
[Federal Register Volume 80, Number 213 (Wednesday, November 4, 2015)]
[Notices]
[Pages 68369-68371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28069]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31886; File No. 812-14404]


U.S. Bank National Association; Notice of Application

October 29, 2015.
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: Applicant requests 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 the applicant as a 
trustee in connection with the Issuer's ABS when the applicant is 
affiliated with an underwriter for the Issuer's ABS.
    Applicant: U.S. Bank National Association.
    Filing Dates: The application was filed on December 19, 2014 and 
amended on June 4, 2015, and September 29, 2015.
    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 November 23, 2015 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: The Commission: Brent J. Fields, Secretary, U.S. Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. 
Applicant: U.S. Bank National Association, 101 East 5th Street, Saint 
Paul, MN 55101.

For Further Information Contact: Jean E. Minarick, Senior Counsel, at 
(202) 551-6811, or Daniele Marchesani 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.
    Applicant's Representations:
    1. The applicant is a subsidiary of U.S. Bancorp.\1\ The applicant 
is frequently selected to act as trustee in connection with ABS issued 
by Issuers.
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    \1\ The applicant also requests 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 the applicant as a trustee in connection 
with an Issuer's ABS. The applicant represents that any other entity 
intending to rely on this relief 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 held by the Issuer. The servicer typically collects the 
income from the assets and remits the income to the trustee. The 
trustee uses the income, as instructed by the servicer and 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

[[Page 68370]]

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 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 the applicant recommends a 
trustee to a sponsor, both the underwriter's recommendation and any 
selection of the 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 the applicant. The applicant will not price its services as 
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 
the 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, the applicant will resign as 
trustee for the Issuer consistent with the requirements of Rule 3a-
7(a)(4)(i). In such an event, the 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 privately place them with buyers 
obtained by the underwriter. The sponsor, the Issuer and/or one of 
their affiliates 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, the Issuer and/or one of 
their affiliates.
    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 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. The 
applicant represents that although an underwriter typically may provide 
credit or credit enhancement for an Issuer or engage in remarketing 
agent activities, an underwriter affiliated with the applicant will not 
provide or engage in such activities.
    Applicant's 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. Applicant requests 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 the applicant as a trustee to the Issuer 
when the applicant is affiliated with an underwriter involved in the 
organization of the Issuer. Applicant submits 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. Applicant states that when Rule 3a-7 was proposed in 1992, 
virtually all trustees were unaffiliated with the other parties 
involved in an ABS Transaction. Applicant states 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. Applicant also states that bank 
consolidation has been accompanied by the expansion of banks into 
investment banking, including the underwriting of ABS Transactions. 
Applicant further states that due to these banking industry changes, 
most trustees that provide services to Issuers, including the 
applicant, have affiliations with underwriters to Issuers. Applicant 
states that, as a result, when an affiliate of the applicant is 
selected to underwrite ABS in an ABS Transaction, Rule 3a-7(a)(4)(i)'s

[[Page 68371]]

Independent Trustee Requirement generally prevents applicant from 
serving as trustee for the Issuer. Applicant states 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. Applicant submits that due to the nature and timing of the roles 
of the trustee and the underwriter, applicant's affiliation with an 
underwriter would not result in a conflict of interest or possibility 
of overreaching that could harm investors. Applicant states 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. Applicant 
states 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 has no 
role subsequent to the distribution of the Issuer's securities. 
Applicant further states 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. Applicant states 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. Applicant states 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. Applicant further states 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, Applicant states 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. Applicant submits 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. Applicant states 
that 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. Applicant submits 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. Applicant further states 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. Applicant states that the conditions set forth below provide 
additional protections against conflicts and overreaching. For example, 
the conditions ensure that the Applicant will continue to act as an 
independent party safeguarding the assets of an Issuer regardless of an 
affiliation with the 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.
    Applicant's Conditions:
    The 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 an affiliated underwriter will 
be disclosed in writing to all parties involved in an ABS Transaction, 
including the rating agencies and the ABS holders.
    3. An underwriter affiliated with the applicant will not be 
involved in the operation of an Issuer, and its 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/or providing the sponsor with a line of credit for 
the assets to be transferred to the Issuer in connection with, and 
prior to, the related securitization.
    4. An affiliated person of the applicant, including an affiliated 
underwriter, will not provide credit or credit enhancement to an Issuer 
if the applicant serves as trustee to the Issuer.
    5. An 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 an affiliated underwriter's contractual obligations 
pursuant to the underwriting agreement will be enforceable by the 
sponsor, the Issuer and/or one of their affiliates.
    7. Consistent with the requirements of Rule 3a-7(a)(4)(i), the 
applicant will resign as trustee for the Issuer if applicant becomes 
obligated to enforce any of an 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.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-28069 Filed 11-3-15; 8:45 am]
BILLING CODE 8011-01-P


