in interest would otherwise be subject to an 
exemption).\10\
---------------------------------------------------------------------------

    \10\ In this regard, the Department is providing no opinion 
herein as to whether such principal transactions would be covered by 
any existing exemption.
---------------------------------------------------------------------------

    10. The Applicants state that no more than five (5) percent of the 
total amount of either Deutsche Bank AG Stock or Deutsche Bank 
Affiliate Stock, that is issued and outstanding at any time, will be 
held in the aggregate by Index and Model-Driven Funds managed by DB 
Asset Managers.
    For purposes of the acquisition and holding of Deutsche Bank AG 
Stock by all of the Funds from June 4, 1999 until the date this 
proposed exemption is granted, such Stock will constitute no more than 
three (3) percent of any independent third party index on which the 
investments of an Index or Model-Driven Fund are based. For example, 
Deutsche Bank AG Stock currently represents only .937% of the FTSE 100 
Index, 1.382% of the MSCI EURO Index and .703% of the FTSE Eurotop 300 
Index. Although some indexes include Deutsche Bank Stock in percentages 
that exceed three (3) percent of the index, Deutsche Bank does not 
currently utilize such indices for its Index and Model-Driven Funds 
with ``plan assets'' subject to the Act.
    For purposes of future acquisitions and holdings of Deutsche Bank 
Stock by such Funds once this proposed exemption is granted, neither 
the

[[Page 56714]]

Deutsche Bank AG Stock nor the Deutsche Bank Affiliate Stock will 
constitute more than five (5) percent of any independent third party 
index on which the investments of an Index or Model-Driven Fund are 
based. In this regard, the Applicants have identified at least seven 
(7) indexes which include Deutsche Bank Stock where the current 
approximate capitalization weight of the index represented by Deutsche 
Bank Stock exceeds three (3) percent. The Applicants request that the 
proposed exemption allow Deutsche Bank to design a passive investment 
strategy for an Index or Model-Driven Fund which seeks to track an 
index that contains Deutsche Bank Stock, or which transforms such an 
index in a model-prescribed way, as long as the Deutsche Bank Stock 
does not constitute more than five (5) percent of the index.\11\
---------------------------------------------------------------------------

    \11\ The Applicants have identified certain independent third 
party indexes where the current approximate capitalization weight of 
the index represented by Deutsche Bank Stock exceeds five (5) 
percent. However, the Applicants have agreed to limit the 
prospective relief that would be provided by this proposed exemption 
to Index and Model-Driven Funds which track indexes where the 
specified composition of Deutsche Bank Stock in the index does not 
exceed five (5) percent of such index.
---------------------------------------------------------------------------

    With respect to an index's specified composition of particular 
stocks in its portfolio, the Applicants state that future Funds may 
track an index where the appropriate weighting for stocks listed in the 
index is not capitalization-weighted. However, the Applicants state 
that Funds maintained by DB Asset Managers and other Affiliates of 
Deutsche Bank may track indexes where the selection of a particular 
stock by the index, and the amount of stock to be included in the 
index, is not established based on the market capitalization of the 
corporation issuing such stock. Therefore, since an independent 
organization may choose to create an index where there are other index 
weightings for stocks composing the index, the Applicants request that 
the proposed exemption allow for Deutsche Bank Stock to be acquired by 
a Fund in the amounts which are specified by the particular index, 
subject to the other restrictions imposed under this proposed 
exemption. The Applicants represent that, in all instances, 
acquisitions or dispositions of Deutsche Bank Stock by a Fund will be 
for the sole purpose of maintaining strict quantitative conformity with 
the relevant index upon which the Fund is based or, in the case of a 
Model-Driven Fund, a modified version of such an index as created by a 
computer model based on prescribed objective criteria and third-party 
data.
    11. The Applicants state that plan fiduciaries independent of 
Deutsche Bank have authorized and will continue to authorize the 
investment of any plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds Deutsche Bank Stock, other than in the case of a 
Deutsche Bank Plan. The Applicants represent that no more than ten (10) 
percent of the assets of any Fund that acquires and holds Deutsche Bank 
Stock will be comprised of assets of any Deutsche Bank Plan for which 
Deutsche Bank exercises investment discretion.
    12. The Applicants will appoint an independent fiduciary which will 
direct the voting of Deutsche Bank Stock held by the Funds. Currently, 
the independent fiduciary that directs the voting of Deutsche Bank 
Stock held by the Funds is Institutional Shareholders Services, Inc.
    Deutsche Bank states that in all instances the independent 
fiduciary chosen to vote Deutsche Bank Stock for the Funds will be a 
consulting firm specializing in corporate governance issues and proxy 
voting on behalf of institutional investors with large equity 
portfolios. The fiduciary will develop and follow standard guidelines 
and procedures for the voting of proxies by institutional fiduciaries. 
The Applicants will provide the independent fiduciary with all 
necessary information regarding the Funds that hold Deutsche Bank 
Stock, the amount of Deutsche Bank Stock held by the Funds on the 
record date for shareholder meetings of the Applicants, and all proxy 
and consent materials with respect to Deutsche Bank Stock. The 
independent fiduciary will maintain records with respect to its 
activities as an independent fiduciary on behalf of the Funds, 
including the number of shares of Deutsche Bank Stock voted, the manner 
in which they were voted, and the rationale for the vote if the vote 
was not consistent with the independent fiduciary's procedures and 
current voting guidelines in effect at the time of the vote. The 
independent fiduciary will supply the Applicants with such information 
after each shareholder meeting. The independent fiduciary will be 
required to acknowledge that it will be acting as a fiduciary with 
respect to the plans which invest in the Funds which own Deutsche Bank 
Stock, when voting such stock.
    13. In summary, with respect to all acquisitions, holdings, and 
dispositions of Deutsche Bank AG Stock by the Funds since June 4, 1999, 
the Applicants represent that such transactions meet the criteria of 
section 408(a) of the Act for the following reasons:
    (a) Each Index or Model-Driven Fund involved is based on an Index, 
as defined in Section IV(c) above;
    (b) The acquisition, holding and disposition of the Deutsche Bank 
AG Stock by the Index or Model-Driven Fund is for the sole purpose of 
maintaining strict quantitative conformity with the relevant index upon 
which the Fund is based, and does not involve any agreement, 
arrangement or understanding regarding the design or operation of the 
Fund acquiring the Deutsche Bank Stock which is intended to benefit 
Deutsche Bank or any party in which Deutsche Bank may have an interest;
    (c) All aggregate daily purchases of Deutsche Bank AG Stock by the 
Funds do not exceed, on any particular day, the greater of: (i) 15 
percent of the average daily trading volume for such Stock occurring on 
the applicable exchange and automated trading system for the previous 
five (5) business days, or (ii) 15 percent of the average daily trading 
volume for such Stock occurring on the applicable exchange and 
automated trading system on the date of the transaction, as determined 
by the best available information for the trades occurring on that 
date;
    (d) All purchases and sales of Deutsche Bank AG Stock occur either 
(i) on the Frankfurt Stock Exchange, a recognized securities exchange 
as defined herein, (ii) through an automated trading system (as defined 
herein) operated by a broker-dealer that is subject to regulation by 
the BAK, the BAWe, or another applicable regulatory authority (pursuant 
to the applicable securities laws), that provides a mechanism for 
customer orders to be matched on an anonymous basis without the 
participation of a broker-dealer, or (iii) in a direct, arms-length 
transaction entered into on a principal basis with a broker-dealer, in 
the ordinary course of its business, where such broker-dealer is 
independent of Deutsche Bank and is either registered under the '34 
Act, and thereby subject to regulation by the SEC, or subject to 
regulation and supervision by the BAK, the BAWe, or another applicable 
regulatory authority;
    (e) No transactions by a Fund involve purchases from or sales to 
Deutsche Bank (including officers, directors, or employees thereof), or 
any party in interest that is a fiduciary with discretion to invest 
plan assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption);

[[Page 56715]]

    (f) No more than five (5) percent of the total amount of Deutsche 
Bank AG Stock issued and outstanding at any time is held in the 
aggregate by Index and Model-Driven Funds managed by DB Asset Managers;
    (g) Deutsche Bank AG Stock constitutes no more than three (3) 
percent of any independent third party index on which the investments 
of an Index or Model-Driven Fund are based;
    (h) A plan fiduciary independent of Deutsche Bank authorizes the 
investment of such plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds Deutsche Bank AG Stock, other than with respect 
to plans maintained by Applicants and their affiliates; and
    (i) A fiduciary independent of Deutsche Bank (e.g., Institutional 
Shareholders Services, Inc.) directs the voting of the Deutsche Bank AG 
Stock held by an Index or Model-Driven Fund on any matter in which 
shareholders of Deutsche Bank Stock are required or permitted to vote.
    With respect to all acquisitions, holdings, and dispositions of 
Deutsche Bank AG Stock or Deutsche Bank Affiliate Stock by the Funds 
after this proposed exemption is granted, the Applicants represent that 
such transactions will meet the criteria of section 408(a) of the Act 
for the following reasons:
    (a) Each Index or Model-Driven Fund involved will be based on an 
Index, as defined in Section IV(c) above;
    (b) The acquisition or disposition of Deutsche Bank Stock will be 
for the sole purpose of maintaining strict quantitative conformity with 
the relevant Index upon which the Index or Model-Driven Fund is based, 
and will not involve any agreement, arrangement or understanding 
regarding the design or operation of the Fund acquiring the Deutsche 
Bank Stock which is intended to benefit Deutsche Bank or any party in 
which Deutsche Bank may have an interest;
    (c) Whenever Deutsche Bank Stock is initially added to an index on 
which a Fund is based, or initially added to the portfolio of a Fund 
(i.e., a Buy-up), all acquisitions of Deutsche Bank Stock necessary to 
bring the Fund's holdings of such Stock either to its capitalization-
weighted or other specified composition in the relevant index, as 
determined by the independent organization maintaining such index, or 
to its correct weighting as determined by the computer model which has 
been used to transform the index, will be restricted by conditions 
which are designed to prevent possible market price manipulations;
    (d) Subsequent to acquisitions necessary to bring a Fund's holdings 
of Deutsche Bank Stock to its specified weighting in the index or 
model, pursuant to the restrictions noted in paragraph (c) above, all 
aggregate daily purchases of Deutsche Bank Stock by the Funds will not 
exceed, on any particular day, the greater of: (i) 15 percent of the 
average daily trading volume for such Stock occurring on the applicable 
exchange and automated trading system for the previous five (5) 
business days, or (ii) 15 percent of the average daily trading volume 
for such Stock occurring on the applicable exchange and automated 
trading system, as determined by the best available information for the 
trades that occurred on such date;
    (e) All transactions in Deutsche Bank Stock, other than 
acquisitions of such Stock in a Buy-up described in paragraph (c) 
above, will be either: (i) entered into on a principal basis with a 
broker-dealer, in the ordinary course of its business, where such 
broker-dealer is independent of Deutsche Bank and is either registered 
under the '34 Act, and thereby subject to regulation by the SEC, or 
subject to regulation and supervision by the BAK, the BAWe, or another 
applicable regulatory authority, (ii) effected on an automated trading 
system operated by a broker-dealer subject to regulation by either the 
SEC, BAK, the BAWe, another applicable regulatory authority or by a 
recognized securities exchange which, in either case, provides a 
mechanism for customer orders to be matched on an anonymous basis 
without the participation of a broker-dealer, or (iii) effected through 
a recognized securities exchange (as defined herein) so long as the 
broker is acting on an agency basis.
    (f) No transactions by a Fund will involve purchases from or sales 
to Deutsche Bank (including officers, directors, or employees thereof), 
or any party in interest that is a fiduciary with discretion to invest 
plan assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption);
    (g) No more than five (5) percent of the total amount of either 
Deutsche Bank AG Stock or Deutsche Bank Affiliate Stock, that is issued 
and outstanding at any time, will be held in the aggregate by Index and 
Model-Driven Funds managed by DB Asset Managers;
    (h) Deutsche Bank Stock will constitute no more than five (5) 
percent of any independent third party index on which the investments 
of an Index or Model-Driven Fund are based;
    (i) A plan fiduciary independent of Deutsche Bank will authorize 
the investment of such plan's assets in an Index or Model-Driven Fund 
which purchases and/or holds Deutsche Bank Stock pursuant to the 
procedures described herein, other than in the case of a Deutsche Bank 
Plan; and
    (j) A fiduciary independent of Deutsche Bank will direct the voting 
of the Deutsche Bank Stock held by an Index or Model-Driven Fund on any 
matter in which shareholders of Deutsche Bank Stock are required or 
permitted to vote.
    Notice to Interested Persons: Notice of the proposed exemption 
should be mailed by first class mail to interested persons, including 
the appropriate fiduciaries for employee benefit plans currently 
invested in the Index and/or Model-Driven Funds that acquire and hold 
Deutsche Bank Stock. The notice should contain a copy of the proposed 
exemption as published in the Federal Register and an explanation of 
the rights of interested parties to comment on or request a hearing 
regarding the proposed exemption. All notices should be sent to 
interested persons within 15 days of the publication of this proposed 
exemption in the Federal Register. Any written comments and/or requests 
for a hearing must be received by the Department from interested 
persons within 45 days of the publication of this proposed exemption in 
the Federal Register.
    In addition, Deutsche Bank shall provide a copy of the proposed 
exemption and, if granted, a copy of the final exemption upon request 
to all ERISA-covered plans that invest in any Index or Model-Driven 
Fund that will include Deutsche Bank AG Stock or Deutsche Bank 
Affiliate Stock in its portfolio after the date the final exemption is 
published in the Federal Register.

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

American Express Financial Corporation Located in Minneapolis, 
Minnesota

[Application No. D-10855]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act, section 4975(c)(2) of the Code, 
and section 8477(c)(3) of the Federal Employees Retirement System Act 
of 1986 (FERSA), and in accordance with the procedures set forth in 29 
CFR Part

[[Page 56716]]

2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Section I--Exemption for the Acquisition, Holding and Disposition of 
American Express Company Stock

    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(D), 406(b)(1) and 406(b)(2) of the Act, section 8477(c)(2)(A) 
and (B) of FERSA, and the sanctions resulting from the application of 
section 4975 of the Code by reason of section 4975(c)(1)(D) and (E) of 
the Code, shall not apply to the acquisition, holding and disposition 
of the common stock of American Express Company or its current and 
future affiliates (AE Stock) by Index and Model-Driven Funds managed by 
American Express Financial Corporation (AEFC), provided that the 
following conditions and the general conditions in Section II are met:
    (a) The acquisition or disposition of AE Stock is for the sole 
purpose of maintaining strict quantitative conformity with the relevant 
index upon which the Index or Model-Driven Fund is based, and does not 
involve any agreement, arrangement or understanding regarding the 
design or operation of the Fund acquiring the AE Stock which is 
intended to benefit AEFC or any party in which AEFC may have an 
interest.
    (b) Whenever AE Stock is initially added to an index on which an 
Index or Model-Driven Fund is based, or initially added to the 
portfolio of an Index or Model-Driven Fund, all acquisitions of AE 
Stock necessary to bring the Fund's holdings of such Stock either to 
its capitalization-weighted or other specified composition in the 
relevant index, as determined by the independent organization 
maintaining such index, or to its correct weighting as determined by 
the model which has been used to transform the index, occur in the 
following manner:
    (1) Purchases are from, or through, only one broker or dealer on a 
single trading day;
    (2) Based on the best available information, purchases are not the 
opening transaction for the trading day;
    (3) Purchases are not effected in the last half hour before the 
scheduled close of the trading day;
    (4) Purchases are at a price that is not higher than the lowest 
current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
    (5) Aggregate daily purchases do not exceed 15 percent of the 
average daily trading volume for the security, as determined by the 
greater of either (i) the trading volume for the security occurring on 
the applicable exchange and automated trading system on the date of the 
transaction, or (ii) an aggregate average daily trading volume for the 
security occurring on the applicable exchange and automated trading 
system for the previous five (5) business days, both based on the best 
information reasonably available at the time of the transaction;
    (6) All purchases and sales of AE Stock occur either (i) on a 
recognized U.S. securities exchange (as defined in section III(k) 
below), (ii) through an automated trading system (as defined in section 
III(j) below) operated by a broker-dealer independent of AEFC that is 
registered under the Securities Exchange Act of 1934 (the `34 Act), and 
thereby subject to regulation by the Securities and Exchange Commission 
(SEC), which provides a mechanism for customer orders to be matched on 
an anonymous basis without the participation of a broker-dealer, or 
(iii) through an automated trading system (as defined in section III(j) 
below) that is operated by a recognized U.S. securities exchange (as 
defined in section III(k) below), pursuant to the applicable securities 
laws, and provides a mechanism for customer orders to be matched on an 
anonymous basis without the participation of a broker-dealer; and
    (7) If the necessary number of shares of AE Stock cannot be 
acquired within 10 business days from the date of the event which 
causes the particular Fund to require AE Stock, AEFC appoints a 
fiduciary which is independent of AEFC to design acquisition procedures 
and monitor compliance with such procedures.
    (c) Subsequent to acquisitions necessary to bring a Fund's holdings 
of AE Stock to its specified weighting in the index or model pursuant 
to the restrictions described in paragraph (b) above, all aggregate 
daily purchases of AE Stock by the Funds do not exceed on any 
particular day the greater of:
    (1) 15 percent of the average daily trading volume for the AE Stock 
occurring on the applicable exchange and automated trading system (as 
defined below) for the previous five (5) business days, or
    (2) 15 percent of the trading volume for AE Stock occurring on the 
applicable exchange and automated trading system (as defined below) on 
the date of the transaction, as determined by the best available 
information for the trades that occurred on such date.
    (d) All transactions in AE Stock not otherwise described in 
paragraph (b) above are either: (i) entered into on a principal basis 
in a direct, arms-length transaction with a broker-dealer, in the 
ordinary course of its business, where such broker-dealer is 
independent of AEFC and is registered under the '34 Act, and thereby 
subject to regulation by the SEC, (ii) effected on an automated trading 
system (as defined in section III(j) below) operated by a broker-dealer 
independent of AEFC that is subject to regulation by either the SEC or 
another applicable regulatory authority, or an automated trading system 
operated by a recognized U.S. securities exchange (as defined in 
section III(k) below) which, in either case, provides a mechanism for 
customer orders to be matched on an anonymous basis without the 
participation of a broker-dealer, or (iii) effected through a 
recognized U.S. securities exchange (as defined in section III(k) 
below) so long as the broker is acting on an agency basis.
    (e) No transactions by a Fund involve purchases from, or sales to, 
AEFC (including officers, directors, or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption).
    (f) No more than five (5) percent of the total amount of AE Stock, 
that is issued and outstanding at any time, is held in the aggregate by 
Index and Model-Driven Funds managed by AEFC.
    (g) AE Stock constitutes no more than five (5) percent of any 
independent third party index on which the investments of an Index or 
Model-Driven Fund are based.
    (h) A plan fiduciary independent of AEFC authorizes the investment 
of such plan's assets in an Index or Model-Driven Fund which purchases 
and/or holds AE Stock (other than in the case of an employee benefit 
plan sponsored or maintained by AEFC for its own employees (an AEFC 
Plan)), pursuant to the procedures described herein.
    (i) A fiduciary independent of the AEFC directs the voting of the 
AE Stock held by an Index or Model-Driven Fund on any matter in which 
shareholders of AE Stock are required or permitted to vote.
    (j) No more than ten (10) percent of the assets of any Fund that 
acquires and holds AE Stock is comprised of any AEFC Plan(s) for which 
AEFC exercises investment discretion.

Section II--General Conditions

    (a) AEFC maintains or causes to be maintained for a period of six 
years from the date of the transaction the records necessary to enable 
the persons described in paragraph (b) of this Section to determine 
whether the

[[Page 56717]]

conditions of this exemption have been met, except that (1) a 
prohibited transaction will not be considered to have occurred if, due 
to circumstances beyond the control of AEFC, the records are lost or 
destroyed prior to the end of the six-year period, and (2) no party in 
interest other than AEFC shall be subject to the civil penalty that may 
be assessed under section 502(i) of the Act or to the taxes imposed by 
section 4975(a) and (b) of the Code if the records are not maintained 
or are not available for examination as required by paragraph (b) 
below.
    (b)(1) Except as provided in paragraph (b)(2) and notwithstanding 
any provisions of section 504(a)(2) and (b) of the Act, the records 
referred to in paragraph (a) of this Section are unconditionally 
available at their customary location for examination during normal 
business hours by--
    (A) Any duly authorized employee or representative of the 
Department or the Internal Revenue Service,
    (B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of 
the plan, or any duly authorized employee or representative of such 
fiduciary,
    (C) Any contributing employer to any plan participating in an Index 
or Model-Driven Fund or any duly authorized employee or representative 
of such employer, and
    (D) Any participant or beneficiary of any plan participating in an 
Index or Model-Driven Fund, or a representative of such participant or 
beneficiary.
    (2) None of the persons described in subparagraphs (B) through (D) 
of this paragraph (b) shall be authorized to examine trade secrets of 
AEFC or commercial or financial information which is considered 
confidential.

Section III--Definitions

    (a) The term ``Index Fund'' means any investment fund, account or 
portfolio sponsored, maintained, trusteed, or managed by AEFC, in which 
one or more investors invest, and--
    (1) Which is designed to track the rate of return, risk profile and 
other characteristics of an independently maintained securities Index, 
as described in Section III(c) below, by either (i) replicating the 
same combination of securities which compose such Index or (ii) 
sampling the securities which compose such Index based on objective 
criteria and data;
    (2) For which AEFC does not use its discretion, or data within its 
control, to affect the identity or amount of securities to be purchased 
or sold;
    (3) That contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and,
    (4) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund which is intended to 
benefit AEFC or any party in which AEFC may have an interest.
    (b) The term ``Model-Driven Fund'' means any investment fund, 
account or portfolio sponsored, maintained, trusteed, or managed by 
AEFC, in which one or more investors invest, and--
    (1) Which is composed of securities the identity of which and the 
amount of which are selected by a computer model that is based on 
prescribed objective criteria using independent third party data, not 
within the control of AEFC, to transform an independently maintained 
Index, as described in Section III(c) below;
    (2) Which contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and
    (3) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund or the utilization of any 
specific objective criteria which is intended to benefit AEFC or any 
party in which AEFC may have an interest.
    (c) The term ``Index'' means a securities index that represents the 
investment performance of a specific segment of the public market for 
equity or debt securities in the United States, but only if--
    (1) The organization creating and maintaining the index is--
    (A) engaged in the business of providing financial information, 
evaluation, advice or securities brokerage services to institutional 
clients,
    (B) a publisher of financial news or information, or
    (C) a public stock exchange or association of securities dealers; 
and,
    (2) The index is created and maintained by an organization 
independent of AEFC; and,
    (3) the index is a generally accepted standardized index of 
securities which is not specifically tailored for the use of AEFC.
    (d) The term ``opening date'' means the date on which investments 
in or withdrawals from an Index or Model-Driven Fund may be made.
    (e) The term ``Buy-up'' means an acquisition of AE Stock by an 
Index or Model-Driven Fund in connection with the initial addition of 
such Stock to an independently maintained index upon which the Fund is 
based or the initial investment of a Fund in such Stock.
    (f) The term ``AEFC'' refers to American Express Financial 
Corporation and its Affiliates, as defined below in paragraph (g).
    (g) The term ``Affiliate'' means, with respect to AEFC, an entity 
which, directly or indirectly, through one or more intermediaries, is 
controlled by AEFC;
    (h) An ``affiliate'' of AEFC includes:
    (1) Any person, directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
the person;
    (2) Any officer, director, employee or relative of such person, or 
partner of any such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (i) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (j) The term ``automated trading system'' means an electronic 
trading system that functions in a manner intended to simulate a 
securities exchange by electronically matching orders on an agency 
basis from multiple buyers and sellers, such as an ``alternative 
trading system'' within the meaning of the SEC's Reg. ATS [17 CFR Part 
242.300], as such definition may be amended from time to time, or an 
``automated quotation system'' as described in Section 3(a)(51)(A)(ii) 
of the `34 Act [15 U.S.C. 78c(a)(51)(A)(ii)].
    (k) The term ``recognized U.S. securities exchange'' means a U.S. 
securities exchange that is registered as a ``national securities 
exchange'' under Section 6 of the `34 Act (15 U.S.C. 78f), as such 
definition may be amended from time to time, which performs with 
respect to securities the functions commonly performed by a stock 
exchange within the meaning of definitions under the applicable 
securities laws (e.g., 17 CFR Part 240.3b-16).

Summary of Facts and Representations

    1. American Express Financial Corporation (the Applicant), a 
Delaware corporation, together with its subsidiaries is a financial 
advisor and provides a wide range of fiduciary, record keeping, 
custodial, brokerage and investment services to corporations, 
institutions, governments, employee benefit plans, governmental 
retirement plans and private investors.
    The Applicant is wholly-owned by American Express Company. As of

[[Page 56718]]

December 31, 1998, American Express Company and its Affiliates had 
consolidated assets of $126.9 billion and total stockholders' equity of 
$9.698 billion. The Applicant is an investment manager of various 
portfolios subject to ERISA that are invested in a strategy that tracks 
or transforms an index maintained by a third party that includes the 
stock of American Express Company (i.e. AE Stock). The Applicant seeks 
exemptive relief to permit it and its Affiliates to maintain individual 
or collective investment funds that will acquire and hold any AE Stock 
issued by American Express Company or an Affiliate, if the conditions 
of the exemption are met. For the purposes of this proposed exemption, 
the Applicant requests that the relief apply to American Express 
Financial Corporation, American Express Company, and their respective 
current or future Affiliates (collectively referred to herein as 
``AEFC'').
    2. AEFC acts as investment manager of institutional accounts, 
including employee benefit plans, with assets totaling approximately 
$38.3 million. AEFC also provides directed trust or investment 
management services to various employee benefit plans. AEFC is, to the 
extent of the provision of investment management services, a fiduciary 
of these plans.
    As a fiduciary, AEFC may be either directed by an independent plan 
fiduciary or plan participants that have the ability, under the plan 
document, to direct investments for their own plan accounts. 
Alternatively, in those cases in which AEFC manages the investments, 
the Applicant represents that AEFC does not exercise any discretionary 
authority over whether an employee benefit plan (other than an AEFC 
Plan) invests in particular Index or Model-Driven Funds.
    The Applicant represents that no Index or Model-Driven Funds 
containing ``plan assets'' covered by the Act \12\ have held such 
Stock. The Applicant also states that any exemptive relief for cross-
trades of securities, including AE Stock, by Index and Model-Driven 
Funds maintained by AEFC should be considered separately.\13\
---------------------------------------------------------------------------

    \12\ See 29 CFR 2510.3-101; Definition of ``plan assets''--plan 
investments.
    \13\ In this regard, the Department directs interested persons 
to the Proposed Class Exemption for Cross-Trades of Securities by 
Index and Model-Driven Funds which was published in the Federal 
Register on December 15, 1999 (64 FR 70057).
---------------------------------------------------------------------------

    3. AEFC manages different collective investment funds in various 
ways to enable plan assets to be diversified to reduce risk and to be 
invested in types of investments that a particular manager for a plan 
may determine is appropriate at a particular time. Index Funds and 
Model-Driven Funds (i.e., the Funds) are two examples of AEFC's 
collective investment funds which include plan investors.
    4. An Index Fund may be a separately managed account or a 
collective investment fund, the objective of which is to track the rate 
of return, risk profile and other characteristics of an independently-
maintained stock or bond index representing the performance of a 
specific segment of the public market for equity or debt securities. 
The Index Funds are passively managed, in that the choice of stocks or 
bonds purchased and sold, and the volume purchased and sold, are made 
according to predetermined third party indices rather than according to 
active evaluation of the investments by the manager.
    5. A Model-Driven Fund may be a separately managed account or a 
collective investment fund, the performance of which is based on 
computer models using prescribed objective criteria to transform an 
independently-maintained stock or bond index representing the 
performance of a specific segment of the public market for equity or 
debt securities. The portfolio of a Model-Driven Fund is determined by 
the details of the computer model, which examines structural aspects of 
the stock or bond market rather than the underlying values of such 
securities.
    6. The Applicant represents that the process for the establishment 
and operation of all Funds which are model-driven is very disciplined. 
Objective rules are established for each model. Such Funds operate 
pursuant to pre-specified computer programs and the rules and programs 
are changed only infrequently.
    7. The Applicant currently offers more than 10 collective 
investment funds that are invested according to the criteria of various 
third-party indexes or are model-driven based on such indexes. For 
example, some Funds track the Russell 2000 Index,\14\ while other Funds 
track the Standard & Poor's 500 Composite Stock Price Index (the S&P 
500 Index).\15\ Most of the Funds track stock indexes, although some 
Funds track indexes of debt securities, such as the Lehman Brothers 
Bond Indices. \16\
---------------------------------------------------------------------------

    \14\ The Russell 2000 Index was established and is maintained by 
the Frank Russell Company, which is not an affiliate of AEFC. The 
Russell 2000 Index is a subject of the larger Russell 3000 Index. 
The Russell 3000 Index consists of the largest 3,000 publicly traded 
stocks of U.S. domiciled corporations, as identified by the Frank 
Russell Company, and includes large, medium and small stocks.
    \15\ The S&P Index is composed of 500 stocks that are traded on 
the New York Stock Exchange and the NASDAQ National Market System. 
The S&P 500 is a market value-weighted index (i.e. shares 
outstanding times stock price) in which each company's influence on 
the Index's performance is directly proportional to its market 
value.
    \16\ The indexes of debt securities used for the Funds, such as 
the Lehman Brothers Bond Index, consist primarily of high-quality 
fixed-income securities representing the U.S. government, corporate, 
and mortgage-backed securities sectors of the bond market in the 
U.S. The Applicant currently has two debt based Funds.
---------------------------------------------------------------------------

    8. In addition to Funds that are collective investment funds, AEFC 
may have investment responsibility for individual investment funds 
which are separate portfolios for various client accounts, including 
employee benefit plans, where the portfolio is invested in accordance 
with a third-party index. The Applicant represents that the ability of 
all Funds to invest in the AE Stock would improve the tracking of such 
indexes.
    9. The Applicant states that the proposed exemption is necessary to 
allow Funds holding ``plan assets'' to purchase and hold AE Stock in 
order to replicate the capitalization-weighted or other specified 
composition of AE Stock in an independently maintained third party 
index used by an Index Fund or to achieve the desired transformation of 
an index used to create a portfolio for a Model-Driven Fund.\17\
---------------------------------------------------------------------------

    \17\ The Applicant is not requesting any relief from sections 
406 or 407(a) of the Act in connection with the acquisition and 
holding of AE Stock by any AEFC Plans which invest in the 
Applicant's Index Funds. In this regard, such transactions may be 
covered by the statutory exemption under section 408(e) of the Act, 
if the conditions of that exemption are met. However, the Department 
is not providing an opinion in this proposed exemption as to whether 
the conditions of section 408(e) of the Act would be met for such 
transactions.
---------------------------------------------------------------------------

    The Applicant represents that when the AE Stock is added to an 
index on which a Fund is based, or are added to the portfolio of a Fund 
which tracks an index that includes the AE Stock, all acquisitions 
necessary, as an initial matter, to bring the Fund's holdings of the AE 
Stock to its capitalization or other specified weighting in the 
applicable Index, will comply with conditions (see Section I(b)(1)-(7) 
above) which are designed to prevent possible market price manipulation 
and are based, in part, on the restrictions of SEC Rule 10b-18.\18\
---------------------------------------------------------------------------

    \18\ SEC Rule 10b-18 provides a ``safe harbor'' for issuers of 
securities from section 9(a)(2) of the Securities Exchange Act of 
1934 and SEC Rule 10b-5 (which generally prohibits persons from 
manipulating the price of a security and engaging in fraud in 
connection with the purchase or sale of a security).
---------------------------------------------------------------------------

    Such acquisitions of AE Stock by a Fund are referred to herein as a 
``Buy-

[[Page 56719]]

up''.\19\ The conditions required for a ``Buy-up'' of AE Stock are as 
follows:
---------------------------------------------------------------------------

    \19\ The Applicant anticipates that generally acquisitions of AE 
Stock by an Index or Model-Driven Fund in a ``Buy-up'' will occur 
within 10 business days from the date of the event which causes the 
particular Fund to require AE Stock. AEFC does not anticipate that 
the amounts of AE Stock acquired by any Fund in a ``Buy-up'' will be 
significant. In this regard, the Department notes that the 
conditions required herein are designed to minimize the market 
impact of purchases made by the Funds in any ``Buy-up'' of AE Stock.
---------------------------------------------------------------------------

    (A) Purchases will be from or through only one broker or dealer on 
a single trading day;
    (B) Based on the best available information, purchases will not be 
the opening transaction for the trading day;
    (C) Purchases will not be effected in the last half hour before the 
scheduled close of the trading day;
    (D) Purchases will be at a price that is not higher than the lowest 
current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
    (E) Aggregate daily purchases will not exceed 15 percent of the 
daily trading volume for the security, as determined by the greater of 
either (i) the trading volume for the security occurring on the 
applicable exchange and automated trading system on the date of the 
transaction, or (ii) an aggregate average daily trading volume for the 
security occurring on the applicable exchange and automated trading 
system for the previous five (5) business days, both based on the best 
information reasonably available at the time of the transaction;
    (F) All purchases and sales of AE Stock will occur either (i) on a 
recognized U.S. securities exchange (as defined in Section III(k)), 
(ii) through an automated trading system (as defined in Section III(j)) 
operated by a broker-dealer independent of AEFC that is registered 
under the 34 Act, and thereby subject to regulation by the SEC, which 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer, or (iii) through an 
automated trading system (as defined in Section III(j) above) that is 
operated by a recognized U.S. securities exchange (as defined in 
Section III(k)), pursuant to the applicable securities laws, and 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer; and
    (G) If the necessary number of shares of AE Stock cannot be 
acquired within 10 business days from the date of the event which 
causes the particular Fund to require AE Stock, AEFC will appoint a 
fiduciary which is independent of AEFC to design acquisition procedures 
and monitor AEFC's compliance with such procedures.
    The independent fiduciary and its principals will be completely 
independent from AEFC. The independent fiduciary will also be 
experienced in developing and operating investment strategies for 
individual and collective investment vehicles that track third-party 
indices. Furthermore, the independent fiduciary will not act as the 
broker for any purchases or sales of AE Stock and will not receive any 
commissions as a result of this initial acquisition program.
    The independent fiduciary will have as its primary goal the 
development of trading procedures that minimize the market impact of 
purchases made pursuant to the initial acquisition program by the 
particular Fund. The Applicant would expect that, under the trading 
procedures established by the independent fiduciary, the trading 
activities will be conducted in a low-profile, mechanical, non-
discretionary manner and would involve a number of small purchases over 
the course of each day, randomly timed. The Applicant further expects 
that such a program will allow AEFC to acquire the necessary shares of 
AE Stock for the Funds with minimum impact on the market and in a 
manner that will be in the best interests of any employee benefit plans 
that participate in such Funds.
    The independent fiduciary will also be required to monitor AEFC's 
compliance with the trading program and procedures developed for the 
initial acquisition of AE Stock. During the course of any initial 
acquisition program, the independent fiduciary will be required to 
review the activities weekly to determine compliance with the trading 
procedures and notify AEFC should any non-compliance be detected. 
Should the trading procedures need modifications due to unforeseen 
events or consequences, the independent fiduciary will be required to 
consult with AEFC and must approve in advance any alteration of the 
trading procedures.
    10. Subsequent to initial acquisitions necessary to bring a Fund's 
holdings of AE Stock to its specified weighting in the index or model 
pursuant to the restrictions described above, all aggregate daily 
purchases of AE Stock by the Funds will not exceed on any particular 
day the greater of:
    (i) 15 percent of the average daily trading volume for the AE Stock 
occurring on the applicable exchange and automated trading system (as 
described herein) for the previous five (5) business days, or
    (ii) 15 percent of the trading volume for AE Stock occurring on the 
applicable exchange and automated trading system (as described herein) 
on the date of the transaction, as determined by the best available 
information for the trades that occurred on such date.
    11. All additional purchases or subsequent sales of the AE Stock by 
the Funds that are made on a daily basis merely to track an applicable 
Index or to conform to an applicable model would be accomplished either 
through cross-trade transactions, subject to the conditions of an 
applicable exemption, \20\ or on the open market, subject to the 
conditions of this exemption. All such purchases and sales of the AE 
Stock shall be either: (1) Entered into on a principal basis in a 
direct, arms-length transaction with a broker-dealer, \21\ in the 
ordinary course of its business, where such broker-dealer is 
independent of AEFC and is registered under the `34 Act, and thereby 
subject to regulation by the SEC; (2) effected on an automated trading 
system (as defined in Section III(j) above) operated by a broker-dealer 
independent of AEFC that is either registered under the `34 Act, and 
thereby subject to regulation by the SEC, or an automated trading 
system operated by a recognized U.S. securities exchange (as defined 
above) which, in either case, provides a mechanism for customer orders 
to be matched on an anonymous basis without the participation of a 
broker-dealer; or (3) effected through a recognized U.S. securities 
exchange (as defined in Section III(k) above) so long as the broker is 
acting on an agency basis.
---------------------------------------------------------------------------

    \20\ See footnote 2.
    \21\ The Department notes that no relief is being provided 
herein for purchases and sales of securities between a Fund and a 
broker-dealer, acting as a principal, which may be considered 
prohibited transactions as a result of such broker-dealer being a 
party in interest, under section 3(14) of the Act, with respect to 
any plans that are investors in the Fund. However, such transactions 
may be covered by one or more of the Department's existing class 
exemptions. For example, PTE 84-14 (49 FR 9497, March 13, 1984) 
permits, under certain conditions, parties in interest to engage in 
various transactions with plans whose assets are invested in an 
investment fund managed by a ``qualified professional asset 
manager'' (QPAM) who is independent of the parties in interest (with 
certain limited exceptions) and meets specified financial standards.
---------------------------------------------------------------------------

    However, daily purchases of AE Stock for a Fund, which occur after 
all acquisitions of such Stock have been made in order to bring the 
Fund's holdings to the capitalization or other specified weighting of 
the AE Stock in the index, would not be subject to the conditions 
required herein for a ``Buy-up'' period. In this regard, the Applicant

[[Page 56720]]

states that the restrictions required for acquisitions of AE Stock 
during a ``Buy-up'' period are not necessary for the volume of 
transactions which are expected by a Fund for daily tracking of an 
index in order to respond to changes in the composition or weighting of 
the AE Stock in the index.
    12. The Applicant represents that no more than 5 percent of the 
total outstanding shares of the AE Stock will be held in the aggregate 
by Index and Model-Driven Funds managed by AEFC. In addition, the 
Applicant states that the AE Stock will not constitute more than 5 
percent of the value of any independent third-party index on which 
investments of an Index or Model-Driven Fund are based. Specifically, 
the Applicant represents that the current weighting of AE Stock in the 
S&P Index is .56 percent.
    13. The Applicant states that plan fiduciaries independent of AEFC 
will authorize the investment of any plan's assets in an Index or 
Model-Driven Fund which purchases and/or holds AE Stock, pursuant to 
the procedures described herein. AEFC will also appoint an independent 
fiduciary which will direct the voting of any AE Stock held by the 
Funds. The independent fiduciary will be a consulting firm specializing 
in corporate governance issues and proxy voting on behalf of public and 
private pension funds, banks, trust companies, money managers, 
insurance companies and other institutional investors with large equity 
portfolios. The independent fiduciary will be required to develop and 
follow standard guidelines and procedures for the voting of proxies by 
institutional fiduciaries. The Applicant will provide the independent 
fiduciary with all necessary information regarding the Funds that hold 
AE Stock on the record date for shareholder meetings of AEFC, and all 
proxy and consent materials with respect to the AE Stock. The 
independent fiduciary will maintain records with respect to its 
activities as an independent fiduciary on behalf of the Funds, 
including the number of the shares of AE Stock voted, the manner in 
which they were voted, and the rationale for the vote if the vote was 
not consistent with the independent fiduciary's procedures and current 
voting guidelines in effect at the time of the vote. The independent 
fiduciary will supply AEFC with the information after each shareholder 
meeting. The independent fiduciary will be required to acknowledge that 
it will be acting as a fiduciary with respect to the plans which invest 
in the Funds which own the AE Stock, when voting such stock.
    14. In summary, with respect to all acquisitions, holdings, and 
dispositions of AE Stock by the Funds, the Applicant represents that 
such transactions will meet the criteria of section 408(a) of the Act 
for the following reasons:
    (a) Each Index or Model-Driven Fund involved will be based on an 
Index, as defined in Section III(c) above;
    (b) The acquisition or disposition of AE Stock will be for the sole 
purpose of maintaining strict quantitative conformity with the relevant 
Index upon which the Index or Model-Driven Fund is based, and will not 
involve any agreement, arrangement or understanding regarding the 
design or operation of the Fund acquiring the AE Stock which is 
intended to benefit AEFC or any party in which AEFC may have an 
interest;
    (c) Whenever AE Stock is initially added to an index on which a 
Fund is based, or initially added to the portfolio of a Fund (i.e., a 
Buy-up), all acquisitions of AE Stock necessary to bring the Fund's 
holdings of such Stock either to its capitalization-weighted or other 
specified composition in the relevant index, as determined by the 
independent organization maintaining such index, or to its correct 
weighting as determined by the computer model which has been used to 
transform the index, will be restricted by conditions which are 
designed to prevent possible market price manipulations;
    (d) Subsequent to acquisitions necessary to bring a Fund's holdings 
of AE Stock to its specified weighting in the index or model, pursuant 
to the restrictions noted in paragraph (c) above, all aggregate daily 
purchases of AE Stock by the Funds will not exceed, on any particular 
day, the greater of:
    (1) 15 percent of the average daily trading volume for the AE Stock 
occurring on the applicable exchange and automated trading system for 
the previous five (5) business days, or
    (2) 15 percent of the trading volume for AE Stock occurring on the 
applicable exchange and automated trading system on the date of the 
transaction, as determined by the best available information for the 
trades that occurred on such date;
    (e) All transactions in AE Stock, other than acquisitions of such 
Stock in a Buy-up described in paragraph (c) above, will be either: (i) 
entered into on a principal basis with a broker-dealer, in the ordinary 
course of its business, where such broker-dealer is independent of AEFC 
and is registered under the `34 Act, and thereby subject to regulation 
by the SEC, (ii) effected on an automated trading system operated by a 
broker-dealer independent of AEFC that is subject to regulation by 
either the SEC or another applicable regulatory authority, or an 
automated trading system operated by a recognized U.S. securities 
exchange which, in either case, provides a mechanism for customer 
orders to be matched on an anonymous basis without the participation of 
a broker-dealer, or (iii) effected through a recognized U.S. securities 
exchange (as defined herein) so long as the broker is acting on an 
agency basis.
    (f) No transactions by a Fund will involve purchases from or sales 
to AEFC (including officers, directors, or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption);
    (g) No more than five (5) percent of the total amount of AE Stock, 
that is issued and outstanding at any time, will be held in the 
aggregate by Index and Model-Driven Funds managed by AEFC;
    (h) AE Stock will constitute no more than five (5) percent of any 
independent third party index on which the investments of an Index or 
Model-Driven Fund are based;
    (i) A plan fiduciary independent of AEFC will authorize the 
investment of such plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds AE Stock (other than in the case of an AEFC 
plan), pursuant to the procedures described herein; and
    (j) A fiduciary independent of AEFC will direct the voting of the 
AE Stock held by an Index or Model-Driven Fund on any matter in which 
shareholders of AE Stock are required or permitted to vote.

FOR FURTHER INFORMATION CONTACT: Mr. J. Martin Jara of the Department, 
telephone (202) 219-8194. (This is not a toll-free number.)

Countrywide Securities Corporation (Countrywide) Located in 
Calabasas, California

[Application No. D-10863]

Proposed Exemption

I. Transactions

    A. Effective January 28, 2000, the restrictions of sections 406(a) 
and 407(a) of the Act, and the taxes imposed by section 4975(a) and (b) 
of the Code by reason of section 4975(c)(1)(A) through (D) of the Code, 
shall not apply to the following transactions involving trusts and 
certificates evidencing interests therein:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the

[[Page 56721]]

initial issuance of certificates between the sponsor or underwriter and 
an employee benefit plan when the sponsor, servicer, trustee or insurer 
of a trust, the underwriter of the certificates representing an 
interest in the trust, or an obligor is a party in interest with 
respect to such plan;
    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates; 
and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.A.(1) or (2).
    Notwithstanding the foregoing, section I.A. does not provide an 
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and 
407 for the acquisition or holding of a certificate on behalf of an 
Excluded Plan by any person who has discretionary authority or renders 
investment advice with respect to the assets of that Excluded Plan.\22\
---------------------------------------------------------------------------

    \22\ Section I.A. provides no relief from sections 406(a)(1)(E), 
406(a)(2) and 407 for any person rendering investment advice to an 
Excluded Plan within the meaning of section 3(21)(A)(ii) and 
regulation 29 CFR 2510.3-21(c).
---------------------------------------------------------------------------

    B. Effective January 28, 2000, the restrictions of sections 
406(b)(1) and 406(b)(2) of the Act, and the taxes imposed by section 
4975(a) and (b) of the Code by reason of section 4975(c)(1)(E) of the 
Code, shall not apply to:
    (1) The direct or indirect sale, exchange or transfer of 
certificates in the initial issuance of certificates between the 
sponsor or underwriter and a plan when the person who has discretionary 
authority or renders investment advice with respect to the investment 
of plan assets in the certificates is (a) an obligor with respect to 5 
percent or less of the fair market value of obligations or receivables 
contained in the trust, or (b) an affiliate of a person described in 
(a); if:
    (i) The plan is not an Excluded Plan;
    (ii) Solely in the case of an acquisition of certificates in 
connection with the initial issuance of the certificates, at least 50 
percent of each class of certificates in which plans have invested is 
acquired by persons independent of the members of the Restricted Group 
and at least 50 percent of the aggregate interest in the trust is 
acquired by persons independent of the Restricted Group;
    (iii) A plan's investment in each class of certificates does not 
exceed 25 percent of all of the certificates of that class outstanding 
at the time of the acquisition; and
    (iv) Immediately after the acquisition of the certificates, no more 
than 25 percent of the assets of a plan with respect to which the 
person has discretionary authority or renders investment advice are 
invested in certificates representing an interest in a trust containing 
assets sold or serviced by the same entity.\23\ For purposes of this 
paragraph B.(1)(iv) only, an entity will not be considered to service 
assets contained in a trust if it is merely a subservicer of that 
trust;
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    \23\ For purposes of this proposed exemption, each plan 
participating in a commingled fund (such as a bank collective trust 
fund or insurance company pooled separate account) shall be 
considered to own the same proportionate undivided interest in each 
asset of the commingled fund as its proportionate interest in the 
total assets of the commingled fund as calculated on the most recent 
preceding valuation date of the fund.
---------------------------------------------------------------------------

    (2) The direct or indirect acquisition or disposition of 
certificates by a plan in the secondary market for such certificates, 
provided that the conditions set forth in paragraphs B.(1)(i), (iii) 
and (iv) are met; and
    (3) The continued holding of certificates acquired by a plan 
pursuant to subsection I.B.(1) or (2).
    C. Effective January 28, 2000, the restrictions of sections 406(a), 
406(b) and 407(a) of the Act, and the taxes imposed by section 4975(a) 
and (b) of the Code by reason of section 4975(c) of the Code, shall not 
apply to transactions in connection with the servicing, management and 
operation of a trust, provided:
    (1) Such transactions are carried out in accordance with the terms 
of a binding pooling and servicing agreement; and
    (2) The pooling and servicing agreement is provided to, or 
described in all material respects in, the prospectus or private 
placement memorandum provided to investing plans before they purchase 
certificates issued by the trust.\24\
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    \24\ In the case of a private placement memorandum, such 
memorandum must contain substantially the same information that 
would be disclosed in a prospectus if the offering of the 
certificates were made in a registered public offering under the 
Securities Act of 1933. In the Department's view, the private 
placement memorandum must contain sufficient information to permit 
plan fiduciaries to make informed investment decisions. For purposes 
of this proposed exemption, references to ``prospectus'' include any 
related prospectus supplement thereto, pursuant to which 
certificates are offered to investors.
---------------------------------------------------------------------------

    Notwithstanding the foregoing, section I.C. does not provide an 
exemption from the restrictions of section 406(b) of the Act, or from 
the taxes imposed by reason of section 4975(c) of the Code, for the 
receipt of a fee by a servicer of the trust from a person other than 
the trustee or sponsor, unless such fee constitutes a ``qualified 
administrative fee'' as defined in section III.S.
    D. Effective January 28, 2000, the restrictions of sections 406(a) 
and 407(a) of the Act, and the taxes imposed by sections 4975(a) and 
(b) of the Code by reason of sections 4975(c)(1)(A) through (D) of the 
Code, shall not apply to any transactions to which those restrictions 
or taxes would otherwise apply merely because a person is deemed to be 
a party in interest or disqualified person (including a fiduciary) with 
respect to a plan by virtue of providing services to the plan (or by 
virtue of having a relationship to such service provider described in 
section 3(14)(F), (G), (H) or (I) of the Act or section 4975(e)(2)(F), 
(G), (H) or (I) of the Code), solely because of the plan's ownership of 
certificates.

II. General Conditions

    A. The relief provided under Part I is available only if the 
following conditions are met:
    (1) The acquisition of certificates by a plan is on terms 
(including the certificate price) that are at least as favorable to the 
plan as they would be in an arm's-length transaction with an unrelated 
party;
    (2) The rights and interests evidenced by the certificates are not 
subordinated to the rights and interests evidenced by other 
certificates of the same trust;
    (3) The certificates acquired by the plan have received a rating 
from a Rating Agency (as defined in section III.W.) at the time of such 
acquisition that is in one of the three highest generic rating 
categories;
    (4) The trustee is not an affiliate of any other member of the 
Restricted Group. However, the trustee shall not be considered to be an 
affiliate of a servicer solely because the trustee has succeeded to the 
rights and responsibilities of the servicer pursuant to the terms of a 
pooling and servicing agreement providing for such succession upon the 
occurrence of one or more events of default by the servicer;
    (5) The sum of all payments made to and retained by the 
underwriters in connection with the distribution or placement of 
certificates represents not more than reasonable compensation for 
underwriting or placing the certificates; the sum of all payments made 
to and retained by the sponsor pursuant to the assignment of 
obligations (or interests therein) to the trust represents not more 
than the fair market value of such obligations (or interests); and the 
sum of all payments made to and retained by the servicer represents not 
more than reasonable compensation for the servicer's services under the 
pooling

[[Page 56722]]

and servicing agreement and reimbursement of the servicer's reasonable 
expenses in connection therewith;
    (6) The plan investing in such certificates is an ``accredited 
investor'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities and Exchange Commission under the Securities Act of 1933; 
and
    (7) In the event that the obligations used to fund a trust have not 
all been transferred to the trust on the closing date, additional 
obligations as specified in subsection III.B.(1) may be transferred to 
the trust during the pre-funding period (as defined in section III.BB.) 
in exchange for amounts credited to the pre-funding account (as defined 
in section III.Z.), provided that:
    (a) The pre-funding limit (as defined in section III.AA.) is not 
exceeded;
    (b) All such additional obligations meet the same terms and 
conditions for eligibility as those of the original obligations used to 
create the trust corpus (as described in the prospectus or private 
placement memorandum and/or pooling and servicing agreement for such 
certificates), which terms and conditions have been approved by a 
Rating Agency. Notwithstanding the foregoing, the terms and conditions 
for determining the eligibility of an obligation may be changed if such 
changes receive prior approval either by a majority of the outstanding 
certificateholders or by a Rating Agency;
    (c) The transfer of such additional obligations to the trust during 
the pre-funding period does not result in the certificates receiving a 
lower credit rating from a rating agency upon termination of the pre-
funding period than the rating that was obtained at the time of the 
initial issuance of the certificates by the trust;
    (d) The weighted average annual percentage interest rate (the 
average interest rate) for all of the obligations in the trust at the 
end of the pre-funding period will not be more than 100 basis points 
lower than the average interest rate for the obligations which were 
transferred to the trust on the closing date;
    (e) In order to ensure that the characteristics of the receivables 
actually acquired during the pre-funding period are substantially 
similar to those which were acquired as of the closing date, the 
characteristics of the additional obligations will be either monitored 
by a credit support provider or other insurance provider which is 
independent of the sponsor, or an independent accountant retained by 
the sponsor will provide the sponsor with a letter (with copies 
provided to the Rating Agency, the underwriter and the trustees) 
stating whether or not the characteristics of the additional 
obligations conform to the characteristics of such obligations 
described in the prospectus, private placement memorandum and/or 
pooling and servicing agreement. In preparing such letter, the 
independent accountant will use the same type of procedures as were 
applicable to the obligations which were transferred as of the closing 
date;
    (f) The pre-funding period shall be described in the prospectus or 
private placement memorandum provided to investing plans; and
    (g) The trustee of the trust (or any agent with which the trustee 
contracts to provide trust services) will be a substantial financial 
institution or trust company experienced in trust activities and 
familiar with its duties, responsibilities and liabilities as a 
fiduciary under the Act. The trustee, as the legal owner of the 
obligations in the trust, will enforce all the rights created in favor 
of certificateholders of such trust, including employee benefit plans 
subject to the Act.
    B. Neither any underwriter, sponsor, trustee, servicer, insurer, 
nor any obligor, unless it or any of its affiliates has discretionary 
authority or renders investment advice with respect to the plan assets 
used by a plan to acquire certificates, shall be denied the relief 
provided under Part I, if the provision of subsection II.A.(6) above is 
not satisfied with respect to acquisition or holding by a plan of such 
certificates, provided that (1) such condition is disclosed in the 
prospectus or private placement memorandum; and (2) in the case of a 
private placement of certificates, the trustee obtains a representation 
from each initial purchaser which is a plan that it is in compliance 
with such condition, and obtains a covenant from each initial purchaser 
to the effect that, so long as such initial purchaser (or any 
transferee of such initial purchaser's certificates) is required to 
obtain from its transferee a representation regarding compliance with 
the Securities Act of 1933, any such transferees will be required to 
make a written representation regarding compliance with the condition 
set forth in subsection II.A.(6) above.

III. Definitions

    For purposes of this proposed exemption:
    A. ``Certificate'' means:
    (1) A Certificate--
    (a) that represents a beneficial ownership interest in the assets 
of a trust; and
    (b) that entitles the holder to pass-through payments of principal, 
interest, and/or other payments made with respect to the assets of such 
trust; or
    (2) A Certificate denominated as a debt instrument--
    (a) that represents an interest in a Real Estate Mortgage 
Investment Conduit (REMIC) or a Financial Asset Securitization 
Investment Trust (FASIT) within the meaning of section 860D(a) or 
section 860L, respectively, of the Code; and
    (b) that is issued by, and is an obligation of, a trust;
with respect to certificates defined in (1) and (2) above for which 
Countrywide or any of its affiliates is either (i) the sole underwriter 
or the manager or co-manager of the underwriting syndicate, or (ii) a 
selling or placement agent.
For purposes of this proposed exemption, references to ``certificates 
representing an interest in a trust'' include certificates denominated 
as debt which are issued by a trust.
    B. ``Trust'' means an investment pool, the corpus of which is held 
in trust and consists solely of:
    (1) (a) Secured consumer receivables that bear interest or are 
purchased at a discount (including, but not limited to, home equity 
loans and obligations secured by shares issued by a cooperative housing 
association); and/or
    (b) Secured credit instruments that bear interest or are purchased 
at a discount in transactions by or between business entities 
(including, but not limited to, qualified equipment notes secured by 
leases, as defined in section III.T); and/or
    (c) Obligations that bear interest or are purchased at a discount 
and which are secured by single-family residential, multi-family 
residential and commercial real property (including obligations secured 
by leasehold interests on commercial real property); and/or
    (d) Obligations that bear interest or are purchased at a discount 
and which are secured by motor vehicles or equipment, or qualified 
motor vehicle leases (as defined in section III.U); and/or
    (e) ``Guaranteed governmental mortgage pool certificates,'' as 
defined in 29 CFR 2510.3-101(i)(2); and/or
    (f) Fractional undivided interests in any of the obligations 
described in clauses (a)-(e) of this section B.(1);
    (2) Property which had secured any of the obligations described in 
subsection B.(1);
    (3) (a) Undistributed cash or temporary investments made therewith 
maturing no later than the next date on which distributions are to be 
made to certificateholders; and/or

[[Page 56723]]

    (b) Cash or investments made therewith which are credited to an 
account to provide payments to certificateholders pursuant to any yield 
supplement agreement or similar yield maintenance arrangement to 
supplement the interest rates otherwise payable on obligations 
described in subsection III.B.(1) held in the trust, provided that such 
arrangements do not involve swap agreements or other notional principal 
contracts; and/or
    (c) Cash transferred to the trust on the closing date and permitted 
investments made therewith which:
    (i) are credited to a pre-funding account established to purchase 
additional obligations with respect to which the conditions set forth 
in clauses (a)-(g) of subsection II.A.(7) are met and/or;
    (ii) are credited to a capitalized interest account (as defined in 
section III.X.); and
    (iii) are held in the trust for a period ending no later than the 
first distribution date to certificateholders occurring after the end 
of the pre-funding period.
    For purposes of this clause (c) of subsection III.B.(3), the term 
``permitted investments'' means investments which are either: (i) 
direct obligations of, or obligations fully guaranteed as to timely 
payment of principal and interest by the United States, or any agency 
or instrumentality thereof, provided that such obligations are backed 
by the full faith and credit of the United States or (ii) have been 
rated (or the obligor has been rated) in one of the three highest 
generic rating categories by a rating agency; are described in the 
pooling and servicing agreement; and are permitted by the rating 
agency; and
    (4) Rights of the trustee under the pooling and servicing 
agreement, and rights under any insurance policies, third-party 
guarantees, contracts of suretyship, yield supplement agreements 
described in clause (b) of subsection III.B.(3) and other credit 
support arrangements with respect to any obligations described in 
subsection III.B.(1).
    Notwithstanding the foregoing, the term ``trust'' does not include 
any investment pool unless: (i) The investment pool consists only of 
assets of the type described in clauses (a) through (f) of subsection 
III.B.(1) which have been included in other investment pools, (ii) 
certificates evidencing interests in such other investment pools have 
been rated in one of the three highest generic rating categories by a 
Rating Agency for at least one year prior to the plan's acquisition of 
certificates pursuant to this proposed exemption, and (iii) 
certificates evidencing interests in such other investment pools have 
been purchased by investors other than plans for at least one year 
prior to the plan's acquisition of certificates pursuant to this 
proposed exemption.
    C. ``Underwriter'' means:
    (1) Countrywide;
    (2) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
Countrywide; or
    (3) Any member of an underwriting syndicate or selling group of 
which Countrywide or a person described in (2) is a manager or co-
manager with respect to the certificates.
    D. ``Sponsor'' means the entity that organizes a trust by 
depositing obligations therein in exchange for certificates.
    E. ``Master Servicer'' means the entity that is a party to the 
pooling and servicing agreement relating to trust assets and is fully 
responsible for servicing, directly or through subservicers, the assets 
of the trust.
    F. ``Subservicer'' means an entity which, under the supervision of 
and on behalf of the master servicer, services obligations contained in 
the trust, but is not a party to the pooling and servicing agreement.
    G. ``Servicer'' means any entity which services obligations 
contained in the trust, including the master servicer and any 
subservicer.
    H. ``Trustee'' means the trustee of the trust, and in the case of 
certificates which are denominated as debt instruments, also means the 
trustee of the indenture trust.
    I. ``Insurer'' means the insurer or guarantor of, or provider of 
other credit support for, a trust. Notwithstanding the foregoing, a 
person is not an insurer solely because it holds securities 
representing an interest in a trust which are of a class subordinated 
to certificates representing an interest in the same trust.
    J. ``Obligor'' means any person, other than the insurer, that is 
obligated to make payments with respect to any obligation or receivable 
included in the trust. Where a trust contains qualified motor vehicle 
leases or qualified equipment notes secured by leases, ``obligor'' 
shall also include any owner of property subject to any lease included 
in the trust, or subject to any lease securing an obligation included 
in the trust.
    K. ``Excluded Plan'' means any plan with respect to which any 
member of the Restricted Group is a ``plan sponsor'' within the meaning 
of section 3(16)(B) of the Act.
    L. ``Restricted Group'' with respect to a class of certificates 
means:
    (1) Each underwriter;
    (2) Each insurer;
    (3) The sponsor;
    (4) The trustee;
    (5) Each servicer;
    (6) Any obligor with respect to obligations or receivables included 
in the trust constituting more than 5 percent of the aggregate 
unamortized principal balance of the assets in the trust, determined on 
the date of the initial issuance of certificates by the trust; or
    (7) Any affiliate of a person described in (1)-(6) above.
    M. ``Affiliate'' of another person includes:
    (1) Any person directly or indirectly, through one or more 
intermediaries, controlling, controlled by, or under common control 
with such other person;
    (2) Any officer, director, partner, employee, relative (as defined 
in section 3(15) of the Act), a brother, a sister, or a spouse of a 
brother or sister of such other person; and
    (3) Any corporation or partnership of which such other person is an 
officer, director or partner.
    N. ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    O. A person will be ``independent'' of another person only if:
    (1) Such person is not an affiliate of that other person; and
    (2) The other person, or an affiliate thereof, is not a fiduciary 
who has investment management authority or renders investment advice 
with respect to any assets of such person.
    P. ``Sale'' includes the entrance into a forward delivery 
commitment (as defined in section Q below), provided:
    (1) The terms of the forward delivery commitment (including any fee 
paid to the investing plan) are no less favorable to the plan than they 
would be in an arm's-length transaction with an unrelated party;
    (2) The prospectus or private placement memorandum is provided to 
an investing plan prior to the time the plan enters into the forward 
delivery commitment; and
    (3) At the time of the delivery, all conditions of this proposed 
exemption (if granted) applicable to sales are met.
    Q. ``Forward delivery commitment'' means a contract for the 
purchase or sale of one or more certificates to be delivered at an 
agreed future settlement date. The term includes both mandatory 
contracts (which contemplate obligatory delivery and acceptance of the

[[Page 56724]]

certificates) and optional contracts (which give one party the right 
but not the obligation to deliver certificates to, or demand delivery 
of certificates from, the other party).
    R. ``Reasonable compensation'' has the same meaning as that term is 
defined in 29 CFR 2550.408c-2.
    S. ``Qualified Administrative Fee'' means a fee which meets the 
following criteria:
    (1) The fee is triggered by an act or failure to act by the obligor 
other than the normal timely payment of amounts owing in respect of the 
obligations;
    (2) The servicer may not charge the fee absent the act or failure 
to act referred to in (1);
    (3) The ability to charge the fee, the circumstances in which the 
fee may be charged, and an explanation of how the fee is calculated are 
set forth in the pooling and servicing agreement; and
    (4) The amount paid to investors in the trust will not be reduced 
by the amount of any such fee waived by the servicer.
    T. ``Qualified Equipment Note Secured By A Lease'' means an 
equipment note:
    (1) Which is secured by equipment which is leased;
    (2) Which is secured by the obligation of the lessee to pay rent 
under the equipment lease; and
    (3) With respect to which the trust's security interest in the 
equipment is at least as protective of the rights of the trust as would 
be the case if the equipment note were secured only by the equipment 
and not the lease.
    U. ``Qualified Motor Vehicle Lease'' means a lease of a motor 
vehicle where:
    (1) The trust owns or holds a security interest in the lease;
    (2) The trust owns or holds a security interest in the leased motor 
vehicle; and
    (3) The trust's security interest in the leased motor vehicle is at 
least as protective of the trust's rights as would be the case if the 
trust consisted of motor vehicle installment loan contracts.
    V. ``Pooling and Servicing Agreement'' means the agreement or 
agreements among a sponsor, a servicer and the trustee establishing a 
trust. In the case of certificates which are denominated as debt 
instruments, ``Pooling and Servicing Agreement'' also includes the 
indenture entered into by the trustee of the trust issuing such 
certificates and the indenture trustee.
    W. ``Rating Agency'' means Standard & Poor's Structured Rating 
Group (S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps 
Credit Rating Co. (D&P) or Fitch IBCA, Inc. (Fitch) or their 
successors;
    X. ``Capitalized Interest Account'' means a trust account: (i) 
which is established to compensate certificateholders for shortfalls, 
if any, between investment earnings on the pre-funding account and the 
pass-through rate payable under the certificates; and (ii) which meets 
the requirements of clause (c) of subsection III.B.(3).
    Y. ``Closing Date'' means the date the trust is formed, the 
certificates are first issued and the trust's assets (other than those 
additional obligations which are to be funded from the pre-funding 
account pursuant to subsection II.A.(7)) are transferred to the trust.
    Z. ``Pre-Funding Account'' means a trust account: (i) which is 
established to purchase additional obligations, which obligations meet 
the conditions set forth in clauses (a)-(g) of subsection II.A.(7); and 
(ii) which meets the requirements of clause (c) of subsection 
III.B.(3).
    AA. ``Pre-Funding Limit'' means a percentage or ratio of the amount 
allocated to the pre-funding account, as compared to the total 
principal amount of the certificates being offered which is less than 
or equal to 25 percent.
    BB. ``Pre-Funding Period'' means the period commencing on the 
closing date and ending no later than the earliest to occur of: (i) the 
date the amount on deposit in the pre-funding account is less than the 
minimum dollar amount specified in the pooling and servicing agreement; 
(ii) the date on which an event of default occurs under the pooling and 
servicing agreement; or (iii) the date which is the later of three 
months or 90 days after the closing date.
    CC. ``Countrywide'' means Countrywide Securities Corporation and 
its affiliates.
    The Department notes that this proposed exemption is included 
within the meaning of the term ``Underwriter Exemption'' as it is 
defined in section V(h) of Prohibited Transaction Exemption 95-60 (60 
FR 35925, July 12, 1995), the Class Exemption for Certain Transactions 
Involving Insurance Company General Accounts at (see 60 FR 35932).

Summary of Facts and Representations

    1. Countrywide is a California corporation, organized on November 
4, 1981 as an indirect wholly-owned subsidiary of Countrywide Credit 
Industries, Inc. (CCI).\25\ It is a registered broker-dealer and a 
member of both the National Association of Securities Dealers, inc. and 
the Securities Investor Protection Corporation. Countrywide primarily 
trades mortgage-related and other securities, including pass-through 
certificates issued by GNMA, FNMA and FHLMC, callable agency debt, and 
collateralized mortgage obligations. Countrywide also trades 
certificates of deposit issued by banks, the deposits of which are 
insured by the Bank Insurance Fund. It participates in the underwriting 
of securities for Countrywide Home Loans, Inc. (CHL), CWMBS, Inc., 
CWABS, Inc. and others. Countrywide trades with institutional 
investors, such as investment managers, pension fund companies, 
insurance companies, depositories, and other broker-dealers. It does 
not maintain retail accounts. Countrywide had total assets of $2.5 
billion as of February 28, 2000, and CCI had total assets of $18.4 
billion on May 31, 2000.
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    \25\ The Department notes that it proposed exemptive relief for 
Countrywide (65 FR 51454) on August 23, 2000 in connection with the 
amendment of PTE 97-34. PTE 97-34 amended over 40 individual 
``Underwriter Exemptions''. The proposed amendment of the individual 
Underwriter Exemptions, however, generally would be effective for 
transactions occurring on or after August 23, 2000. Since 
Countrywide requested an exemption based upon 97-34 with an 
effective date retroactive to January 28, 2000, the Department 
determined to publish this proposal with the earlier effective date.
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    Countrywide maintains its principal offices in Calabasas, 
California and maintains a sales office in New York City. CCI, a 
Delaware corporation organized in 1969, acts as a holding company. Its 
principal office is also located in Calabasas, California.
    CHL is a New York corporation organized in 1969 as a wholly-owned 
subsidiary of CCI. It is engaged primarily in the mortgage banking 
business, and originates, purchases, sells and services prime mortgage 
loans, sub-prime mortgage loans and home equity loans. It originates 
mortgage loans through a retail branch system and through mortgage loan 
brokers, and purchases loans originated by correspondents nationwide. 
It sells substantially all loans that it originates or purchases. In 
the fiscal year ending February 28, 1999, CHL originated or purchased 
over 800,000 loans with an aggregate principal amount of over $92 
million. It also services on a non-recourse basis substantially all of 
the mortgage loans that it originates or purchases, and services loans 
originated by other lenders under bulk servicing contracts. At the end 
of the fiscal year ending February 28, 1999, the loans in CHL's 
servicing portfolio had a principal balance of more than $215 billion. 
CHL has its principal offices in Calabasas, California, and maintains 
approximately 500 branch offices in all 50 states.
    CWMBS, Inc. is a Delaware corporation organized in 1993 for the

[[Page 56725]]

limited purpose of acquiring, owning and transferring mortgage-related 
assets and selling interests in and bonds secured by those assets. It 
is a limited purpose financial subsidiary wholly-owned by CCI, and it 
maintains its principal office in Calabasas, California.
    CWABS, Inc. is a Delaware corporation incorporated in 1996 for the 
limited purpose of acquiring, owning and transferring mortgage-related 
assets and selling interests in and bonds secured by those assets. It 
is a limited purpose finance subsidiary wholly-owned by CCI, and it 
maintains its principal office in Calabasas, California.

Trust Assets

    2. Countrywide seeks exemptive relief to permit plans to invest in 
pass-through certificates representing undivided interests in the 
following categories of trusts: (1) Single and multi-family residential 
or commercial mortgage investment trusts; \26\ (2) motor vehicle 
receivable investment trusts; (3) consumer or commercial receivables 
investment trusts; and (4) guaranteed governmental mortgage pool 
certificate investment trusts.\27\
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    \26\ The Department notes that PTE 83-1 (48 FR 895, January 7, 
1983), a class exemption for mortgage pool investment trusts, would 
generally apply to trusts containing single-family residential 
mortgages, provided that the applicable conditions of PTE 83-1 are 
met. Countrywide requests relief for single-family residential 
mortgages in this exemption because it would prefer one exemption 
for all trusts of similar structure. However, Countrywide has stated 
that it may still avail itself of the exemptive relief provided by 
PTE 83-1.
    \27\ Guaranteed governmental mortgage pool certificates are 
mortgage-backed securities with respect to which interest and 
principal payable is guaranteed by the Government National Mortgage 
Association (GNMA), the Federal Home Loan Mortgage Corporation 
(FHLMC), or the Federal National Mortgage Association (FNMA). The 
Department's regulation relating to the definition of ``plan 
assets'' (29 CFR 2510.3-101(i)) provides that where a plan acquires 
a guaranteed governmental mortgage pool certificate, the plan's 
assets include the certificate and all of its rights with respect to 
such certificate under applicable law, but do not, solely by reason 
of the plan's holding of such certificate, include any of the 
mortgages underlying such certificate. The applicant is requesting 
exemptive relief for trusts containing guaranteed governmental 
mortgage pool certificates because the certificates in the trusts 
may be plan assets.
---------------------------------------------------------------------------

    3. Commercial mortgage investment trusts may include mortgages on 
ground leases of real property. Commercial mortgages are frequently 
secured by ground leases on the underlying property, rather than by fee 
simple interests. The separation of the fee simple interest and the 
ground lease interest is generally done for tax reasons. Properly 
structured, the pledge of the ground lease to secure a mortgage 
provides a lender with the same level of security as would be provided 
by a pledge of the related fee simple interest. The terms of the ground 
leases pledged to secure leasehold mortgages will in all cases be at 
least ten years longer than the term of such mortgages.\28\
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    \28\ Trust assets may also include obligations that are secured 
by leasehold interests on residential real property. See PTE 90-32 
involving Prudential-Bache Securities, Inc. (55 FR 23147, June 6, 
1990 at 23150).
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Trust Structure

    4. Each trust is established under a pooling and servicing 
agreement between a sponsor, a servicer and a trustee.\29\ The sponsor 
or servicer of a trust selects assets to be included in the trust.\30\ 
These assets are receivables which may have been originated, in the 
ordinary course of business, by a sponsor or servicer of the trust, an 
affiliate of the sponsor or servicer, or by an unrelated lender and 
subsequently acquired by the trust sponsor or servicer.\31\
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    \29\ The Department is of the view that the term ``trust'' 
includes a trust: (a) the assets of which, although all specifically 
identified by the sponsor or the originator as of the closing date, 
are not all transferred to the trust on the closing date for 
administrative or other reasons but will be transferred to the trust 
shortly after the closing date, or (b) with respect to which 
certificates are not purchased by plans until after the end of the 
pre-funding period at which time all receivables are contained in 
the trust.
    \30\ It is the Department's view that the definition of 
``trust'' contained in section III.B. includes a two-tier structure 
under which certificates issued by the first trust, which contains a 
pool of receivables described above, are transferred to a second 
trust which issues securities that are sold to plans. However, the 
Department is of the further view that, since the exemption provides 
relief for the direct or indirect acquisition or disposition of 
certificates that are not subordinated, no relief would be available 
if the certificates held by the second trust were subordinated to 
the rights and interests evidenced by other certificates issued by 
the first trust.
    \31\ It is the view of the Department that section III.B.(4) 
includes within the definition of the term ``trust'' rights under 
any yield supplement or similar arrangement which obligates the 
sponsor or master servicer, or another party specified in the 
relevant pooling and servicing agreement, to supplement the interest 
rates otherwise payable on the obligations described in section 
III.B.(1), in accordance with the terms of a yield supplement 
arrangement described in the pooling and servicing agreement, 
provided that such arrangements do not involve swap agreements or 
other notional principal contracts.
---------------------------------------------------------------------------

    Typically, on or prior to the closing date, the sponsor acquires 
legal title to all assets selected for the trust, establishes the trust 
and designates an independent entity as trustee. On the closing date, 
the sponsor conveys to the trust legal title to the assets, and the 
trustee issues certificates representing fractional undivided interests 
in the trust assets. Typically, all receivables to be held in the trust 
are transferred as of the closing date, but in some transactions, as 
described more fully below, a limited percentage of the receivables to 
be held in the trust may be transferred during a limited period of time 
following the closing date, through the use of a pre-funding account.
    Countrywide, alone or together with other broker-dealers, acts as 
underwriter or placement agent with respect to the sale of the 
certificates. All of the public offerings of certificates presently 
contemplated have been or are to be underwritten by Countrywide on a 
firm commitment basis. In addition, Countrywide anticipates that it may 
privately place certificates on both a firm commitment and an agency 
basis. Countrywide may also act as the lead underwriter for a syndicate 
of securities underwriters.
    Certificateholders will be entitled to receive monthly, quarterly 
or semi-annual installments of principal and/or interest, or lease 
payments due on the receivables, adjusted, in the case of payments of 
interest, to a specified rate--the pass-through rate--which may be 
fixed or variable.
    When installments or payments are made on a semi-annual basis, 
funds are not permitted to be commingled with the servicer's assets for 
longer than would be permitted for a monthly-pay security. A segregated 
account is established in the name of the trustee (on behalf of 
certificateholders) to hold funds received between distribution dates. 
The account is under the sole control of the trustee, who invests the 
account's assets in short-term securities which have received a rating 
comparable to the rating assigned to the certificates. In some cases, 
the servicer may be permitted to make a single deposit into the account 
once a month. When the servicer makes such monthly deposits, payments 
received from obligors by the servicer may be commingled with the 
servicer's assets during the month prior to deposit. Usually, the 
period of time between receipt of funds by the servicer and deposit of 
these funds in a segregated account does not exceed one month. 
Furthermore, in those cases where distributions are made semi-annually, 
the servicer will furnish a report on the operation of the trust to the 
trustee on a monthly basis. At or about the time this report is 
delivered to the trustee, it will be made available to 
certificateholders and delivered to or made available to each Rating 
Agency that has rated the certificates.
    5. Some of the certificates will be multi-class certificates. 
Countrywide requests exemptive relief for two types of multi-class 
certificates: ``strip'' certificates and ``fast-pay/slow-pay'' 
certificates. Strip certificates are a type of security in which the 
stream of

[[Page 56726]]

interest payments on receivables is split from the flow of principal 
payments and separate classes of certificates are established, each 
representing rights to disproportionate payments of principal and 
interest.\32\
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    \32\ It is the Department's understanding that where a plan 
invests in REMIC ``residual'' interest certificates to which this 
exemption applies, some of the income received by the plan as a 
result of such investment may be considered unrelated business 
taxable income to the plan, which is subject to income tax under the 
Code. The Department emphasizes that the prudence requirement of 
section 404(a)(l)(B) of the Act would require plan fiduciaries to 
carefully consider this and other tax consequences prior to causing 
plan assets to be invested in certificates pursuant to this proposed 
exemption.
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    ``Fast-pay/slow-pay'' certificates involve the issuance of classes 
of certificates having different stated maturities or the same 
maturities with different payment schedules. Interest and/or principal 
payments received on the underlying receivables are distributed first 
to the class of certificates having the earliest stated maturity of 
principal, and/or earlier payment schedule, and only when that class of 
certificates has been paid in full (or has received a specified amount) 
will distributions be made with respect to the second class of 
certificates. Distributions on certificates having later stated 
maturities will proceed in like manner until all the certificateholders 
have been paid in full. The only difference between this multi-class 
pass-through arrangement and a single-class pass-through arrangement is 
the order in which distributions are made to certificateholders. In 
each case, certificateholders will have a beneficial ownership interest 
in the underlying assets. In neither case will the rights of a plan 
purchasing a certificate be subordinated to the rights of another 
certificateholder in the event of default on any of the underlying 
obligations. In particular, if the amount available for distribution to 
certificateholders is less than the amount required to be so 
distributed, all senior certificateholders then entitled to receive 
distributions will share in the amount distributed on a pro rata 
basis.\33\
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    \33\ If a trust issues subordinated certificates, holders of 
such subordinated certificates may not share in the amount 
distributed on a pro rata basis with the senior certificateholders. 
The Department notes that the proposed exemption does not provide 
relief for plan investment in such subordinated certificates.
---------------------------------------------------------------------------

    6. The trust will be maintained as an essentially passive entity. 
Therefore, both the sponsor's discretion and the servicer's discretion 
with respect to assets included in a trust are severely limited. 
Pooling and servicing agreements provide for the substitution of 
receivables by the sponsor only in the event of defects in 
documentation discovered within a short time after the issuance of 
trust certificates (within 120 days, except in the case of obligations 
having an original term of 30 years, in which case the period will not 
exceed two years). Any receivable so substituted is required to have 
characteristics substantially similar to the replaced receivable and 
will be at least as creditworthy as the replaced receivable.
    In some cases, the affected receivable would be repurchased, with 
the purchase price applied as a payment on the affected receivable and 
passed-through to certificateholders.
    In some cases the trust will be maintained as a Financial Asset 
Securitization Investment Trust (``FASIT''), a statutory entity created 
by the Small Business Job Protection Act of 1996, adding sections 860H, 
860J, 860K and 860L to the Code. In general, a FASIT is designed to 
facilitate the securitization of debt obligations, such as credit card 
receivables, home equity loans, and auto loans, and thus, allows 
certain features such as revolving pools of assets, trusts containing 
unsecured receivables and certain hedging types of investments. A FASIT 
is not a taxable entity and debt instruments issued by such trusts, 
which might otherwise be recharacterized as equity, will be treated as 
debt in the hands of the holder for tax purposes. However, a trust 
which is the subject of the proposed exemption will be maintained as a 
FASIT only where the assets held by the FASIT will be comprised of 
secured debt; revolving pools of assets or hedging investments will not 
be allowed unless specifically authorized by the exemption, if granted, 
so that a trust maintained as a FASIT will be maintained as an 
essentially passive entity.

Trust Structure with Pre-Funding Account

Pre-Funding Accounts
    7. As described briefly above, some transactions may be structured 
using a pre-funding account or a capitalized interest account. If pre-
funding is used, cash sufficient to purchase the receivables to be 
transferred after the closing date will be transferred to the trust by 
the sponsor or originator on the closing date. During the pre-funding 
period, such cash and temporary investments, if any, made therewith 
will be held in a pre-funding account and used to purchase the 
additional receivables, the characteristics of which will be 
substantially similar to the characteristics of the receivables 
transferred to the trust on the closing date. The pre-funding period 
for any trust will be defined as the period beginning on the closing 
date and ending on the earliest to occur of (i) the date on which the 
amount on deposit in the pre-funding account is less than a specified 
dollar amount, (ii) the date on which an event of default occurs under 
the related pooling and servicing agreement or (iii) the date which is 
the later of three months or ninety (90) days after the closing date. 
Certain specificity and monitoring requirements described below will be 
met and will be disclosed in the pooling and servicing agreement and/or 
the prospectus or private placement memorandum.
    For transactions involving a trust using pre-funding, on the 
closing date, a portion of the offering proceeds will be allocated to 
the pre-funding account generally in an amount equal to the excess of 
(i) the principal amount of certificates being issued over (ii) the 
principal balance of the receivables being transferred to the trust on 
such closing date. In certain transactions, the aggregate principal 
balance of the receivables intended to be transferred to the trust may 
be larger than the total principal balance of the certificates being 
issued. In these cases, the cash deposited in the pre-funding account 
will equal the excess of the principal balance of the total receivables 
intended to be transferred to the trust over the principal balance of 
the receivables being transferred on the closing date.
    On the closing date, the sponsor transfers the assets to the trust 
in exchange for the certificates. The certificates are then sold to 
Countrywide for cash or to the certificateholders directly if the 
certificates are sold through Countrywide as a placement agent. The 
cash received by the sponsor from the certificateholders (or 
Countrywide) for the sale of the certificates issued by the trust in 
excess of the purchase price for the receivables and certain other 
trust expenses, such as underwriting or placement agent fees and legal 
and accounting fees, constitutes the cash to be deposited in the pre-
funding account. Such funds are either held in the trust and accounted 
for separately, or are held in a sub-trust. In either event, these 
funds are not part of the assets of the sponsor.
    Generally, the receivables are transferred at par value, unless the 
interest rate payable on the receivables is not sufficient to service 
both the interest rates to be paid on the certificates and the 
transaction fees (i.e., servicing fees, trustee fees and fees to credit 
support providers). In such cases, the receivables are sold to the 
trust at a

[[Page 56727]]

discount, based on an objective, written, mechanical formula which is 
set forth in the pooling and servicing agreement and agreed upon in 
advance between the sponsor, the Rating Agency and any credit support 
provider or other insurer. The proceeds payable to the sponsor from the 
sale of the receivables transferred to the trust may also be reduced to 
the extent they are used to pay transaction costs (which typically 
include underwriting or placement agent fees and legal and accounting 
fees). In addition, in certain cases, the sponsor may be required by 
the Rating Agencies or credit support providers to set up trust reserve 
accounts to protect the certificateholders against credit losses.
    The pre-funding account of any trust will be limited so that the 
percentage or ratio of the amount allocated to the pre-funding account, 
as compared to the total principal amount of the certificates being 
offered (the pre-funding limit) will not exceed 25%. The pre-funding 
limit (which may be expressed as a ratio or as a stated percentage or a 
combination thereof) will be specified in the prospectus or the private 
placement memorandum.
    Any amounts paid out of the pre-funding account are used solely to 
purchase receivables and to support the certificate pass-through rate 
(as explained below). Amounts used to support the pass-through rate are 
payable only from investment earnings and are not payable from 
principal. However, in the event that, after all of the requisite 
receivables have been transferred into the trust, any funds remain in 
the pre-funding account, such funds will be paid to the 
certificateholders as principal prepayments. Upon termination of the 
trust, if no receivables remain in the trust and all amounts payable to 
certificateholders have been distributed, any amounts remaining in the 
trust would be returned to the sponsor.
    A dramatic change in interest rates on the receivables held in a 
trust using a pre-funding account would be handled as follows. If the 
receivables (other than those with adjustable or variable rates) had 
already been originated prior to the closing date, no action would be 
required as the fluctuations in the market interest rates would not 
affect the receivables transferred to the trust after the closing date. 
In contrast, if interest rates fall after the closing date, loans 
originated after the closing date will tend to be originated at lower 
rates, with the possible result that the receivables will not support 
the certificate pass-through rate. In a situation where interest rates 
drop dramatically and the sponsor is unable to provide sufficient 
receivables at the requisite interest rates, the pool of receivables 
would be closed. In this latter event, under the terms of the pooling 
and servicing agreement, the certificateholders would receive a 
repayment of principal from the unused cash held in the pre-funding 
account. In transactions where the certificate pass-through rates are 
variable or adjustable, the effects of market interest rate 
fluctuations are mitigated. In no event will fluctuations in interest 
rates payable on the receivables affect the pass-through rate for fixed 
rate certificates.
    The cash deposited into the trust and allocated to the pre-funding 
account is invested in certain permitted investments (see below), which 
may be commingled with other accounts of the trust. The allocation of 
investment earnings to each trust account is made periodically as 
earned in proportion to each account's allocable share of the 
investment returns. As pre-funding account investment earnings are 
required to be used to support (to the extent authorized in the 
particular transaction) the pass-through amounts payable to the 
certificateholders with respect to a periodic distribution date, the 
trustee is necessarily required to make periodic, separate allocations 
of the trust's earning to each trust account, thus ensuring that all 
allocable commingled investment earnings are properly credited to the 
pre-funding account on a timely basis.
The Capitalized Interest Account
    8. In certain transactions where a pre-funding account is used, the 
sponsor and/or originator may also transfer to the trust additional 
cash on the closing date, which is deposited in a capitalized interest 
account and used during the pre-funding period to compensate the 
certificateholders for any shortfall between the investment earnings on 
the pre-funding account and the pass-through interest rate payable 
under the certificates.
    The capitalized interest account is needed in certain transactions 
since the certificates are supported by the receivables and the 
earnings on the pre-funding account, and it is unlikely that the 
investment earnings on the pre-funding account will equal the interest 
rates on the certificates (although such investment earnings will be 
available to pay interest on the certificates). The capitalized 
interest account funds are paid out periodically to the 
certificateholders as needed on distribution dates to support the pass-
through rate. In addition, a portion of such funds may be returned to 
the sponsor from time to time as the receivables are transferred into 
the trust and the need for the capitalized interest account diminishes. 
Any amounts held in the capitalized interest account generally will be 
returned to the sponsor and/or originator either at the end of the pre-
funding period or periodically as receivables are transferred and the 
proportionate amount of funds in the capitalized interest account can 
be reduced. Generally, the capitalized interest account terminates no 
later than the end of the pre-funding period. However, there may be 
some cases where the capitalized interest account remains open until 
the first date distributions are made to certificateholders following 
the end of the pre-funding period.
    In other transactions, a capitalized interest account is not 
necessary because the interest paid on the receivables exceeds the 
interest payable on the certificates at the applicable pass-through 
rate and the fees of the trust. Such excess is sufficient to make up 
any shortfall resulting from the pre-funding account earning less than 
the certificate pass-through rate. In certain of these transactions, 
this occurs because the aggregate principal amount of receivables 
exceeds the aggregate principal amount of certificates.
Pre-Funding Account and Capitalized Interest Account Payments and 
Investments
    9. Pending the acquisition of additional receivables during the 
pre-funding period, it is expected that amounts in the pre-funding 
account and the capitalized interest account will be invested in 
certain permitted investments or will be held uninvested. Pursuant to 
the pooling and servicing agreement, all permitted investments must 
mature prior to the date the actual funds are needed. The permitted 
types of investments in the pre-funding account and capitalized 
interest account are investments which are either: (i) direct 
obligations of, or obligations fully guaranteed as to timely payment of 
principal and interest by, the United States or any agency or 
instrumentality thereof, provided that such obligations are backed by 
the full faith and credit of the United States or (ii) have been rated 
(or the obligor has been rated) in one of the three highest generic 
rating categories by a Rating Agency, as set forth in the pooling and 
servicing agreement and as required by the Rating Agencies. The credit 
grade quality of the permitted investments is generally no lower than 
that of the certificates. The types of permitted investments will be

[[Page 56728]]

described in the pooling and servicing agreement.
    The ordering of interest payments to be made from the pre-funding 
and capitalized interest accounts is pre-established and set forth in 
the pooling and servicing agreement. The only principal payments which 
will be made from the pre-funding account are those made to acquire the 
receivables during the pre-funding period and those distributed to the 
certificateholders in the event that the entire amount in the pre-
funding account is not used to acquire receivables. The only principal 
payments which will be made from the capitalized interest account are 
those made to certificateholders if necessary to support the 
certificate pass-through rate or those made to the sponsor either 
periodically as they are no longer needed or at the end of the pre-
funding period when the capitalized interest account is no longer 
necessary.
The Characteristics of the Receivables Transferred During the Pre-
Funding Period
    10. In order to ensure that there is sufficient specificity as to 
the representations and warranties of the sponsor regarding the 
characteristics of the receivables to be transferred after the closing 
date:
    (i) All such receivables will meet the same terms and conditions 
for eligibility as those of the original receivables used to create the 
trust corpus (as described in the prospectus or private placement 
memorandum and/or pooling and servicing agreement for such 
certificates), which terms and conditions have been approved by a 
Rating Agency. However, the terms and conditions for determining the 
eligibility of a receivable may be changed if such changes receive 
prior approval either by a majority vote of the outstanding 
certificateholders or by a Rating Agency;
    (ii) The transfer to the trust of the receivables acquired during 
the pre-funding period will not result in the certificates receiving a 
lower credit rating from the Rating Agency upon termination of the pre-
funding period than the rating that was obtained at the time of the 
initial issuance of the certificates by the trust;
    (iii) The weighted average annual percentage interest rate (the 
average interest rate) for all of the obligations in the trust at the 
end of the pre-funding period will not be more than 100 basis points 
lower than the average interest rate for the obligations which were 
transferred to the trust on the closing date;
    (iv) The trustee of the trust (or any agency with which the trustee 
contracts to provide trust services) will be a substantial financial 
institution or trust company experienced in trust activities and 
familiar with its duties, responsibilities, and liabilities as a 
fiduciary under the Act. The trustee, as the legal owner of the 
obligations in the trust, will enforce all the rights created in favor 
of certificateholders of such trust, including employee benefit plans 
subject to the Act.
    In order to ensure that the characteristics of the receivables 
actually acquired during the pre-funding period are substantially 
similar to receivables that were acquired as of the closing date, the 
characteristics of the additional obligations subsequently acquired 
will be either (i) monitored by a credit support provider or other 
insurance provider which is independent of the sponsor, or (ii) an 
independent accountant retained by the sponsor will provide the sponsor 
with a letter (with copies provided to the Rating Agency, Countrywide 
and the trustee) stating whether or not the characteristics of the 
additional obligations acquired after the closing date conform to the 
characteristics of such obligations described in the prospectus, 
private placement memorandum and/or pooling and servicing agreement. In 
preparing such letter, the independent accountant will use the same 
type of procedures as were applicable to the obligations which were 
transferred as of the closing date.
    Each prospectus, private placement memorandum and/or pooling and 
servicing agreement will set forth the terms and conditions for 
eligibility of the receivables to be included in the trust as of the 
related closing date, as well as those to be acquired during the pre-
funding period, which terms and conditions will have been agreed to by 
the Rating Agencies which are rating the applicable certificates as of 
the closing date. Also included among these conditions is the 
requirement that the trustee be given prior notice of the receivables 
to be transferred, along with such information concerning those 
receivables as may be requested. Each prospectus or private placement 
memorandum will describe the amount to be deposited in, and the 
mechanics of, the pre-funding account and will describe the pre-funding 
period for the trust.

Parties to Transactions

    11. The originator of a receivable is the entity that initially 
lends money to a borrower (obligor), such as a homeowner or automobile 
purchaser, or leases property to a lessee. The originator may either 
retain a receivable in its portfolio or sell it to a purchaser, such as 
a trust sponsor.
    Originators of receivables included in the trusts will be entities 
that originate receivables in the ordinary course of their businesses, 
including finance companies for whom such origination constitutes the 
bulk of their operations, financial institutions for whom such 
origination constitutes a substantial part of their operations, and any 
kind of manufacturer, merchant, or service enterprise for whom such 
origination is an incidental part of its operations. Each trust may 
contain assets of one or more originators. The originator of the 
receivables may also function as the trust sponsor or servicer.
    12. The sponsor will be one of three entities: (i) a special-
purpose or other corporation unaffiliated with the servicer, (ii) a 
special-purpose or other corporation affiliated with the servicer, or 
(iii) the servicer itself. Where the sponsor is not also the servicer, 
the sponsor's role will generally be limited to acquiring the 
receivables to be included in the trust, establishing the trust, 
designating the trustee, and assigning the receivables to the trust.
    13. The trustee of a trust is the legal owner of the obligations in 
the trust. The trustee is also a party to or beneficiary of all the 
documents and instruments deposited in the trust, and as such is 
responsible for enforcing all the rights created thereby in favor of 
certificateholders.
    The trustee will be an independent entity, and therefore will be 
unrelated to Countrywide, the trust sponsor, the servicer or any other 
member of the Restricted Group (as defined in section III.L.). 
Countrywide represents that the trustee will be a substantial financial 
institution or trust company experienced in trust activities. The 
trustee receives a fee for its services, which will be paid by the 
servicer or sponsor or out of the trust assets. The method of 
compensating the trustee will be specified in the pooling and servicing 
agreement and disclosed in the prospectus or private placement 
memorandum relating to the offering of the certificates.
    14. The servicer of a trust administers the receivables on behalf 
of the certificateholders. The servicer's functions typically involve, 
among other things, notifying borrowers of amounts due on receivables, 
maintaining records of payments received on receivables and instituting 
foreclosure or similar proceedings in the event of default. In cases 
where a pool of receivables has been purchased from a number of

[[Page 56729]]

different originators and deposited in a trust, the receivables may be 
``subserviced'' by their respective originators and a single entity may 
``master service'' the pool of receivables on behalf of the owners of 
the related series of certificates. Where this arrangement is adopted, 
a receivable continues to be serviced from the perspective of the 
borrower by the local subservicer, while the investor's perspective is 
that the entire pool of receivables is serviced by a single, central 
master servicer who collects payments from the local subservicers and 
passes them through to certificateholders.
    Receivables of the type suitable for inclusion in a trust 
invariably are serviced with the assistance of a computer. After the 
sale, the servicer keeps the sold receivables on the computer system in 
order to continue monitoring the accounts. Although the records 
relating to sold receivables are kept in the same master file as 
receivables retained by the originator, the sold receivables are 
flagged as having been sold. To protect the investor's interest, the 
servicer ordinarily covenants that this ``sold flag'' will be included 
in all records relating to the sold receivables, including the master 
file, archives, tape extracts and printouts.
    The sold flags are invisible to the obligor and do not affect the 
manner in which the servicer performs the billing, posting and 
collection procedures related to the sold receivables. However, the 
servicer uses the sold flag to identify the receivables for the purpose 
of reporting all activity on those receivables after their sale to 
investors.
    Depending on the type of receivable and the details of the 
servicer's computer system, in some cases the servicer's internal 
reports can be adapted for investor reporting with little or no 
modification. In other cases, the servicer may have to perform special 
calculations to fulfill the investor reporting responsibilities. These 
calculations can be performed on the servicer's main computer, or on a 
small computer with data supplied by the main system. In all cases, the 
numbers produced for the investors are reconciled to the servicer's 
books and reviewed by public accountants.
    The underwriter (i.e., Countrywide, its affiliate, or a member of 
an underwriting syndicate or selling group of which Countrywide or its 
affiliate is a manager or co-manager) will be a registered broker-
dealer that acts as underwriter or placement agent with respect to the 
sale of the certificates. Public offerings of certificates are 
generally made on a firm commitment basis. Private placement of 
certificates may be made on a firm commitment or agency basis. It is 
anticipated that the lead and co-managing underwriters will make a 
market in certificates offered to the public.
    In some cases, the originator and servicer of receivables to be 
included in a trust and the sponsor of the trust (although they may 
themselves be related) will be unrelated to Countrywide. In other 
cases, however, affiliates of Countrywide may originate or service 
receivables included in a trust or may sponsor a trust.

Certificate Price, Pass-Through Rate and Fees

    15. In some cases, the sponsor will obtain the receivables from 
various originators pursuant to existing contracts with such 
originators under which the sponsor continually buys receivables. In 
other cases, the sponsor will purchase the receivables at fair market 
value from the originator or a third party pursuant to a purchase and 
sale agreement related to the specific offering of certificates. In 
other cases, the sponsor will originate the receivables itself.
    As compensation for the receivables transferred to the trust, the 
sponsor receives certificates representing the entire beneficial 
interest in the trust, or the cash proceeds of the sale of such 
certificates. If the sponsor receives certificates from the trust, the 
sponsor sells all or a portion of these certificates for cash to 
investors or securities underwriters.
    16. The price of the certificates, both in the initial offering and 
in the secondary market, is affected by market forces, including 
investor demand, the pass-through interest rate on the certificates in 
relation to the rate payable on investments of similar types and 
quality, expectations as to the effect on yield resulting from 
prepayment of underlying receivables, and expectations as to the 
likelihood of timely payment.
    The pass-through rate for certificates is equal to the interest 
rate on receivables included in the trust minus a specified servicing 
fee.\34\ This rate is generally determined by the same market forces 
that determine the price of a certificate. The price of a certificate 
and its pass-through, or coupon, rate together determine the yield to 
investors. If an investor purchases a certificate at less than par, 
that discount augments the stated pass-through rate; conversely, a 
certificate purchased at a premium yields less than the stated coupon.
---------------------------------------------------------------------------

    \34\ The pass-through rate on certificates representing 
interests in trusts holding leases is determined by breaking down 
lease payments into ``principal'' and ``interest'' components based 
on an implicit interest rate.
---------------------------------------------------------------------------

    17. As compensation for performing its servicing duties, the 
servicer (who may also be the sponsor or an affiliate thereof, and 
receive fees for acting in that capacity) will retain the difference 
between payments received on the receivables in the trust and payments 
payable (at the pass-through rate) to certificateholders, except that 
in some cases a portion of the payments on receivables may be paid to a 
third party, such as a fee paid to a provider of credit support. The 
servicer may receive additional compensation by having the use of the 
amounts paid on the receivables between the time they are received by 
the servicer and the time they are due to the trust (which time is set 
forth in the pooling and servicing agreement). The servicer typically 
will be required to pay the administrative expenses of servicing the 
trust, including in some cases the trustee's fee, out of its servicing 
compensation.
    The servicer is also compensated to the extent it may provide 
credit enhancement to the trust or otherwise arrange to obtain credit 
support from another party. This ``credit support fee'' may be 
aggregated with other servicing fees, and is either paid out of the 
interest income received on the receivables in excess of the pass-
through rate or paid in a lump sum at the time the trust is 
established.
    18. The servicer may be entitled to retain certain administrative 
fees paid by a third party, usually the obligor. These administrative 
fees fall into three categories: (a) prepayment fees; (b) late payment 
and payment extension fees; and (c) expenses, fees and charges 
associated with foreclosure or repossession, or other conversion of a 
secured position into cash proceeds, upon default of an obligation.
    Compensation payable to the servicer will be set forth or referred 
to in the pooling and servicing agreement and described in reasonable 
detail in the prospectus or private placement memorandum relating to 
the certificates.
    19. Payments on receivables may be made by obligors to the servicer 
at various times during the period preceding any date on which pass-
through payments to the trust are due. In some cases, the pooling and 
servicing agreement may permit the servicer to place these payments in 
non-interest bearing accounts maintained with itself or to commingle 
such payments with its own funds prior to the distribution dates. In 
these cases, the servicer would

[[Page 56730]]

be entitled to the benefit derived from the use of the funds between 
the date of payment on a receivable and the pass-through date. 
Commingled payments may not be protected from the creditors of the 
servicer in the event of the servicer's bankruptcy or receivership. In 
those instances when payments on receivables are held in non-interest 
bearing accounts or are commingled with the servicer's own funds, the 
servicer is required to deposit these payments by a date specified in 
the pooling and servicing agreement into an account from which the 
trustee makes payments to certificateholders.
    20. The underwriter will receive a fee in connection with the 
securities underwriting or private placement of certificates. In a firm 
commitment underwriting, this fee would consist of the difference 
between what the underwriter receives for the certificates that it 
distributes and what it pays the sponsor for those certificates. In a 
private placement, the fee normally takes the form of an agency 
commission paid by the sponsor. In a best efforts underwriting in which 
the underwriter would sell certificates in a public offering on an 
agency basis, the underwriter would receive an agency commission rather 
than a fee based on the difference between the price at which the 
certificates are sold to the public and what it pays the sponsor. In 
some private placements, the underwriter may buy certificates as 
principal, in which case its compensation would be the difference 
between what it receives for the certificates that it sells and what it 
pays the sponsor for these certificates.

Purchase of Receivables by the Servicer

    21. The applicant represents that as the principal amount of the 
receivables in a trust is reduced by payments, the cost of 
administering the trust generally increases, making the servicing of 
the trust prohibitively expensive at some point. Consequently, the 
pooling and servicing agreement generally provides that the servicer 
may purchase the receivables remaining in the trust when the aggregate 
unpaid balance payable on the receivables is reduced to a specified 
percentage (usually 5 to 10 percent) of the initial aggregate unpaid 
balance.
    The purchase price of a receivable is specified in the pooling and 
servicing agreement and will be at least equal to: (1) the unpaid 
principal balance on the receivable plus accrued interest, less any 
unreimbursed advances of principal made by the servicer; or (2) the 
greater of (a) the amount in (1) or (b) the fair market value of such 
obligations in the case of a REMIC, or the fair market value of the 
receivables in the case of a trust that is not a REMIC.

Certificate Ratings

    22. The certificates will have received one of the three highest 
ratings available from a Rating Agency. Insurance or other credit 
support (such as surety bonds, letters of credit, guarantees, or 
overcollateralization) will be obtained by the trust sponsor to the 
extent necessary for the certificates to attain the desired rating. The 
amount of this credit support is set by the Rating Agencies at a level 
that is a multiple of the worst historical net credit loss experience 
for the type of obligations included in the issuing trust.

Provision of Credit Support

    23. In some cases, the master servicer, or an affiliate of the 
master servicer, may provide credit support to the trust (i.e. act as 
an insurer). In these cases, the master servicer, in its capacity as 
servicer, will first advance funds to the full extent that it 
determines that such advances will be recoverable (a) out of late 
payments by the obligors, (b) from the credit support provider (which 
may be the master servicer or an affiliate thereof) or, (c) in the case 
of a trust that issues subordinated certificates, from amounts 
otherwise distributable to holders of subordinated certificates, and 
the master servicer will advance such funds in a timely manner. When 
the servicer is the provider of the credit support and provides its own 
funds to cover defaulted payments, it will do so either on the 
initiative of the trustee, or on its own initiative on behalf of the 
trustee, but in either event it will provide such funds to cover 
payments to the full extent of its obligations under the credit support 
mechanism. In some cases, however, the master servicer may not be 
obligated to advance funds but instead would be called upon to provide 
funds to cover defaulted payments to the full extent of its obligations 
as insurer. Moreover, a master servicer typically can recover advances 
either from the provider of credit support or from future payments on 
the affected assets.
    If the master servicer fails to advance funds, fails to call upon 
the credit support mechanism to provide funds to cover delinquent 
payments, or otherwise fails in its duties, the trustee would be 
required and would be able to enforce the certificateholders' rights, 
as both a party to the pooling and servicing agreement and the owner of 
the trust estate, including rights under the credit support mechanism. 
Therefore, the trustee, who is independent of the servicer, will have 
the ultimate right to enforce the credit support arrangement.
    When a master servicer advances funds, the amount so advanced is 
recoverable by the master servicer out of future payments on 
receivables held by the trust to the extent not covered by credit 
support. However, where the master servicer provides credit support to 
the trust, there are protections in place to guard against a delay in 
calling upon the credit support to take advantage of the fact that the 
credit support declines proportionally with the decrease in the 
principal amount of the obligations in the trust as payments on 
receivables are passed through to investors. These safeguards include:
    (a) There is often a disincentive to postponing credit losses 
because the sooner repossession or foreclosure activities are 
commenced, the more value that can be realized on the security for the 
obligation;
    (b) The master servicer has servicing guidelines which include a 
general policy as to the allowable delinquency period after which an 
obligation ordinarily will be deemed uncollectible. The pooling and 
servicing agreement will require the master servicer to follow its 
normal servicing guidelines and will set forth the master servicer's 
general policy as to the period of time after which delinquent 
obligations ordinarily will be considered uncollectible;
    (c) As frequently as payments are due on the receivables included 
in the trust (monthly, quarterly or semi-annually, as set forth in the 
pooling and servicing agreement), the master servicer is required to 
report to the independent trustee the amount of all past-due payments 
and the amount of all servicer advances, along with other current 
information as to collections on the receivables and draws upon the 
credit support. Further, the master servicer is required to deliver to 
the trustee annually a certificate of an executive officer of the 
master servicer stating that a review of the servicing activities has 
been made under such officer's supervision, and either stating that the 
master servicer has fulfilled all of its obligations under the pooling 
and servicing agreement or, if the master servicer has defaulted under 
any of its obligations, specifying any such default. The master 
servicer's reports are reviewed at least annually by independent 
accountants to ensure that the master servicer is following its normal 
servicing standards and that the master servicer's reports conform to 
the master servicer's internal accounting records. The results of the 
independent

[[Page 56731]]

accountants' review are delivered to the trustee; and
    (d) The credit support has a ``floor'' dollar amount that protects 
investors against the possibility that a large number of credit losses 
might occur towards the end of the life of the trust, whether due to 
servicer advances or any other cause. Once the floor amount has been 
reached, the servicer lacks an incentive to postpone the recognition of 
credit losses because the credit support amount thereafter is subject 
to reduction only for actual draws. From the time that the floor amount 
is effective until the end of the life of the trust, there are no 
proportionate reductions in the credit support amount caused by 
reductions in the pool principal balance. Indeed, since the floor is a 
fixed dollar amount, the amount of credit support ordinarily increases 
as a percentage of the pool principal balance during the period that 
the floor is in effect.

Disclosure

    24. In connection with the original issuance of certificates, the 
prospectus or private placement memorandum will be furnished to 
investing plans. The prospectus or private placement memorandum will 
contain information material to a fiduciary's decision to invest in the 
certificates, including:
    (a) Information concerning the payment terms of the certificates, 
the rating of the certificates, any material risk factors with respect 
to the certificates, and the fact that principal amounts left in the 
pre-funding account at the end of the pre-funding period will be paid 
to certificateholders as a repayment of principal;
    (b) A description of the trust as a legal entity and a description 
of how the trust was formed by the seller/servicer or other sponsor of 
the transaction;
    (c) Identification of the independent trustee for the trust;
    (d) A description of the receivables contained in the trust, 
including the types of receivables, the diversification of the 
receivables, their principal terms, and their material legal aspects, 
and a description of any pre-funding account used or capitalized 
interest account used in connection with a pre-funding account;
    (e) A description of the sponsor and servicer;
    (f) A description of the pooling and servicing agreement, including 
a description of the seller's principal representations and warranties 
as to the trust assets, including the terms and conditions for 
eligibility of any receivables transferred during the pre-funding 
period and the trustee's remedy for any breach thereof; a description 
of the procedures for collection of payments on receivables and for 
making distributions to investors, and a description of the accounts 
into which such payments are deposited and from which such 
distributions are made; a description of permitted investments for any 
pre-funding account or capitalized interest account; identification of 
the servicing compensation and any fees for credit enhancement that are 
deducted from payments on receivables before distributions are made to 
investors; a description of periodic statements provided to the 
trustee, and provided to or made available to investors by the trustee; 
and a description of the events that constitute events of default under 
the pooling and servicing contract and a description of the trustee's 
and the investors' remedies incident thereto;
    (g) A description of the credit support;
    (h) A general discussion of the principal federal income tax 
consequences of the purchase, ownership and disposition of the pass-
through securities by a typical investor;
    (i) A description of the underwriters' plan for distributing the 
pass-through securities to investors;
    (j) Information about the scope and nature of the secondary market, 
if any, for the certificates; and
    (k) A statement as to the duration of any pre-funding period and 
the pre-funding limit for the trust.
    25. Reports indicating the amount of payments of principal and 
interest are provided to certificateholders at least as frequently as 
distributions are made to certificateholders. Certificateholders will 
also be provided with periodic information statements setting forth 
material information concerning the underlying assets, including, where 
applicable, information as to the amount and number of delinquent and 
defaulted loans or receivables.
    26. In the case of a trust that offers and sells certificates in a 
registered public offering, the trustee, the servicer or the sponsor 
will file such periodic reports as may be required to be filed under 
the Securities Exchange Act of 1934. Although some trusts that offer 
certificates in a public offering will file quarterly reports on Form 
10-Q and Annual Reports on Form 10-K, many trusts obtain, by 
application to the Securities and Exchange Commission (SEC), a complete 
exemption from the requirement to file quarterly reports on Form 10-Q 
and a modification of the disclosure requirements for annual reports on 
Form 10-K. If such an exemption is obtained, these trusts normally 
would continue to have the obligation to file current reports on Form 
8-K to report material developments concerning the trust and the 
certificates and copies of the statements sent to certificateholders. 
While the SEC's interpretation of the periodic reporting requirements 
is subject to change, periodic reports concerning a trust will be filed 
to the extent required under the Securities Exchange Act of 1934.
    27. At or about the time distributions are made to 
certificateholders, a report will be delivered to the trustee as to the 
status of the trust and its assets, including underlying obligations. 
Such report will typically contain information regarding the trust's 
assets (including those purchased by the trust from any pre-funding 
account), payments received or collected by the servicer, the amount of 
prepayments, delinquencies, servicer advances, defaults and 
foreclosures, the amount of any payments made pursuant to any credit 
support, and the amount of compensation payable to the servicer. Such 
report also will be delivered to or made available to the rating agency 
or agencies that have rated the trust's certificates.
    In addition, promptly after each distribution date, 
certificateholders will receive a statement prepared by the servicer, 
paying agent or trustee summarizing information regarding the trust and 
its assets, including underlying receivables. Such statement will 
typically contain information regarding payments and prepayments, 
delinquencies, the remaining amount of the guaranty or other credit 
support and a breakdown of payments between principal and interest.

Forward Delivery Commitments

    28. To date, no forward delivery commitments have been entered into 
by Countrywide in connection with the offering of any certificates, but 
Countrywide may contemplate entering into such commitments. The utility 
of forward delivery commitments has been recognized with respect to 
offering similar certificates backed by pools of residential mortgages, 
and Countrywide may find it desirable in the future to enter into such 
commitments for the purchase of certificates.

Secondary Market Transactions

    29. It is Countrywide's normal policy to attempt to make a market 
for securities for which it is lead or co-managing underwriter, and it 
is Countrywide's intention to make a market for any certificates for 
which it is lead or co-managing underwriter, although it is under no 
obligation to do so. At times Countrywide will facilitate

[[Page 56732]]

sales by investors who purchase certificates if Countrywide has acted 
as agent or principal in the original private placement of the 
certificates and if such investors request Countrywide's assistance.

Retroactive Relief

    30. Countrywide represents that it has not engaged in transactions 
related to mortgage-backed and asset-backed securities based on the 
assumption that retroactive relief would be granted prior to the date 
of their application. However, Countrywide requests the exemptive 
relief granted to be retroactive to January 28, 2000, the date of their 
application, and would like to rely on such retroactive relief for 
transactions entered into prior to the date exemptive relief may be 
granted.

Summary

    31. In summary, the applicant represents that the transactions for 
which exemptive relief is requested satisfy the statutory criteria of 
section 408(a) of the Act due to the following:
    (a) The trusts contain ``fixed pools'' of assets. There is little 
discretion on the part of the trust sponsor to substitute receivables 
contained in the trust once the trust has been formed;
    (b) In the case where a pre-funding account is used, the 
characteristics of the receivables to be transferred to the trust 
during the pre-funding period will be substantially similar to the 
characteristics of those transferred to the trust on the closing date, 
thereby giving the sponsor and/or originator little discretion over the 
selection process, and compliance with this requirement will be assured 
by the specificity of the characteristics and the monitoring mechanisms 
contemplated under the proposed exemption. In addition, certain cash 
accounts will be established to support the certificate pass-through 
rate and such cash accounts will be invested in short-term, 
conservative investments; the pre-funding period will be of a 
reasonably short duration; a pre-funding limit will be imposed; and any 
Internal Revenue Service requirements with respect to pre-funding 
intended to preserve the passive income character of the trust will be 
met. The fiduciary of the plans making the decision to invest in 
certificates is thus fully apprised of the nature of the receivables 
which will be held in the trust and has sufficient information to make 
a prudent investment decision.
    (c) Certificates in which plans invest will have been rated in one 
of the three highest rating categories by a rating agency. Credit 
support will be obtained to the extent necessary to attain the desired 
rating;
    (d) All transactions for which Countrywide seeks exemptive relief 
will be governed by the pooling and servicing agreement, which is made 
available to plan fiduciaries for their review prior to the plan's 
investment in certificates;
    (e) Exemptive relief from sections 406(b) and 407 for sales to 
plans is substantially limited; and
    (f) Countrywide anticipates that it will make a secondary market in 
certificates (although it is under no obligation to do so).
    Notice to Interested Persons: The applicant represents that any 
securities offered in reliance upon the proposed exemption prior to the 
date the final exemption is published in the Federal Register shall 
disclose in the offering memorandum or prospectus:
    (a) The availability of the proposed exemption; (b) the right of 
potentially interested plan fiduciaries to comment on the proposed 
exemption; and (c) information on how an interested plan fiduciary can 
obtain a copy of the proposed exemption (once it is available) from 
Countrywide.
    Once this proposed exemption is granted, a copy of the exemption 
published in the Federal Register shall be distributed to any current 
or prospective plan investor in a security offered in reliance upon the 
exemption upon request of such investor, and each offering memorandum 
or prospectus offering securities in reliance upon the exemption shall 
describe and disclose the availability of the exemption.
    Comments and requests for a hearing must be received by the 
Department not later than 45 days from the date of publication of this 
notice of proposed exemption in the Federal Register.

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

Maple Partners Financial Group, Inc. (Maple); Located in Toronto, 
Ontario, Canada

[Application No. D-10905]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\35\
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    \35\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to corresponding provisions of the Code.
---------------------------------------------------------------------------

Section I--Transactions

    A. If the exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) of the Act and the sanctions resulting from 
the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, shall not apply, effective May 
31, 2000, to any purchase or sale of securities between certain non-
U.S. affiliates of Maple, which are foreign broker-dealers or banks 
(the Foreign Affiliates, as defined below) and employee benefit plans 
(the Plans) with respect to which the Foreign Affiliates are parties in 
interest, including options written by a Plan, Maple, or a Foreign 
Affiliate, provided that the following conditions, and the General 
Conditions of Section II, are satisfied:
    (1) The Foreign Affiliate customarily purchases and sells 
securities for its own account in the ordinary course of its business 
as a broker-dealer or bank;
    (2) The terms of any transaction are at least as favorable to the 
Plan as those the Plan could obtain in a comparable arm's length 
transaction with an unrelated party; and
    (3) Neither the Foreign Affiliate nor an affiliate thereof has 
discretionary authority or control with respect to the investment of 
the Plan assets involved in the transaction, or renders investment 
advice [within the meaning of 29 CFR 2510.3-21(c)] with respect to 
those assets, and the Foreign Affiliate is a party in interest or 
disqualified person with respect to the Plan assets involved in the 
transaction solely by reason of section 3(14)(B) of the Act or section 
4975(e)(2)(B) of the Code, or by reason of a relationship to a person 
described in such sections. For purposes of this paragraph, the Foreign 
Affiliate shall not be deemed to be a fiduciary with respect to a Plan 
solely by reason of providing securities custodial services for a Plan.
    B. If the exemption is granted, the restrictions of sections 
406(a)(1)(A) through (D) and 406(b)(2) of the Act and the sanctions 
resulting from the application of section 4975 of the Code, by reason 
of section 4975(c)(1)(A) through (D) of the Code, shall not apply, 
effective May 31, 2000, to any extension of credit to the Plan by the 
Foreign Affiliate, to permit the settlement of securities transactions, 
regardless of whether they are effected on an agency or a principal 
basis, or in connection with the writing of options contracts, provided 
that the following conditions and the General Conditions of Section II, 
are satisfied:
    (1) The Foreign Affiliate is not a fiduciary with respect to the 
Plan assets

[[Page 56733]]

involved in the transaction, unless no interest or other consideration 
is received by the Foreign Affiliate or an affiliate thereof, in 
connection with such extension of credit; and
    (2) Any extension of credit would be lawful under the Securities 
Exchange Act of 1934 (the 1934 Act) and any rules or regulations 
thereunder, if the 1934 Act, rules, or regulations were applicable.
    C. If the exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) of the Act and the sanctions resulting from 
the application of section 4975 of the Code, by reason of section 
4975(c)(1)(A) through (D) of the Code, shall not apply, effective May 
31, 2000, to the lending of securities to the Foreign Affiliates by the 
Plans, provided that the following conditions, and the General 
Conditions of Section II, are satisfied:
    (1) Neither the Foreign Affiliate nor an affiliate thereof has 
discretionary authority or control with respect to the investment of 
the Plan assets involved in the transaction, or renders investment 
advice [within the meaning of 29 CFR 2510.3-21(c)] with respect to 
those assets;
    (2) The Plan receives from the Foreign Affiliate (by physical 
delivery, by book entry in a securities depository, wire transfer, or 
similar means) by the close of business on the day the loaned 
securities are delivered to the Foreign Affiliate, collateral 
consisting of cash, securities issued or guaranteed by the U.S. 
Government or its agencies or instrumentalities, irrevocable U.S. bank 
letters of credit issued by persons other than the Foreign Affiliate or 
an affiliate of the Foreign Affiliate, or any combination thereof. All 
collateral shall be in U.S. dollars, or dollar-denominated securities 
or bank letters of credit, and shall be held in the United States;
    (3) The collateral has, as of the close of business on the 
preceding business day, a market value equal to at least 100 percent of 
the then market value of the loaned securities (or, in the case of 
letters of credit, a stated amount equal to same);
    (4) The loan is made pursuant to a written loan agreement (the Loan 
Agreement), which may be in the form of a master agreement covering a 
series of securities lending transactions, and which contains terms at 
least as favorable to the Plan as those the Plan could obtain in a 
comparable arm's length transaction with an unrelated party;
    (5) In return for lending securities, the Plan either (a) receives 
a reasonable fee, which is related to the value of the borrowed 
securities and the duration of the loan, or (b) has the opportunity to 
derive compensation through the investment of cash collateral. In the 
latter case, the Plan may pay a loan rebate or similar fee to the 
Foreign Affiliate, if such fee is not greater than what the Plan would 
pay in a comparable arm's length transaction with an unrelated party;
    (6) The Plan receives at least the equivalent of all distributions 
on the borrowed securities made during the term of the loan, including, 
but not limited to, cash dividends, interest payments, shares of stock 
as a result of stock splits, and rights to purchase additional 
securities, that the Plan would have received (net of applicable tax 
withholdings) \36\ had it remained the record owner of such securities;
---------------------------------------------------------------------------

    \36\ The Department notes the applicant's representation that 
dividends and other distributions on foreign securities payable to a 
lending Plan may be subject to foreign tax withholdings and that the 
Foreign Affiliate will always put the Plan back in at least as good 
a position as it would have been in had it not loaned the 
securities.
---------------------------------------------------------------------------

    (7) If the market value of the collateral as of the close of 
trading on a business day falls below 100 percent of the market value 
of the borrowed securities as of the close of trading on that day, the 
Foreign Affiliate delivers additional collateral, by the close of 
business on the following business day, to bring the level of the 
collateral back to at least 100 percent. However, if the market value 
of the collateral exceeds 100 percent of the market value of the 
borrowed securities, the Foreign Affiliate may require the Plan to 
return part of the collateral to reduce the level of the collateral to 
100 percent;
    (8) Before entering into a Loan Agreement, the Foreign Affiliate 
furnishes to the independent Plan fiduciary (a) the most recent 
available audited statement of the Foreign Affiliate's financial 
condition, (b) the most recent available unaudited statement of its 
financial condition (if more recent than the audited statement), and 
(c) a representation that, at the time the loan is negotiated, there 
has been no material adverse change in its financial condition that has 
not been disclosed since the date of the most recent financial 
statement furnished to the independent Plan fiduciary. Such 
representation may be made by the Foreign Affiliate's agreeing that 
each loan of securities shall constitute a representation that there 
has been no such material adverse change;
    (9) The Loan Agreement and/or any securities loan outstanding may 
be terminated by the Plan at any time, whereupon the Foreign Affiliate 
shall deliver certificates for securities identical to the borrowed 
securities (or the equivalent thereof in the event of reorganization, 
recapitalization, or merger of the issuer of the borrowed securities) 
to the Plan within (a) the customary delivery period for such 
securities, (b) three business days, or (c) the time negotiated for 
such delivery by the Plan and the Foreign Affiliate, whichever is 
least, or, alternatively, such period as permitted by Prohibited 
Transaction Class Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981, 
as amended at 52 FR 18754, May 19, 1987), as it may be amended or 
superseded; \37\
---------------------------------------------------------------------------

    \37\ PTE 81-6 provides an exemption under certain conditions 
from section 406(a)(1)(A) through (D) of the Act and the 
corresponding provisions of section 4975(c) of the Code for the 
lending of securities that are assets of an employee benefit plan to 
a U.S. broker-dealer registered under the 1934 Act (or exempted from 
registration under the 1934 Act as a dealer in exempt Government 
securities, as defined therein) or to a U.S. bank, that is a party 
in interest with respect to such plan.
---------------------------------------------------------------------------

    (10) In the event that the loan is terminated and the Foreign 
Affiliate fails to return the borrowed securities, or the equivalent 
thereof, within the time described in paragraph 9, the Plan may 
purchase securities identical to the borrowed securities (or their 
equivalent as described above) and may apply the collateral to the 
payment of the purchase price, any other obligations of the Foreign 
Affiliate under the Loan Agreement, and any expenses associated with 
the sale and/or purchase. The Foreign Affiliate is obligated to pay, 
under the terms of the Loan Agreement, and does pay, to the Plan the 
amount of any remaining obligations and expenses not covered by the 
collateral, plus interest at a reasonable rate. Notwithstanding the 
foregoing, the Foreign Affiliate may, in the event it fails to return 
borrowed securities as described above, replace non-cash collateral 
with an amount of cash not less than the then current market value of 
the collateral, provided that such replacement is approved by the 
independent Plan fiduciary; and
    (11) The independent Plan fiduciary maintains the situs of the Loan 
Agreement in accordance with the indicia of ownership requirements 
under section 404(b) of the Act and the regulations promulgated under 
29 CFR 2550.404(b)-1. However, in the event that the independent Plan 
fiduciary does not maintain the situs of the Loan Agreement in 
accordance with the indicia of ownership requirements of Section 404(b) 
of the Act, the Foreign Affiliate shall not be subject to the civil 
penalty which may be assessed under section 502(i) of the Act, or the 
taxes

[[Page 56734]]

imposed by section 4975(a) and (b) of the Code.
    If the Foreign Affiliate fails to comply with any condition of the 
exemption in the course of engaging in a securities lending 
transaction, the Plan fiduciary who caused the Plan to engage in such 
transaction shall not be deemed to have caused the Plan to engage in a 
transaction prohibited by section 406(a)(1)(A) through (D) of the Act 
solely by reason of the Foreign Affiliate's failure to comply with the 
conditions of the exemption.

Section II--General Conditions

    A. The Foreign Affiliate is a registered broker-dealer or bank 
subject to regulation by a governmental agency, as described in Section 
III.B, and is in compliance with all applicable rules and regulations 
thereof in connection with any transactions covered by this exemption, 
if granted;
    B. The Foreign Affiliate, in connection with any transactions 
covered by this exemption, is in compliance with the requirements of 
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and 
Exchange Commission (SEC) interpretations thereof, providing for 
foreign affiliates a limited exemption from U.S. broker-dealer 
registration requirements;
    C. Prior to any transaction, the Foreign Affiliate enters into a 
written agreement with the Plan in which the Foreign Affiliate consents 
to the jurisdiction of the courts of the United States for any civil 
action or proceeding brought in respect of the subject transactions;
    D. The Foreign Affiliate maintains, or causes to be maintained, 
within the United States for a period of six years from the date of any 
transaction such records as are necessary to enable the persons 
described in paragraph E. to determine whether the conditions of the 
exemption have been met, except that--
    (1) A party in interest with respect to a Plan, other than the 
Foreign Affiliate, shall not be subject to a civil penalty under 
section 502(i) of the Act or the taxes imposed by section 4975 (a) and 
(b) of the Code, if such records are not maintained, or not available 
for examination, as required by paragraph E; and
    (2) A prohibited transaction shall not be deemed to have occurred 
if, due to circumstances beyond the Foreign Affiliate's control, such 
records are lost or destroyed prior to the end of the six year period; 
and
    E. Notwithstanding any provisions of subsections (a)(2) and (b) of 
section 504 of the Act, the Foreign Affiliate makes the records 
referred to in paragraph D unconditionally available during normal 
business hours at their customary location to the following persons or 
a duly authorized representative thereof: (1) The Department, the 
Internal Revenue Service, or the SEC; (2) any fiduciary of a Plan; (3) 
any contributing employer to a Plan; (4) any employee organization any 
of whose members are covered by a Plan; and (5) any participant or 
beneficiary of a Plan. However, none of the persons described in (2) 
through (5) of this subsection are authorized to examine the trade 
secrets of the Foreign Affiliate or commercial or financial information 
which is privileged or confidential.

Section III--Definitions

    A. The term ``affiliate'' of another person shall include: (1) Any 
person directly or indirectly, through one or more intermediaries, 
controlling, controlled by, or under common control with such other 
person; (2) any officer, director, or partner, employee or relative (as 
defined in section 3(15) of the Act) of such other person; and (3) any 
corporation or partnership of which such other person is an officer, 
director or partner. For purposes of this definition, the term 
``control'' means the power to exercise a controlling influence over 
the management or policies of a person other than an individual;
    B. The term ``Foreign Affiliate'' shall mean an affiliate of Maple 
that is subject to regulation as a broker-dealer or bank by (1) the 
Ontario Securities Commission and the Investment Dealers Association in 
Canada; (2) the Securities and Futures Authority in the United Kingdom; 
(3) the Deutsche Bundesbank and the Federal Banking Supervisory 
Authority, i.e., der Bundesaufsichtsamt fuer das Kreditwesen (the BAK) 
in Germany, and the Federal Securities Trading Supervisory Commission, 
Bundesaufsichtsamt fur den Wertpapierhandel (the BAWe); and
    C. The term ``security'' shall include equities, fixed income 
securities, options on equity and on fixed income securities, 
government obligations, and any other instrument that constitutes a 
security under U.S. securities laws. The term ``security'' does not 
include swap agreements or other notional principal contracts.
    Effective Date: This proposed exemption, if granted, will be 
effective as of May 31, 2000.

Summary of Facts and Representations

    1. Maple is a holding company formed under the laws of the Province 
of New Brunswick, Canada. Maple is the parent company of Maple Partners 
U.S.A. Inc. (MPUSA), a Delaware corporation and a broker-dealer 
registered with the SEC pursuant to Section 15 (b) of the 1934 Act. 
MPUSA is a full-line investment and financial services company which is 
a member of the National Association of Securities Dealers, Inc. (the 
NASD) and the Chicago Board Options Exchange, Inc.\38\ As of September 
30, 1999, Maple had (in U.S. dollars) approximately $11.3 billion in 
assets under management, and $284 million in business capital.
    Maple has several foreign affiliates which are broker-dealers or 
banks. Those covered by the proposed exemption (i.e., the Foreign 
Affiliates), and their respective regulating entities, are as follows:
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    \38\ Maple also owns Maple Arbitrage Inc. (MAI), a Delaware 
corporation and a broker-dealer registered with the SEC under the 
1934 Act. MAI is a member of the NASD. MAI engages mainly in trading 
and securities lending activities for its own account.
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    (a) Maple Partners Financial Products Limited, located in Toronto, 
Ontario, is subject to regulation in Canada by the Ontario Securities 
Commission, as well as the Investment Dealers Association and the 
Toronto Stock Exchange, both self-regulatory organizations;
    (b) Maple Partners (U.K.) Limited, located in London, England, is 
subject to regulation in the United Kingdom by the Securities and 
Futures Authority, as well as the London Stock Exchange, the Tradepoint 
Investment Exchange and the London-based Swedish Options Exchange, all 
of which are self-regulatory organizations;
    (c) Maple Partners Bankhaus GmbH (MPBG), located in Frankfurt, is 
subject to regulation in Germany by the Federal Supervisory Office, 
Bundesaufsichtsamt fur das Kreditwesen (i.e., the BAK), and the Federal 
Securities Trading Supervisory Commission, Bundesaufsichtsamt fur den 
Wertpapierhandel (i.e., the BAWe).
    Maple requests an individual exemption to permit the Foreign 
Affiliates identified above, as well as those other affiliates of Maple 
who, in the future, may be subject to governmental regulation in 
Canada, the United Kingdom or Germany, to engage in the securities 
transactions described below with employee benefit plans (i.e., the 
Plans). The proposed exemption is necessary because the Foreign 
Affiliates may be parties in interest with respect to the Plans under 
the Act, by virtue of being a fiduciary (for assets of the Plans other 
than those involved in the transactions) or a service provider to such 
Plans, or by virtue of a relationship to such fiduciary or service 
provider.

[[Page 56735]]

    2. Maple represents that the Foreign Affiliates are subject to 
regulation by a governmental agency in the foreign country in which 
they are located. Maple further represents that registration of a 
foreign broker-dealer or bank with the governmental agency in these 
cases addresses regulatory concerns similar to those concerns addressed 
by registration of a broker-dealer with the SEC under the 1934 Act. The 
rules and regulations set forth by the above-referenced agencies and 
the SEC share a common objective: the protection of the investor by the 
regulation of securities markets.
    Canada and the United Kingdom each have comprehensive financial 
resource and reporting/disclosure rules concerning broker-dealers. 
Broker-dealers are required to demonstrate their capital adequacy. The 
reporting/disclosure rules impose requirements on broker-dealers with 
respect to risk management, internal controls, and records relating to 
counterparties. All such records must be produced at the request of the 
agency at any time. The agencies' registration requirements for broker-
dealers are enforced by fines and penalties and thus constitute a 
comprehensive disciplinary system for the violation of such rules.
    With respect to Germany, the BAK, an independent federal 
institution with ultimate responsibility to the Ministry of Finance, in 
cooperation with the Deutsche Bundesbank, the central bank of the 
German banking system, provides extensive regulation of the banking 
sector. The BAK insures that German banks have procedures for 
monitoring and controlling its worldwide activities through various 
statutory and regulatory standards, such as requirements regarding 
adequate internal controls, oversight, administration and financial 
resources. The BAK reviews compliance with these limitations on 
operations and internal control requirements through an annual audit 
performed by the year-end auditor and through special audits, e.g., on 
specific sections of the Banking Act, as ordered by the BAK and the 
respective State Central Bank auditors. The BAK obtains information on 
the condition of German banks, such as MPBG, by requiring submission of 
periodic, consolidated financial reports and through a mandatory annual 
report prepared by the auditor. The BAK also receives information from 
German banks, such as MPBG, regarding capital adequacy, country risk 
exposure, and foreign exchange exposure. German banking law mandates 
penalties to insure correct reporting to the BAK. The auditors face 
penalties for gross violation of their duties in auditing, for 
reporting misleading information, omitting essential information from 
the audit report, failing to request pertinent information, or failing 
to report to the BAK.
    The distribution and trading of securities in Germany is governed 
by the Stock Corporation Act (Aktiengesetz), the Stock Exchange Code 
(Borsengesetz), and the Securities Trading Act, as amended 
(Wertpapierhandelsgesetz). The Stock Exchange Code involves a three-
tier supervisory system--federal, state and private exchanges. The BAWe 
has been given broad powers to investigate and prosecute various 
securities trading violations.
    Maple represents that, in connection with the transactions covered 
by this proposed exemption, the Foreign Affiliates' compliance with any 
applicable requirements of Rule 15a-6 [17 CFR 240.15a-6(1999)] of the 
1934 Act (as discussed further in Paragraph 6, below), and SEC 
interpretations thereof, providing for foreign affiliates a limited 
exemption from U.S. registration requirements, will offer additional 
protections to the Plans.

Principal Transactions

    3. Maple represents that the Foreign Affiliates operate as traders 
in dealers' markets wherein they customarily purchase and sell 
securities for their own account in the ordinary course of their 
business as broker-dealers or banks and engage in purchases and sales 
of securities, including options on securities, with their clients. 
Such trades are referred to as principal transactions. Maple represents 
that the role of a broker-dealer in a principal transaction in the 
subject foreign countries is virtually identical to that of a broker-
dealer in a principal transaction in the United States.
    Maple requests an individual exemption to permit the Foreign 
Affiliates to engage in principal transactions with the Plans under 
terms and conditions equivalent to those required in Prohibited 
Transaction Class Exemption 75-1 (PTE 75-1, 40 FR 50845, October 31, 
1975), Part II.\39\ Maple states that because PTE 75-1 provides an 
exemption only for U.S. registered broker-dealers and U.S. banks, the 
principal transactions at issue would fall outside the scope of relief 
provided by PTE 75-1.\40\
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    \39\ The Department notes that the proposed principal 
transactions are subject to the general fiduciary responsibility 
provisions of Part 4 of Title I of the Act. Section 404(a) of the 
Act requires, among other things, that a fiduciary of a plan act 
prudently and solely in the interest of the plan and its 
participants and beneficiaries, when making investment decisions on 
behalf of the plan.
    \40\ PTE 75-1, Part II, provides an exemption, under certain 
conditions, from section 406(a) of the Act and section 4975(c)(1)(A) 
through (D) of the Code, for principal transactions between employee 
benefit plans and U.S. registered broker-dealers or U.S. banks that 
are parties in interest with respect to such plans.
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    4. Maple represents that like the U.S. dealer markets, 
international equity and debt markets, including the options markets, 
are no less dependent on a willingness of dealers to trade as 
principals. Over the past decade, the Plans have increasingly invested 
in foreign equity and debt securities, including debt securities issued 
by foreign governments. Thus, Plans seeking to enter into such 
investments may wish to increase the number of trading partners 
available to them by trading with the Foreign Affiliates.
    5. Under the conditions of this proposed exemption, as in PTE 75-1, 
Part II, the Foreign Affiliate must customarily purchase and sell 
securities for its own account in the ordinary course of its business 
as a broker-dealer or bank. The terms of any principal transaction will 
be at least as favorable to the Plan as those the Plan could obtain in 
a comparable arm's length transaction with an unrelated party. Neither 
the Foreign Affiliate nor an affiliate thereof will have discretionary 
authority or control with respect to the investment of the Plan assets 
involved in the principal transaction, or render investment advice 
[within the meaning of 29 CFR 2510.3-21(c)] with respect to those 
assets. In addition, the Foreign Affiliate will be a party in interest 
or disqualified person with respect to the Plan assets involved in the 
principal transaction solely by reason of section 3(14)(B) of the Act 
or section 4975(e)(2)(B) of the Code (i.e., a service provider to the 
Plan), or by reason of a relationship to such a person as described in 
such sections.
    6. Maple represents that Rule 15a-6 of the 1934 Act provides an 
exemption from U.S. registration requirements for a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any 
security (including over-the-counter equity and debt options) by a 
``U.S. institutional investor'' or a ``major U.S. institutional 
investor,'' provided that the foreign broker-dealer, among other 
things, enters into these principal transactions through a U.S. 
registered broker or dealer intermediary.
    The term ``U.S. institutional investor,'' as defined in Rule 15a-
6(b)(7), includes an employee benefit plan within the meaning of the 
Act if:

[[Page 56736]]

    (a) The investment decision is made by a plan fiduciary, as defined 
in section 3(21) of the Act, which is either a bank, savings and loan 
association, insurance company or registered investment adviser, or
    (b) The employee benefit plan has total assets in excess of $5 
million, or
    (c) The employee benefit plan is a self-directed plan with 
investment decisions made solely by persons that are ``accredited 
investors,'' as defined in Rule 501(a)(1) of Regulation D of the 
Securities Act of 1933, as amended.
    The term ``major U.S. institutional investor,'' as defined in Rule 
15a-6(b)(4), includes a U.S. institutional investor that has total 
assets in excess of $100 million.\41\ The intermediation of the U.S. 
registered broker or dealer imposes upon the foreign broker-dealer the 
requirement that the securities transaction be effected in accordance 
with a number of U.S. securities laws and regulations applicable to 
U.S. registered broker-dealers.
---------------------------------------------------------------------------

    \41\ Note that the categories of entities that qualify as 
``major U.S. institutional investors'' has been expanded by an SEC 
No-Action letter. See No-Action Letter issued to Cleary, Gottlieb, 
Steen & Hamilton on April 9, 1997 (the April 9, 1997 No-Action 
Letter).
---------------------------------------------------------------------------

    Maple represents that under Rule 15a-6, a foreign broker-dealer 
that induces or attempts to induce the purchase or sale of any security 
by a U.S. institutional or major U.S. institutional investor in 
accordance with Rule 15a-6 must, among other things:
    (a) Provide written consent to service of process for any civil 
action brought by or proceeding before the SEC or a self-regulatory 
organization;
    (b) Provide the SEC with any information or documents within its 
possession, custody or control, any testimony of foreign associated 
persons, and any assistance in taking the evidence of other persons, 
wherever located, that the SEC requests and that relates to 
transactions effected pursuant to the Rule;
    (c) Rely on the U.S. registered broker or dealer through which the 
principal transactions with the U.S. institutional and major U.S. 
institutional investors are effected, among other things, for:
    (1) Effecting the transactions, other than negotiating their terms;
    (2) Issuing all required confirmations and statements;
    (3) As between the foreign broker-dealer and the U.S. registered 
broker or dealer, extending or arranging for the extension of any 
credit in connection with the transactions;
    (4) Maintaining required books and records relating to the 
transactions, including those required by Rules 17a-3 (Records to be 
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by 
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
    (5) Receiving, delivering, and safeguarding funds and securities in 
connection with the transactions on behalf of the U.S. institutional 
investor or major U.S. institutional investor in compliance with Rule 
15c3-3 (Customer Protection--Reserves and Custody of Securities) of the 
1934 Act; \42\ and
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    \42\ Under certain circumstances described in the April 9, 1997 
No-Action Letter (e.g., clearance and settlement transactions), 
there may be direct transfers of funds and securities between a Plan 
and a Foreign Affiliate. Please note that in such situations (as in 
the other situations covered by Rule 15a-6), the U.S. broker-dealer 
will not be acting as a principal with respect to any duties it is 
required to undertake pursuant to Rule 15a-6.
---------------------------------------------------------------------------

    (6) Participating in certain oral communications (e.g., telephone 
calls) between the foreign associated person and the U.S. institutional 
investor, other than a major U.S. institutional investor. Under certain 
circumstances, the foreign associated person may have direct 
communications and contact with the U.S. institutional investor. (See 
April 9, 1997 No-Action Letter.)

Extensions of Credit

    7. Maple represents that a normal part of the execution of 
securities transactions by broker-dealers on behalf of clients, 
including employee benefit plans, is the extension of credit to clients 
so as to permit the settlement of transactions in the customary three-
day settlement period. Such extensions of credit are also customary in 
connection with the writing of option contracts.
    Maple requests that the proposed exemption include relief for 
extensions of credit to the Plans by the Foreign Affiliates in the 
ordinary course of their purchases or sales of securities, regardless 
of whether they are effected on an agency or a principal basis, or in 
connection with the writing of options contracts. In this regard, an 
exemption for such extensions of credit is provided under PTE 75-1, 
Part V, only for transactions between plans and U.S. registered brokers 
or dealers.\43\
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    \43\ PTE 75-1, Part V, provides an exemption, under certain 
conditions, from section 406 of the Act and section 4975(c)(1) of 
the Code, for extensions of credit, in connection with the purchase 
or sale of securities, between employee benefit plans and U.S. 
registered brokers or dealers that are parties in interest with 
respect to such plans.
---------------------------------------------------------------------------

    8. Under the conditions of this proposed exemption, as in PTE 75-1, 
Part V, the Foreign Affiliate may not be a fiduciary with respect to 
the Plan assets involved in the transaction. However, an exception to 
such condition would be provided herein, as in PTE 75-1, if no interest 
or other consideration is received by the Foreign Affiliate or an 
affiliate thereof, in connection with any such extension of credit. In 
addition, the extension of credit must be lawful under the 1934 Act and 
any rules or regulations thereunder, if the 1934 Act rules or 
regulations were applicable. If the 1934 Act would not be applicable, 
the extension of credit must still be lawful under applicable foreign 
law, in the country where the particular Foreign Affiliate is 
domiciled.

Securities Lending

    9. The Foreign Affiliates, acting as principals, actively engage in 
the borrowing and lending of securities, typically foreign securities, 
from various institutional investors, including employee benefit plans.
    Maple requests an exemption for securities lending transactions 
between the Foreign Affiliates and the Plans under terms and conditions 
equivalent to those required in PTE 81-6 (see Footnote 2). Because PTE 
81-6 provides an exemption only for U.S. registered broker-dealers and 
U.S. banks, the securities lending transactions at issue would fall 
outside the scope of relief provided by PTE 81-6.
    10. The Foreign Affiliates utilize borrowed securities either to 
satisfy their own trading requirements or to re-lend to other broker-
dealers and entities which need a particular security for a certain 
period of time. As described in the Federal Reserve Board's Regulation 
T, borrowed securities are often used to meet delivery obligations in 
the case of short sales or the failure to receive securities that a 
broker-dealer is required to deliver. Maple represents that foreign 
broker-dealers are those broker-dealers most likely to seek to borrow 
foreign securities. Thus, the requested exemption will increase the 
lending demand for such securities, providing the Plans with increased 
securities lending opportunities, which will earn such Plans additional 
rates of return on the borrowed securities (as discussed below).
    11. An institutional investor, such as a pension fund, lends 
securities in its portfolio to a broker-dealer or bank in order to earn 
a fee while continuing to enjoy the benefits of owning the securities, 
(e.g., from the receipt of any interest, dividends, or other 
distributions due on those securities and from any appreciation in the 
value of the securities). The lender generally requires that the 
securities loan be fully collateralized, and the collateral usually

[[Page 56737]]

is in the form of cash, irrevocable bank letters of credit, or high 
quality liquid securities, such as U.S. Government or Federal Agency 
obligations.
    12. With respect to the subject securities lending transactions, 
neither the Foreign Affiliate nor an affiliate of the Foreign Affiliate 
will have discretionary authority or control with respect to the 
investment of the Plan assets involved in the transaction, or render 
investment advice [within the meaning of 29 CFR 2510.3-21(c)] with 
respect to those assets.
    13. By the close of business on the day the loaned securities are 
delivered, the Plan will receive from the Foreign Affiliate (by 
physical delivery, book entry in a securities depository, wire 
transfer, or similar means) collateral consisting of cash, securities 
issued or guaranteed by the U.S. Government or its agencies or 
instrumentalities, irrevocable U.S. bank letters of credit issued by 
persons other than the Foreign Affiliate or an affiliate of the Foreign 
Affiliate, or any combination thereof. All collateral will be in U.S. 
dollars, or dollar-denominated securities or bank letters of credit, 
and will be held in the United States. The collateral will have, as of 
the close of business on the business day preceding the day it is 
posted by the Foreign Affiliate, a market value equal to at least 100 
percent of the then market value of the loaned securities (or, in the 
case of letters of credit, a stated amount equal to same). (As is 
customary in the industry, the Foreign Affiliates typically provide 
collateral of between 102 and 105 percent of the market value of the 
loaned securities.)
    14. The loan will be made pursuant to a written Loan Agreement, 
which may be in the form of a master agreement covering a series of 
securities lending transactions between the Plan and the Foreign 
Affiliate. The terms of the Loan Agreement will be at least as 
favorable to the Plan as those the Plan could obtain in a comparable 
arm's length transaction with an unrelated party. The Loan Agreement 
will also contain a requirement that the Foreign Affiliate pay all 
transfer fees and transfer taxes relating to the securities loans.
    15. In return for lending securities, the Plan will either (a) 
receive a reasonable fee, which is related to the value of the borrowed 
securities and the duration of the loan, or (b) have the opportunity to 
derive compensation through the investment of cash collateral. In the 
latter case, the Plan may pay a loan rebate or similar fee to the 
Foreign Affiliate, if such fee is not greater than what the Plan would 
pay in a comparable arm's length transaction with an unrelated party.
    Earnings generated by non-cash collateral will be returned to the 
Foreign Affiliate. The Plan will be entitled to at least the equivalent 
of all distributions on the borrowed securities made during the term of 
the loan. Such distributions will include cash dividends, interest 
payments, shares of stock as a result of stock splits, and rights to 
purchase additional securities, that the Plan would have received (net 
of any applicable tax withholdings) had it remained the record owner of 
such securities.
    16. If the market value of the collateral as of the close of 
trading on a business day falls below 100 percent of the market value 
of the borrowed securities as of the close of trading on that day, the 
Foreign Affiliate will deliver additional collateral, by the close of 
business on the following business day, to bring the level of the 
collateral back to at least 100 percent. However, if the market value 
of the collateral exceeds 100 percent of the market value of the 
borrowed securities, the Foreign Affiliate may require the Plan to 
return part of the collateral to reduce the level of the collateral to 
100 percent.
    17. Before entering into a Loan Agreement, the Foreign Affiliate 
will furnish to the independent Plan fiduciary, who makes a decision 
whether to lend the Plan's securities, (a) the most recent available 
audited statement of the Foreign Affiliate's financial condition, (b) 
the most recent available unaudited statement of its financial 
condition (if more recent than the audited statement), and (c) a 
representation that, at the time the loan is negotiated, there has been 
no material adverse change in its financial condition that has not been 
disclosed since the date of the most recent financial statement 
furnished to the independent Plan fiduciary. Such representation may be 
made by the Foreign Affiliate's agreeing that each loan of securities 
shall constitute a representation that there has been no such material 
adverse change.
    18. The Loan Agreement and/or any securities loan outstanding may 
be terminated by the Plan at any time, whereupon the Foreign Affiliate 
will deliver certificates for securities identical to the borrowed 
securities (or the equivalent thereof in the event of reorganization, 
recapitalization, or merger of the issuer of the borrowed securities) 
to the Plan within (a) the customary delivery period for such 
securities, (b) three business days, or (c) the time negotiated for 
such delivery by the Plan and the Foreign Affiliate, whichever is 
least, or alternatively, such period as permitted by PTE 81-6, as it 
may be amended or superseded. In the event that the Foreign Affiliate 
fails to return the securities, or the equivalent thereof, within the 
designated time, the Plan will have certain rights under the Loan 
Agreement to realize upon the collateral. The Plan may purchase 
securities identical to the borrowed securities, or the equivalent 
thereof, and may apply the collateral to the payment of the purchase 
price, any other obligations of the Foreign Affiliate under the Loan 
Agreement, and any expenses associated with replacing the borrowed 
securities. The Foreign Affiliate is obligated to pay to the Plan the 
amount of any remaining obligations and expenses not covered by the 
collateral (the value of which shall be determined as of the date the 
borrowed securities should have been returned to the Plan), plus 
interest at a reasonable rate as determined in accordance with an 
independent market source. If replacement securities are not available, 
the Foreign Affiliate will pay the Plan an amount equal to (a) the 
value of the securities as of the date such securities should have been 
returned to the Plan, plus (b) all the accrued financial benefits 
derived from the beneficial ownership of such borrowed securities as of 
such date, plus (c) interest at a reasonable rate determined in 
accordance with an independent market source from such date to the date 
of payment. The amounts paid shall be reduced by the amount or value of 
the collateral determined as of the date the borrowed securities should 
have been returned to the Plan. Notwithstanding the foregoing, the 
Foreign Affiliate may, in the event it fails to return borrowed 
securities as described above, replace non-cash collateral with an 
amount of cash not less than the then current market value of the 
collateral, provided that such replacement is approved by the 
independent Plan fiduciary.
    19. The independent Plan fiduciary will maintain the situs of the 
Loan Agreement in accordance with the indicia of ownership requirements 
under section 404(b) of the Act \44\ and the regulations promulgated 
under 29 CFR 2550.404(b)-1.
---------------------------------------------------------------------------

    \44\ Section 404(b) of the Act states that no fiduciary may 
maintain the indicia of ownership of any assets of a plan outside 
the jurisdiction of the district courts of the United States, except 
as authorized by regulation by the Secretary of Labor.
---------------------------------------------------------------------------

    20. In summary, the applicant represents that the subject 
transactions satisfy the statutory criteria for an exemption under 
section 408(a) of the Act for the following reasons:

[[Page 56738]]

    (a) With respect to the principal transactions effected by the 
Foreign Affiliates, the proposed exemption will enable the Plans to 
realize the same benefits of efficiency and convenience which such 
Plans could derive from principal transactions with U.S. registered 
broker-dealers or U.S. banks, pursuant to PTE 75-1, Part II;
    (b) With respect to extensions of credit in connection with 
purchases or sales of securities, the proposed exemption will enable 
the Foreign Affiliates and the Plans to extend credit in the ordinary 
course of the Foreign Affiliate's business to effect agency or 
principal transactions within the customary three-day settlement 
period, or in connection with the writing of option contracts, for 
transactions between Plans and U.S. registered brokers or dealers, 
pursuant to PTE 75-1, Part V;
    (c) With respect to securities lending transactions effected by the 
Foreign Affiliates, the proposed exemption will enable the Plans to 
realize a low-risk return on securities that otherwise would remain 
idle, as in securities lending transactions between Plans and U.S. 
registered broker-dealers or U.S. banks, pursuant to PTE 81-6; and
    (d) The proposed exemption will provide the Plans with virtually 
the same protections as those provided by PTE 75-1 and PTE 81-6.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department, 
telephone (202) 219-8883. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries, and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 11th day of September, 2000.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits, 
Administration.
[FR Doc. 00-23824 Filed 9-18-00; 8:45 am]
BILLING CODE 4510-29-P