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Re: Request for Clarification of the Underwriter
Exemptions
Dear Messrs. Saxon and Matta:
This is in response to your request for an advisory
opinion by the Department of Labor (the Department) concerning the
requirements of the “Underwriter Exemptions,” as amended.(1)
The most recent amendment to the Underwriter Exemptions is Prohibited
Transaction Exemption (PTE) 2007-05, 72 FR 13130 (March 20, 2007),
Technical Correction at 72 FR 16385 (April 4, 2007). Specifically, you
request an opinion regarding the application of the terms “Affiliate”
and “Restricted Group”, as those terms are defined in the Underwriter
Exemptions, to the facts described in your request.
You described the following facts. You represent U.S.
Bank National Association (USBank), which serves as Trustee of a trust
(Trust) holding title to the underlying loans in a transaction involving
the securitization of commercial mortgage loans (Securitization). The
Securitization was intended to comply with the requirements of the
Underwriter Exemptions (UEs). However, USBank believes that it could be
deemed to be affiliated with one of the other parties to the
Securitization, in violation of the conditions of the UEs. You state that
this uncertainty may adversely affect USBank’s ability to continue to
serve as Trustee of the Trust or to bid to serve as trustee of any similar
future securitization transactions. Accordingly, USBank seeks
clarification that it is not an Affiliate of a member of the Restricted
Group as defined in the UEs.
An entity not affiliated with USBank serves as Sponsor
(Depositor or Sponsor) of the Securitization by organizing the Trust and
arranging for the engagement of the various service providers to the
Trust. The Sponsor purchased commercial mortgage loans from mortgage loan
sellers and "deposited" the loans in the Trust created for the
purpose of issuing securities backed by the underlying loans (Securities).
The Securities were issued in exchange for the loans and were sold through
various underwriters. The underwriters sold the Securities to investors
who may have included employee benefit plans as defined in section 3(3) of
ERISA and plans as defined in section 4975(e)(1) of the Code.(2)
A master servicer oversees management and collection services for
the underlying loans and distribution of cash flows to the investors.
Subservicers are primarily responsible for servicing the individual loans.
A special servicer services certain specific loans.
You represent that USBank has formed a joint venture
(JV) with an otherwise unaffiliated entity (SUB) that sells mortgage loans
to the Sponsor. SUB is 100 percent owned by PARENT, which is one of the
Subservicers in the Securitization. On June 13, 2007, USBank informed the
Department that neither its joint venture partner, SUB, nor the parent
entity, PARENT, is affiliated with the Sponsor. Pursuant to the JV joint
venture agreement (the Agreement), USBank owns 51% of the JV, and SUB owns
the remaining 49%. The purpose of JV is to originate commercial mortgage
loans of the kind that may be sold to sponsors of similar transactions,
for deposit into an underlying securitization trust. In the described
transaction, you represent that JV did not sell mortgage loans to the
Sponsor; however, approximately 6% of the mortgages in the Trust were sold
by SUB.
You state that the Agreement provides that USBank and
SUB will appoint equal numbers of directors to the board of directors of
JV (Board). The Agreement provides that the Board has full control over
policy matters and certain management functions and that the Board can
only act by unanimous consent. The Agreement provides for the creation of
a committee (Investment Committee) responsible for finding, reviewing, and
approving mortgage loans. SUB may appoint up to 15 members to the
Investment Committee and USBank may appoint up to 8 members. Up to 7 of
the members appointed by SUB and up to 2 of the members appointed by
USBank can vote at a meeting of the Investment Committee. Some actions
require unanimous approval of the members of the Investment Committee, but
certain transactions, such as approving mortgage loans under $25 million,
require approval by a majority of the members. The members of the
Investment Committee may not be terminated or replaced except by unanimous
consent of the Board.
You provided the following chart to illustrate both the
Securitization and the various Subsidiary and joint venture relationships
(the latter are in bold).
One of the General Conditions of the Underwriter
Exemptions, as amended, is that the Trustee may not be an
"Affiliate" of any member of the "Restricted Group"
other than an "Underwriter." PTE 2007-05, Section II.A.(4). The
Restricted Group is defined as: (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 Issuer constituting
more than 5 percent of the aggregate unamortized principal balance of the
assets in the Issuer, determined on the date of the initial issuance of
Securities by the Issuer; (7) Each counterparty in an Eligible Swap
Agreement; or (8) Any Affiliate of a person described in subsections III.M.(1)-(7)."
PTE 2007-05, Section III.M. "Servicer" is defined to include “any
Subservicer." PTE 2007-05, Section III.G. "Affiliate" is
defined, in part, to 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, partner,
employee . . . of such other person; and (3) Any corporation or
partnership of which such other person is an officer, director or
partner." PTE 2007-05, Section III.N. For purposes of the UEs,
"Control" is defined as "the power to exercise a
controlling influence over the management or policies of a person other
than an individual." PTE 2007-05, Section III.O.
According to your description, PARENT is a Subservicer
and a member of the Restricted Group. Additionally, SUB, as a wholly owned
subsidiary of PARENT, is defined as “controlled by” PARENT and an
Affiliate of a member of the Restricted Group. Thus, under the definition
of the Restricted Group in the UEs, SUB, an affiliate of a Subservicer, is
a member of the Restricted Group. You note, however, that, in and of
itself, SUB is not a member of the Restricted Group. You state that
although SUB sold loans to the Sponsor, such sales alone are not
sufficient to make SUB a Sponsor as defined in PTE 2007-05.
You inquire as to whether a finding that USBank is an
affiliate of an affiliate of a member of the Restricted Group, would
prevent USBank from serving as Trustee for the Trust in accordance with
the requirements of the UEs. You contend that if SUB is found to “control”
JV, JV may be deemed to be "indirectly...controlled by" PARENT
through SUB. You note that in such a circumstance, JV may be found to be
an Affiliate of PARENT, a member of the Restricted Group, and thus JV
itself would be a member of the Restricted Group. In addition, USBank may
also be deemed to "control" JV. If USBank controls JV, JV would
be an affiliate of USBank. As such, USBank would be an affiliate of an
Affiliate (i.e., JV) of an Affiliate (i.e., SUB) of the original member of
the Restricted Group (i.e., PARENT/Subservicer). To the extent that USBank
may be an affiliate of JV and JV is an Affiliate of a member of the
Restricted Group, USBank would be an affiliate of an Affiliate of a member
of the Restricted Group. You indicated that it is arguable whether JV is
controlled by PARENT, SUB or USBank and therefore an affiliate of each of
these entities.
The Department does not believe that it is necessary to
resolve whether JV is an affiliate of PARENT, SUB or USBank in order to
respond to your request. In the Department’s view, it is only necessary
to address whether USBank is an Affiliate of PARENT or SUB for purposes of
determining whether the relief provided by the UEs is available for the
Securitization transactions in which USBank serves as Trustee. You assert
that USBank is not an Affiliate of SUB merely by reason of the joint
venture, JV. The Department agrees that the fact that USBank and SUB are
both partners in JV does not make US Bank an Affiliate of SUB for purposes
of the UEs. As a result, it is the further view of the Department that
USBank is not an Affiliate of PARENT, a member of the Restricted Group,
solely by reason of USBank’s participation with SUB in the JV.
This letter constitutes an advisory opinion under ERISA
Procedure 76-1 and is issued subject to the provisions of that procedure,
including section 10, relating to the effect of advisory opinions. This
opinion relates only to the specific issue addressed herein.
Sincerely,
Ivan L. Strasfeld
Director, Office of Exemption Determinations
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The Underwriter Exemptions are a group of individual
exemptions granted by the Department to provide relief from certain of
the restrictions of sections 406 and 407 of the Employee Retirement
Income Security Act of 1974 (ERISA or the Act) and the taxes imposed
by sections 4975(a) and (b) of the Internal Revenue Code (Code), by
reason of certain sections of 4975(c)(1) of the Code for certain
transactions involving the origination and operation of certain asset
pool investment trusts and the acquisition, holding, and disposition
of certain passthrough certificates representing undivided
interests in certain specified assets. You ask us to assume, for
purposes of your advisory opinion request, that U.S. Bank National
Association acts as a Trustee of a Trust that is the subject of an
Underwriter Exemption.
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You represent that generally, USBank
does not have information regarding the identities of the parties who
have acquired the Securities.
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