81 FR 71129 - The Bank of New York Mellon Trust Company, National Association and The Bank of New York Mellon; Notice of Application

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 199 (October 14, 2016)

Page Range		71129-71131
FR Document		2016-24840

Federal Register, Volume 81 Issue 199 (Friday, October 14, 2016)

[Federal Register Volume 81, Number 199 (Friday, October 14, 2016)]
[Notices]
[Pages 71129-71131]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2016-24840]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 32309; File No. 812-14680-01]

The Bank of New York Mellon Trust Company, National Association
and The Bank of New York Mellon; Notice of Application

October 7, 2016.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (``Act'') for an exemption from certain
requirements of rule 3a-7(a)(4)(i) under the Act.

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Summary of Application: Applicants request an order that would permit
an issuer of asset-backed securities (``ABS'') that is not registered
as an investment company under the Act in reliance on rule 3a-7 under
the Act (an ``Issuer'') to appoint any of the applicants to act as a
trustee in connection with the Issuer's ABS when any such applicant is
affiliated with an underwriter for the Issuer's ABS.

Applicants: The Bank of New York Mellon Trust Company, National
Association and The Bank of New York Mellon.

Filing Dates: The application was filed on August 1, 2016.

Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicant with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on October 31, 2016 and should be accompanied by proof of service
on the applicant, in the form of an affidavit or, for lawyers, a
certificate of service. Pursuant to rule 0-5 under the Act, hearing
requests should state the nature of the writer's interest, any facts
bearing upon the desirability of a hearing on the matter, the reason
for the request, and the issues contested. Persons who wish to be
notified of a hearing may request notification by writing to the
Commission's Secretary.

ADDRESSES: Brent J. Fields, Secretary, U.S. Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090. Applicants:
Lincoln Finkenberg, Esq., Associate General Counsel & Managing
Director, The Bank of New York Mellon, 225 Liberty Street, New York, NY
10286.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at
(202) 551-3038, or Mary Kay Frech, Branch Chief, at (202) 551-6821
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or for an
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.
Applicants' Representations:
1. Both applicants are wholly-owned direct subsidiaries of The Bank
of New York Mellon Corporation.\1\ Each applicant is frequently
selected to act as trustee in connection with ABS issued by Issuers.
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\1\ Applicants also request that the order apply to an Issuer's
future appointment of any other entity controlling, controlled by,
or under common control (as defined in section 2(a)(9) of the Act)
with any of the applicants as a trustee in connection with an
Issuer's ABS. Applicants represent that any other entity that relies
on the order in the future will comply with the terms and conditions
of the application. Any existing entity currently intending to rely
on the requested order has been named as an applicant.
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2. An ABS transaction typically involves the transfer of assets by
a seller, usually by a ``sponsor,'' to a bankruptcy remote special
purpose corporate or trust entity that is established for the sole
purpose of holding the assets and issuing ABS to investors (an ``ABS
Transaction''). Payments of interest and principal on the ABS depend
primarily on the cash flow generated by the pool of assets owned by the
Issuer.
3. The parties to an ABS Transaction enter into several transaction
agreements that provide for the holding of the assets by the Issuer and
define the rights and responsibilities of the parties to the
transaction (``Transaction Documents''). The operative Transaction
Document governing the trustee is referred to herein as the
``Agreement.''
4. The sponsor of an ABS Transaction assembles the pool of assets
by purchasing or funding them, describes them in the offering
materials, and retains the underwriter to sell interests in the assets
to investors. The sponsor determines the structure of the ABS
Transaction and drafts the Transaction Documents. The sponsor selects
the other parties to the ABS Transaction, including the underwriter,
the servicer, and the trustee.
5. The servicer, either directly or through subservicers, manages
the assets that the Issuer holds. The servicer typically collects all
the income from the assets and remits the income to the trustee. The
trustee uses the income, as instructed by the servicer and/or as
provided by the Agreement, to pay interest and principal on the ABS, to
fund reserve accounts and purchases of additional assets, and to make
other payments including fees owed to the trustee and other parties to
the ABS Transaction.
6. The sponsor of an ABS Transaction selects the trustee and other
participants in the transaction. In selecting a trustee, the sponsor
generally seeks to obtain customary trust administrative and related
services for the Issuer at minimal cost. In some instances, other
parties to an ABS Transaction may provide recommendations to a sponsor
about potential trustees. An underwriter for an ABS Transaction also
may provide advice to the sponsor about trustee selection based on,
among other things, the underwriter's knowledge of the pricing and
expertise offered by a particular trustee in light of the contemplated
transaction.
7. If an underwriter affiliated with an applicant recommends a
trustee to a sponsor, both the underwriter's recommendation and any
selection of an applicant by the sponsor will be based upon customary
market considerations of pricing and expertise, among other things, and
the selection will result from an arms-length negotiation between the
sponsor and an applicant. An applicant

[[Page 71130]]

will not price its services as a trustee in a manner designed to
facilitate its affiliate being named underwriter.
8. The trustee's role in an ABS Transaction is specifically defined
by the Agreement, and under the Agreement the trustee is not expected
or required to perform discretionary functions. The responsibilities of
the trustee as set forth in the Agreement are narrowly circumscribed
and limited to those expressly accepted by the trustee. The trustee
negotiates the provisions applicable to it directly with the sponsor
and is then appointed by, and enters into the Agreement with, the
Issuer.
9. The trustee usually becomes involved in an ABS Transaction after
the substantive economic terms have been negotiated between the sponsor
and the underwriters. The trustee does not monitor any service
performed by, or obligation of, an underwriter, whether or not the
underwriter is affiliated with the trustee. In the unlikely event that
an applicant, in acting as trustee to an Issuer for which an affiliate
acts as underwriter, becomes obligated to enforce any of the affiliated
underwriter's obligations to the Issuer, an applicant will resign as
trustee for the Issuer consistent with the requirements of rule 3a-
7(a)(4)(i). In such an event, an applicant will incur the costs
associated with the Issuer's procurement of a successor trustee.
10. The sponsor selects one or more underwriters to purchase the
Issuer's ABS and resell them or to place them privately with buyers
obtained by the underwriter. The sponsor enters into an underwriting
agreement with the underwriter that sets forth the responsibilities of
the underwriter with respect to the distribution of the ABS and
includes representations and warranties regarding, among other things,
the underwriter and the quality of the Issuer's assets. The obligations
of the underwriter under the underwriting agreement are enforceable
against the underwriter only by the sponsor.
11. The underwriter may assist the sponsor in the organization of
an Issuer by providing advice, based on its expertise in ABS
Transactions, on the structuring and marketing of the ABS. This advice
may relate to the risk tolerance of investors, the type of collateral,
the predictability of the payment stream, the process by which payments
are allocated and down-streamed to investors, the way that credit
losses may affect the trust and the return to investors, whether the
collateral represents a fixed set of specific assets or accounts, and
the use of forms of credit enhancements to transform the risk-return
profile of the underlying collateral. Any involvement of an underwriter
in the organization of an Issuer that occurs is limited to helping
determine the assets to be pooled, helping establish the terms of the
ABS to be underwritten, and providing the sponsor with a warehouse line
of credit for the assets to be transferred to the Issuer in connection
with, and prior to, the related securitization.
12. An underwriter may provide advice to a sponsor regarding the
sponsor's selection of a trustee for the Issuer. However, an
underwriter's role in structuring a transaction would not extend to
determining the obligations of a trustee, and the underwriter is not a
party to the Agreement or to any of the Transaction Documents. Except
for arrangements involving credit or credit enhancement for an Issuer
or remarketing agent activities, the underwriter typically has no role
in the operation of the Issuer after its issuance of securities.
Applicants represent that although an underwriter typically may provide
credit or credit enhancement for an Issuer or engage in remarketing
agent activities, an underwriter affiliated with an applicant will not
provide or engage in such activities.
Applicants' Legal Analysis:
1. Rule 3a-7 excludes from the definition of investment company
under section 3(a) of the Act an Issuer that meets the conditions of
the rule. One of rule 3a-7's conditions, set forth in paragraph
(a)(4)(i), requires that the Issuer appoint a trustee that is not
affiliated with the Issuer or with any person involved in the
organization or operation of the Issuer (the ``Independent Trustee
Requirement''). Rule 3a-7(a)(4)(i) therefore prohibits an Issuer from
appointing a trustee that is affiliated with an underwriter.
2. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction or any class or classes of persons,
securities or transactions from any provision of the Act, or from any
rule thereunder, if and to the extent such exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act.
3. Applicants request exemptive relief under section 6(c) of the
Act from rule 3a-7(a)(4)(i) under the Act to the extent necessary to
permit an Issuer to appoint an applicant as a trustee to the Issuer
when such applicant is affiliated with an underwriter involved in the
organization of the Issuer. Applicants submit that the requested
exemptive relief from the Independent Trustee Requirement is necessary
and appropriate in the public interest and is consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act due to changes in the banking industry, due
to the timing and nature of the roles of the trustee and the
underwriter in ABS Transactions, and because the requested relief is
consistent with the policies and purposes underlying the Independent
Trustee Requirement and rule 3a-7 in general.
4. Applicants note that when rule 3a-7 was proposed in 1992,
virtually all trustees were unaffiliated with the other parties
involved in an ABS Transaction. Applicants state that consolidation
within the banking industry, as well as economic and other business
factors, has resulted in a significant decrease in the number of bank
trustees providing services to Issuers. Applicants also state that bank
consolidation has been accompanied by the expansion of banks into
investment banking, including the underwriting of ABS Transactions.
Applicants further state that due to these banking industry changes,
most trustees that provide services to Issuers, including an applicant,
have affiliations with underwriters to Issuers. Applicants state that,
as a result, when an affiliate of an applicant is selected to
underwrite ABS in an ABS Transaction, rule 3a-7(a)(4)(i)'s Independent
Trustee Requirement generally prevents applicant from serving as
trustee for the Issuer. Applicants state that the Independent Trustee
Requirement imposes an unnecessary regulatory limitation on trustee
selection and causes market distortions by leading to the selection of
trustees for reasons other than customary market considerations of
pricing and expertise. This result is disadvantageous to the ABS market
and to ABS investors.
5. Applicants submit that due to the nature and timing of the roles
of the trustee and the underwriter, an applicant's affiliation with an
underwriter would not result in a conflict of interest or possibility
of overreaching that could harm investors. Applicants state that the
trustee's role begins with the Issuer's issuance of its securities, and
the trustee performs its role over the life of the Issuer. Applicants
state that, in contrast, the underwriter is chosen early in the ABS
Transaction process, may help to structure the ABS Transaction,
distributes the Issuer's securities to investors, and generally have no
role subsequent to the distribution of the Issuer's securities.
Applicants further

[[Page 71131]]

state that an ABS trustee does not monitor the distribution of
securities or any other activity performed by underwriters and there is
no opportunity for a trustee and an affiliated underwriter to act in
concert to benefit themselves at the expense of holders of the ABS
either prior to or after the closing of the ABS Transaction.
6. Applicants state that the trustee's role is narrowly defined,
and that the trustee is neither expected nor required to exercise
discretion or judgment except after a default in the ABS transaction,
which rarely occurs. Applicants state that the duties of a trustee
after a default are limited to enforcing the terms of the Agreement for
the benefit of debt holders as a ``prudent person'' would enforce such
interests for his own benefit. Applicants further state that the
trustee of the Issuer has virtually no discretion to pursue anyone in
any regard other than preserving and realizing on the assets. In any
event, applicants state that any role taken by the trustee in the event
of a default would occur after the underwriter has terminated its role
in the transaction.
7. Applicants submit that the concerns underlying the Independent
Trustee Requirement are not implicated if the trustee for an Issuer is
independent of the sponsor, servicer, and credit enhancer for the
Issuer, but is affiliated with an underwriter for the Issuer, because
in that situation no single entity would act in all capacities in the
issuance of the ABS and the operation of an Issuer. Applicants state
that each applicant would continue to act as an independent party
safeguarding the assets of any Issuer regardless of an affiliation with
an underwriter of the ABS. Applicants submit that the concern that
affiliation could lead to a trustee monitoring the activities of an
affiliate also is not implicated by a trustee's affiliation with an
underwriter, because, in practice, a trustee for an Issuer does not
monitor the distribution of securities or any other activity performed
by underwriters. Applicants further state that the requested relief
would be consistent with the broader purpose of rule 3a-7 of not
hampering the growth and development of the ABS market, to the extent
consistent with investor protection.
8. Applicants state that the conditions set forth below provide
additional protections against conflicts and overreaching. For example,
the conditions ensure that an applicant will continue to act as an
independent party safeguarding the assets of an Issuer regardless of an
affiliation with an underwriter of the ABS and would not allow the
underwriter any greater access to the assets, or cash flows derived
from the assets, of the Issuer than if there were no affiliation.
Applicants' Conditions:
Each applicant agrees that any order granting the requested relief
will be subject to the following conditions:
1. The applicant will not be affiliated with any person involved in
the organization or operation of the Issuer in an ABS Transaction other
than the underwriter.
2. The applicant's relationship to the affiliated underwriter will
be disclosed in writing to all parties involved in an ABS Transaction,
including the rating agencies and the ABS holders.
3. The underwriter affiliated with the applicant will not be
involved in the operation of an Issuer, and the affiliated
underwriter's involvement in the organization of an Issuer will extend
only to determining the assets to be pooled, assisting in establishing
the terms of the ABS to be underwritten, and providing the sponsor with
a warehouse line of credit for the assets to be transferred to the
Issuer in connection with, and prior to, the related securitization.
4. No affiliated person of the applicant, including the affiliated
underwriter, will provide credit or credit enhancement to an Issuer if
the applicant serves as trustee to the Issuer.
5. The underwriter affiliated with the applicant will not engage in
any remarketing agent activities, including involvement in any auction
process in which ABS interest rates, yields, or dividends are reset at
designated intervals in any ABS Transaction for which the applicant
serves as trustee to the Issuer.
6. All of the affiliated underwriter's contractual obligations
pursuant to the underwriting agreement will be enforceable by the
sponsor.
7. Consistent with the requirements of rule 3a-7(a)(4)(i), the
applicant will resign as trustee for the Issuer if the applicant
becomes obligated to enforce any of the affiliated underwriter's
obligations to the Issuer.
8. The applicant will not price its services as trustee in a manner
designed to facilitate its affiliate being named underwriter.

For the Commission, by the Division of Investment Management,
under delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2016-24840 Filed 10-13-16; 8:45 am]
BILLING CODE 8011-01-P

Document Created: 2016-10-14 00:01:34
Document Modified: 2016-10-14 00:01:34

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
Action		Notice of an application under section 6(c) of the Investment Company Act of 1940 (``Act'') for an exemption from certain requirements of rule 3a-7(a)(4)(i) under the Act.
Dates		The application was filed on August 1, 2016.
Contact		Laura J. Riegel, Senior Counsel, at (202) 551-3038, or Mary Kay Frech, Branch Chief, at (202) 551-6821 (Division of Investment Management, Chief Counsel's Office).
FR Citation		81 FR 71129