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Trust Examination Manual

January 25, 1999

Michael A. Lawson
Skadden, Arps, Slate, Meagher, & Flom, LLP
300 South Grand Avenue
Los Angeles, California 90071-3144
ERISA Sec. 406(b)

Dear Mr. Lawson:

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)

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).

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.

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)

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.

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.

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.

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.

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)

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.

Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
  1. --------------------------------------------------------------------------------


    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.
  2. 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 tru sts, and making related changes.
  3. 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.
  4. 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.
  5. See, in this regard, Advisory Opinion 97-15A (May 22, 1997).
  6. 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.

Last Updated 04/02/2008

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