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Michael A. Lawson
Skadden, Arps, Slate, Meagher, & Flom, LLP
300 South Grand Avenue
Los Angeles, California 90071-3144
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1999-03A
ERISA Sec. 406(b)
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Dear Mr. Lawson:
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This is in response to your request for an advisory
opinion concerning the application of section 406(b) of the Employee
Retirement Income Security Act of 1974 (ERISA) and section 4975(c)(1)(D),
(E), and (F) of the Internal Revenue Code of 1986 (the Code).(1)
In particular, you request guidance with respect to a plan fiduciary’s
decision to purchase on the secondary market, with plan assets,
non-subordinated mortgage-backed pass-through certificates (Certificates)
representing interests in a trust fund for which an affiliate of the
fiduciary serves as a sub-servicer.(2)
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You represent that BlackRock Financial Management, Inc. (BlackRock), is an
investment advisor that is registered under the Investment Advisors Act of
1940 and is a wholly-owned second-tier subsidiary of PNC Bank, a national
banking association (PNC). BlackRock has over $45 billion in assets under
management, including assets of a number of employee benefit plans (Plans)
subject to Title I of ERISA and/or section 4975 of the Internal Revenue Code
of 1986 (the Code).
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The Certificates represent interests in trust funds (Trusts), each of which
consists of a segregated pool primarily of conventional, fixed-rate,
multifamily or commercial mortgage loans (Mortgage Loans). A portion of the
Mortgage Loans in each pool have been originated by PNC (PNC Loans). PNC
also acts, pursuant to the pooling and servicing agreement that establishes
each Trust, as a sub-servicer for the PNC Loans held in each Trust. The
services provided by PNC typically include, among other things, notifying
borrowers of amounts due on receivables, maintaining records of payments
received, and instituting foreclosure or similar proceedings in the event of
default with respect to the PNC Loans. Such services do not include any
investment management or investment advisory services. As the subservicer of
PNC Loans in a Trust, PNC receives a monthly fee in an amount equal to a
fixed percentage of the outstanding principal balance of each Loan. This
amount is collected from interest actually paid with respect to each Loan.
In addition, under certain Trusts, PNC is entitled to retain certain
ancillary fees that may be collected with respect to the Loan, including
assumption fees, modification fees, insufficient funds fees and similar
charges. You represent that PNC has no discretion with respect to the assets
or management of the Trust. You further represent that neither PNC nor
BlackRock is affiliated with any other entity that is a party to any of the
Trusts, including the underwriter, master servicer, trustee, insurer, or
obligor to or of the Trusts.
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The sponsor of a Trust, through one or more
underwriters or placement agents, makes an initial public or private
offering of Certificates to investors. After the initial offering,
Certificates are traded on the secondary market. The price of
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 the prepayment of underlying mortgages, and
expectations as to the likelihood of timely payment.(3)
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The pass-through rate for holders of Certificates is equal to the interest
rate on mortgages included in the Trust minus a specified servicing fee. You
represent that all fees and other consideration payable by the Trust to PNC
and other service providers to the Trust are determined and fixed as of the
closing of the initial offering of the Certificates.
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You state that BlackRock will cause Plans to purchase Certificates only on
the secondary market.(4) You
assert that any fees payable to PNC in accordance with the applicable
pooling and servicing agreement between PNC and the Trust will be unaffected
by BlackRock’s causing Plans to purchase Certificates on the secondary
market. Neither PNC nor BlackRock, you state, would have any interest in, or
receive any additional consideration from, any source by reason of, or in
connection with, such secondary market transactions.
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You are seeking guidance that BlackRock would not violate ERISA section
406(b) by causing Plans over which it has fiduciary authority to purchase,
on the secondary market, Certificates of Trusts containing PNC Loans merely
because its affiliate, PNC, acts as sub- servicer for such Loans and
receives compensation, pursuant to its subservicing agreements, from the
Trusts for the provision of such services.
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Section 406(b)(1) of ERISA prohibits a fiduciary with respect to a plan from
dealing with the assets of the plan in his own interest or for his own
account. Section 406(b)(2) prohibits a fiduciary, in his individual or any
other capacity, from acting in any transaction involving the plan on behalf
of a party (or representing a party) whose interests are adverse to the
interests of the plan or the interests of its participants or beneficiaries.
Section 406(b)(3) prohibits a fiduciary from receiving any consideration for
his own personal account from any party dealing with such plan in connection
with a transaction involving the assets of the plan.
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You have represented that PNC’s compensation from the
Trusts is determined and fixed as of the close of the initial offering of
Certificates in each Trust and is not affected by whether or not BlackRock
invests plan assets in the Certificates in the secondary market.
Regulation section 29 C.F.R. 2550.408b-2(e)(2) states that a fiduciary
does not engage in an act described in section 406(b)(1) of ERISA if the
fiduciary does not use any of the authority, control, or responsibility
that makes such person a fiduciary to cause a plan to pay additional fees
for a service provided by such fiduciary or by a person in whom such
fiduciary has an interest that may affect the exercise of such
fiduciary’s best judgment as a fiduciary. Similarly, it is the view of
the Department that a fiduciary does not engage in an act described in
section 406(b)(3) of ERISA if the fiduciary does not use any of its
authority, control, or responsibility to cause a third party to pay to the
fiduciary any compensation in connection with a transaction involving the
assets of the plan.(5) Accordingly, it
is the opinion of the Department that BlackRock would not violate section
406(b)(1) or (b)(3) of ERISA by causing Plans over which it has fiduciary
authority to purchase Certificates of the Trusts on the secondary market
merely because its affiliate, PNC, acts as a sub-servicer of the Trusts,
as long as the compensation that BlackRock and PNC receives is not
affected by such investment. Moreover, because PNC’s relationship to the
Trusts remains wholly unaffected by BlackRock’s investment of Plan
assets in the Certificates, such investment would not be considered to
involve BlackRock’s acting on behalf of PNC in violation of section
406(b)(2) of ERISA merely because of PNC’s role as sub-servicer of the
Trusts.(6)
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This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41
Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued
subject to the provisions of the procedure, including section 10 relating to
the effect of advisory opinions.
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Sincerely,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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Under Reorganization Plan No. 4 of
1978 (43 FR 47713, October 17, 1978), the authority of the Secretary
of the Treasury to issue rulings under section 4975 of the Code has
been transferred, with certain exceptions not here relevant, to the
Secretary of Labor. Therefore, the references in this letter to
specific sections of ERISA refer also to the corresponding sections of
the Code.
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You represent that, although
BlackRock Financial Management, Inc., a plan fiduciary that is an
affiliate of a sub-servicer of the issuing trust, is the entity that
would cause a plan to purchase the Certificates, the purchase of such
Certificates would otherwise conform to the conditions set forth in a
series of individual prohibited transaction exemptions (PTEs) issued
by the Department of Labor for plan investments in securities issued
by trusts that hold multifamily and commercial mortgages (generally
referred to as the Underwriter Exemptions). See, e.g., PTEs 97-5 (SouthTrust
Securities, Inc. (62 FR 1926, January 14, 1997), 96-94 (First Chicago,
NBD, 61 FR 68787, December 30, 1996), and 96-92 (BA Securities, Inc.,
61 FR 66333, December 17, 1996). See also, class PTE 97-34 (62 FR
39021, July 21, 1997), which amended the individual PTEs involving
such trusts, primarily to permit pre-funding of the trusts, and making
related changes.
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In this connection, we note that the
Underwriter Exemptions referred to in fn. 2, above, require that, at
the time of acquisition by a plan, certificates must have received one
of the three highest ratings available from one of four specified
rating services.
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Under the facts detailed in the
Underwriter Exemptions, the underwriter of certificates normally
attempts to make a market for securities (including certificates) for
which it is the lead or co-managing underwriter. At times, an
underwriter will facilitate sales by investors who purchase
certificates if the underwriter has acted as agent or principal in the
original private placement of the certificates and if such investors
request the underwriter’s assistance.
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See, in this regard, Advisory
Opinion 97-15A (May 22, 1997).
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This opinion does not address,
however, the question of whether, in actual operation, BlackRock’s
decisions to invest plan assets are designed to benefit PNC. For
example, this opinion would not apply if BlackRock conditioned
investment in any Certificate of a Trust on whether the Trust includes
mortgages that are serviced by PNC.
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