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Laraine S. Rothenberg, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
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1999-05A
ERISA Sec. 401(b)
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Dear Ms. Rothenberg:
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This is in response to your request on behalf of the Federal Agricultural
Mortgage Corporation (“Farmer Mac”) for an advisory opinion regarding
the application of the “plan assets” regulation issued by the Department
of Labor (the Department) under the Employee Retirement Income Security Act
of 1974 (“ERISA”) to certain mortgage pool certificates offered by
Farmer Mac. Specifically, you request an advisory opinion that guaranteed
mortgage-backed certificates issued by Farmer Mac are “guaranteed
governmental mortgage pool certificates” within the meaning of 29 C.F.R.
2510.3-101(i)(2). You also request an advisory opinion as to whether certain
parties performing various services with respect to the assets underlying
the mortgage-backed certificates would be parties in interest under section
3(14) of ERISA or disqualified persons under section 4975(e)(2) of the
Internal Revenue Code of 1986 (the Code) with respect to investing employee
benefit plans.(1) In addition, you ask
for an advisory opinion that the certificates would be deemed to meet a
particular condition of a group of prohibited transaction exemptions (“the
Underwriter Exemptions”),(2) granted
to provide relief for the origination and operation of certain asset pool
investment trusts, including guaranteed governmental mortgage pool
certificate investment trusts, and for the acquisition, holding and
disposition of asset backed pass-through certificates representing undivided
interests in those trusts.
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You represent that Farmer Mac is a federally chartered corporate
instrumentality of the United States established in 1987 for the purpose of
promoting a secondary market for agricultural mortgage loans, similar to the
secondary markets in residential mortgage loans established by the Federal
National Mortgage Association (“Fannie Mae”) and Federal Home Loan
Mortgage Corporation (“Freddie Mac”).(3)
The Board of Directors of Farmer Mac consists of fifteen members, five of
whom are elected by holders of common stock of Farmer Mac that are banks,
insurance companies, or other financial institutions or entities; five of
whom are elected by holders of common stock of Farmer Mac that are Farm
Credit System institutions; and five of whom, including the Chairman of the
Board, are appointed by the President of the United States and confirmed by
the Senate.
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Farmer Mac is authorized under the Farm Credit Act to purchase several
different types of agricultural and real estate mortgages, mortgage
pass-through certificates and other mortgage- backed securities evidencing
interests in or secured by agricultural real estate mortgages, and to resell
them, primarily in the form of mortgage-backed certificates
(“Certificates”) representing undivided interests in pools of mortgages
purchased by Farmer Mac.(4) You state
that while Farmer Mac Certificates are not guaranteed directly by the United
States, Farmer Mac guarantees the timely payment of principal and interest
on such investments to all Certificate holders. Farmer Mac Certificates
provide for periodic (monthly, quarterly, semi-annual or annual) payment of
interest and the pass-through of principal based on collections with respect
to the underlying mortgages.
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You state further that Farmer Mac Certificates are offered from time to time
in one or more series. Each series of Certificates represents, in the
aggregate, the entire beneficial ownership interest in a segregated pool of
mortgages held in a trust fund managed by Farmer Mac Securities Corporation
(“Depositor”), a wholly-owned subsidiary of Farmer Mac. The Certificates
are purchased from the Depositor by an underwriter or placement agent that
offers the Certificates from time to time in public offerings registered
under the Securities Act of 1933, and in private placements. The
Certificates may be sold in negotiated transactions, at varying prices
determined at the time of sale.
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The trustee of the trust funds managed by the Depositor
is currently U.S. Bank Trust National Association.(5)
The assets of the trust funds consist of segregated pools of fixed rate or
adjustable rate agricultural real estate mortgage loans (“Qualified
Loans”); portions of loans that are guaranteed by the United States
Secretary of Agriculture (“Guaranteed Portions”); mortgage
pass-through certificates or other mortgage-backed securities evidencing
interests in or secured by Qualified Loans or Guaranteed Portions; or any
combination thereof (collectively, “Qualified Assets”).(6)
Qualified Loans are secured by parcels of land, which may be improved by
buildings or other structures permanently affixed to the parcels, that are
used for the production of one or more agricultural commodities and
consist of a minimum of five acres or are used in producing minimum annual
receipts of at least $5,000; or by a mortgage on a principal residence
that is a single-family moderately priced residential dwelling located in
a rural area.(7)
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You represent further that the sellers of Qualified
Assets (“Sellers”) are banks and other financial institutions,
including member institutions of the Farm Credit System and insurance
companies. The Sellers may be the financial institutions that originally
made the Qualified Loans (“Originators”) or they may be purchasers of
the Qualified Loans from one or more Originators. Farmer Mac selects the
Qualified Assets that it wishes to purchase from a Seller, after
determining that the Qualified Assets meet Farmer Mac’s underwriting
standards. The Depositor then purchases the Qualified Assets from the
Seller, assigns the Qualified Assets transferred to it by the Seller to a
segregated pool in a trust fund,(8)
causes the trust fund to issue one or more series of Certificates, and
receives the proceeds of the sale of the Certificates. Farmer Mac
guarantees the timely payment of principal and interest on the
Certificates upon their issuance by the Depositor. To assure its ability
to fulfill its guarantee obligations, Farmer Mac is required to establish
reserves upon issuance of a guarantee. Farmer Mac’s charter provides
that, in the event that Farmer Mac’s own reserves and capital are
insufficient to enable it to meet its guarantee obligations, the Treasury
will purchase up to $1.5 billion of Farmer Mac’s obligations.(9)
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You state that Farmer Mac acts as Master Servicer of the Qualified Loans in
each loan pool and is ultimately responsible for the servicing of the
Qualified Loans, though it has contracted with banks and other financial
institutions (collectively, “Central Servicers”) to perform the
servicing functions on its behalf, including the distribution of principal
and interest payments on the Qualified Loans in each pool and the
distribution of any yield maintenance charge (the amount payable by a
borrower under a loan in connection with a principal prepayment or
acceleration by the lender) to the Trust Fund, on behalf of the holders of
Certificates.(10) Pursuant to the
contracts, Central Servicers establish and maintain separate accounts on
behalf of the Trust Fund for the collection of payments on Qualified Assets
and foreclose upon or comparably convert the ownership of properties of any
Qualified Loans that continue in default.(11)
The Central Servicers are compensated for their services out of the interest
payments received on each Qualified Loan and also retain certain late fees,
servicing charges assessed against borrowers, and other fees. Central
Servicers may subcontract their servicing functions with respect to the
Qualified Loans to qualified agricultural mortgage servicers (“Field
Servicers”), some of whom may be Sellers or Originators.
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The Farm Credit Administration (FCA), acting through
the Office of Secondary Market Oversight (OSMO), has general regulatory
and enforcement authority over Farmer Mac, including the authority to
promulgate rules and regulations governing the activities of Farmer Mac
and to apply its general enforcement power to Farmer Mac and its
activities. In accordance with its statutory mandate, Farmer Mac’s loan
standards were submitted to Congress for approval before they were adopted
in 1990. The Director of OMSO, who is selected by and reports to the FCA
Board, is responsible for the examination of Farmer Mac and the general
supervision of the safe and sound performance by Farmer Mac of the powers
and duties vested in it by Title VIII of the Farm Credit Act of 1971, as
amended.(12)
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The Farm Credit Act requires the FCA to examine and audit Farmer Mac’s
books and financial transactions and to perform an evaluation of the safety
and soundness of Farmer Mac’s operations at least annually. Farmer Mac is
required to file quarterly reports of condition with the FCA, as well as
copies of all documents filed with the Securities Exchange Commission under
the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934. While the FCA is not required to approve the payment of dividends on
Farmer Mac common stock, the Farm Credit Act provides that no dividend may
be declared or paid unless the Farmer Mac Board determines that adequate
provision has been made for the corporation’s reserve against guarantee
losses and that no obligation issued by Farmer Mac to the Secretary of the
Treasury remains outstanding.(13) Under
its general regulatory and supervisory authority, the FCA regularly reviews
new programs and activities of Farmer Mac involving the purchase, sale,
servicing of, lending on the security of, or otherwise dealing in
conventional agricultural mortgages. In addition, the Farm Credit Act
requires the Comptroller General of the United States to perform an annual
review of the actuarial soundness and reasonableness of the guarantee fees
established by Farmer Mac.
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It is expected by the Board of Directors and management of Farmer Mac that
the Depositor will not have any relationships to investing employee benefit
plans, other than through their transactions with respect to the
Certificates. However, you state that obligors with respect to Qualified
Assets Collateralizing the Certificates (“Borrowers”) may be related to
sponsors of investing employee benefit plans. For example, a Borrower may
also be the plan sponsor of an investing employee benefit plan. You state
that it is also possible that a Central Servicer, Field Servicer, Seller, or
trustee of a trust fund managed by the Depositor may be related to investing
employee benefit plans and may therefore be a party in interest or fiduciary
with respect to such plans.
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The Department’s plan asset regulation at 29 C.F.R. 2510.3-101 describes
the circumstances under which the assets of an entity in which a plan
invests will be considered to include assets of the plan for purposes of
ERISA’s reporting and disclosure and fiduciary responsibility provisions
and the related prohibited transaction provisions of the Internal Revenue
Code. Section 2510.3-101(i)(2) defines a “guaranteed governmental mortgage
pool certificate” as “a certificate backed by, or evidencing an interest
in, specified mortgages or participation interests therein and with respect
to which interest and principal payable pursuant to the certificate are
guaranteed by the United States or an agency or instrumentality thereof.”
The regulation specifically refers to mortgage pool certificates guaranteed
by Ginnie Mae, Freddie Mac, or Fannie Mae,(14)
but makes clear that the exception may also apply to similar governmental
mortgage pool investments. As explained in the preamble to the final
regulation, the regulation provides in section 2510.3-101(i)(l) that, when a
plan invests in a guaranteed governmental mortgage pool, its assets include
its investment, but do not, solely by reason of such investment, include any
of the underlying mortgages. Thus, the sponsor or manager of a governmental
mortgage pool would not be a fiduciary of a plan solely by reason of the
plan’s investment in the pool. The regulation specifically states that
interests in Freddie Mac, Ginnie Mae and Fannie Mae are among the
investments to which the regulation’s general rule applies.(15)
Accordingly, the term “guaranteed governmental mortgage pool
certificate” in section 2510.3-101(i)(2) is not limited to securities of
the three entities specifically listed, but encompasses any certificates
backed by, or evidencing an interest in, specified mortgages or
participation interests therein and with respect to which interest and
principal payable pursuant to the certificate are guaranteed by the United
States or an agency or instrumentality thereof.
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It appears to the Department from your representations that, for purposes of
the definition of plan assets, Farmer Mac was established and is operated in
a manner substantially similar to that of Fannie Mae and Freddie Mac. Like
those entities, Farmer Mac is a Federally chartered instrumentality of the
United States that issues guarantees on pools of mortgage loans in order to
increase the availability of mortgage credit. Although Farmer Mac
Certificates are not guaranteed by the United States, in light of the
significant Federal involvement in the management of the Farmer Mac, it is
our view that investments in Certificates issued by Farmer Mac should be
treated in the same way as investments in certificates issued by Fannie Mae
and Freddie Mac. Based on your representations and in view of the foregoing,
it is the view of the Department that the mortgage pool Certificates
guaranteed and issued by Farmer Mac meet the definition of a “guaranteed
governmental mortgage pool certificate,” as defined in 29 C.F.R.
2510.3-101(i)(2).
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The Department notes that ERISA’s general standards
of fiduciary liability apply to any investment by a plan covered by Title
I, including an investment in a guaranteed governmental mortgage
certificate as defined in 29 C.F.R. 2510.3-101(i)(2). Section 404(a)(1)(B)
of ERISA requires that a fiduciary discharge his duties to a plan solely
in the interests of the plan participants and beneficiaries, and with the
care, skill, prudence and diligence under the circumstances then
prevailing that a prudent man would use in the conduct of an enterprise of
like character and with like aims. Accordingly, the fiduciaries of an
investing plan must act “prudently” and “solely in the interest”
of the plan’s participants and beneficiaries when deciding whether or
not to invest in a Certificate.
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You also requested an opinion as to whether trustees of
a trust fund managed by the Depositor, Central Servicers, Field Servicers
or Borrowers would be parties in interest under section 3(14) of ERISA or
disqualified persons under section 4975(e)(2) of the Code. In this regard,
we note that the mere investment of plan assets in the Certificates issued
by Farmer Mac would not, by itself, make those entities parties in
interest or disqualified persons, since it is our view that it is only the
Certificates, and not the assets underlying the Certificates, that are
plan assets. However, to the extent any of these entities have other
relationships to the investing plans that are described in ERISA section
3(14) or Code section 4975(e)(2), such entities may be parties in interest
or disqualified persons with respect to such plans.
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Further, because it is our view that the Certificates
are “guaranteed governmental mortgage certificates” within the meaning
of that term as defined at 29 C.F.R. 2510.3-101(i)(2), transactions
between these parties and a Farmer Mac trust fund that relate only to the
assets underlying the Certificates, and that do not involve the
Certificates themselves, would not constitute prohibited transactions
under sections 406 or 407 of ERISA or section 4975(c)(1) of the Code.
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We are unable to provide you guidance on your final
question regarding the Underwriter Exemptions. Specifically, you asked for
an opinion that the Certificates are deemed to meet the condition that
“the certificates acquired by the plan have received a rating at the
time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor’s Structured Rating
Group, Moodys Investors Service, Inc., Duff & Phelps Credit Rating Co.
or Fitch Investors Service, L.P.” We do not have authority to deem that
a transaction satisfies a condition set forth in an individual exemption.
To the extent that the prohibited transactions provisions of ERISA or the
Code are implicated by transactions involving the Certificates, we suggest
that you discuss this matter with the Office of Exemption Determinations
of this agency.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Section 10 of the
Procedure describes 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 Presidential Reorganization
Plan No. 4 of 1978, 43 Fed. Reg. 47713 (Oct. 17, 1978), the authority
of the Secretary of the Treasury to issue rulings under section 4975
of the Code has been, with certain exceptions not here relevant,
transferred to the Secretary of Labor, and the Secretary of the
Treasury is bound by the interpretations of the Secretary of Labor
pursuant to such authority.
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Such exemptions include, for
example, Banc One Capital Corporation, 60 Fed. Reg. 49011 (Sept. 21,
1995); ContiFinancial Services Corporation, 61 Fed. Reg. 3490 (Jan 31,
1996); and SouthTrust Securities, 62 Fed. Reg. 1926 (Jan. 14, 1997).
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Farmer Mac was created by the
Agricultural Credit Act of 1987 (12 U.S.C. §§ 2279aa et seq.), which
amended the Farm Credit Act of 1971. The Farm Credit System Reform Act
of 1996 (Pub. L. 104-105 (1996)) (the 1996 Act) amended the Farm
Credit Act and expanded Farmer Mac’s secondary market authority.
Among other things, the 1996 Act authorized Farmer Mac to purchase and
pool eligible loans to serve as collateral for securities guaranteed
by Farmer Mac; eliminated a requirement to create a subordinated
interest or reserve of at least 10% of the initial principal balance
of pooled loans; and included requirements that Federal Reserve banks
act as depositories for and fiscal agents of Farmer Mac and that
Farmer Mac have access to the Federal Reserve System’s book-entry
system, thereby permitting Farmer Mac securities to be traded in the
same manner as those issued by Fannie Mae, Freddie Mac and the
Government National Mortgage Association (“Ginnie Mae”). The
latter three entities are also sometimes referred to as FNMA, FHLMC,
and GNMA, respectively.
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Public offerings of Farmer Mac
guaranteed mortgage-backed Certificates are required to be registered
under the Securities Act of 1933.
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Under the Farm Credit Act, Farmer
Mac may select itself, or banks or other financial institutions not
affiliated with Farmer Mac, to serve as trustee of a trust fund. While
U.S. Bank Trust Corporation is currently the trustee of all the trust
funds managed by the Depositor, it is possible that at some point
different trusts might have different trustees.
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The Trust Fund may also include a de
minimus amount of real estate owned by the Trust Fund following a
foreclosure and proceeds received by the Trust Fund with respect to
Qualified Loans prior to such proceeds being distributed.
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You represent that Farmer Mac does
not currently secure Qualified Loans solely by mortgages on primary
residences located in rural areas, but, under the Farm Credit Act, is
permitted to do so.
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The segregated pool may also contain
Qualified Assets transferred to the Depositor by other Sellers.
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The Farm Credit Act also permits
Farmer Mac and its affiliates to issue debt obligations for the
purpose of obtaining amounts for the re-purchase of any securities
previously issued and guaranteed by Farmer Mac that represent
interests in, or obligations backed by, pools of Qualified Loans; for
the purchase of Qualified Loans; and for obtaining reasonable amounts
for business operations, including adequate liquidity, subject to
minimum capital requirements imposed by Farmer Mac’s charter.
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As Master Servicer, Farmer Mac has
the right to purchase from the Trust Fund delinquent Qualified Loans
and property acquired by the Trust Fund upon foreclosure or comparable
conversion of a Qualified Loan.
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Central Servicers are selected by
Farmer Mac based on their experience, general reputation and financial
strength. Current Central Servicers are Lend Lease Business, Inc.;
AgFirst Farm Credit Bank; and GMAC Commercial Mortgage Corporation.
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12 U.S.C. §§ 2279aa et seq.
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“Guarantee losses” refer to
payments by Farmer Mac of principal and interest on guaranteed
securities in excess of the liquidation proceeds of the collateral
securing the Qualified Loans in the pool that backs such securities.
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Farmer Mac was created subsequent to
the promulgation of both the Department’s 1982 final regulation on
government mortgage pools (the 1982 Regulation), 47 Fed. Reg. 21241
(May 18, 1982), and the Department’s 1986 final regulation on the
definition of plan assets. (See 29 CFR 2510.3-101, 51 Fed. Reg. 41262,
41278 (Nov. 13, 1986)). The 1986 final regulation on the definition of
plan assets incorporated the guaranteed governmental mortgage pool
exception established in the 1982 Regulation and redesignated it to
appear at 29 C.F.R. 2510.3-101(i).
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Preamble to the Final Regulation on
Trust Requirement and Definition of Plan Assets--Governmental Mortgage
Pools, 47 Fed. Reg. 21241 (May 18, 1982), at 21243-44.
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