Global Exempt Certificates of Ownership in NHA MBS Securities Inc. — SEC — US

PUBL~C SO DEe 1994
Our Ref. No. 94-747-CC

Global Exempt Certificates

of Ownership in NHA MBS

RESPONSE OF THE OFFICE OF CHIEF COUNSEL Securities Inc.

DIVISION OF INVESTMENT MAAGEMENT
File No. 132-3

Your letter of November 11, 1994 requests our assurance that

we would not recommend enforcement action to the Commission if

Global Exempt Certificates of Ownership in NHA MBS Securities Inc.

("Global ECONS") issues securities without registering under the

Investment Company Act of 1940 ("1940 Act") in reliance on rule

3a-7 thereunder. 1/

Global ECONS, a wholly owned Canadian subsidiary of Goldman

Sachs Canada, proposes to acquire pools of NHA Mortgage-Backed

Securities ("Underlying Securities") that evidence interests in

pools of residential mortgages insured by an agency of the Canadian

government. Global ECONS will issue and sell in the U. S. and in

other countries certificates that provide holders with undivided

co-ownership interests in the Underlying Securities

("Certificates") .
Global ECONS will convey all of its right, title, and interest

in a specific pool of Underlying Securities and the right to

receive all payments thereon to a trustee ("Trustee") that meets the requirements of section 26 (a) (1) of the 1940 Act. As required by paragraph (a) (4) (i) of rule 3a-7, the Trustee will not be

affiliated with Global ECONS or Goldman Sachs Canada. 1/

The Trustee will act in various capacities as agent, nominee,

and trustee for and on behalf of the Certificateholders. In its

capacity as trustee, the Trustee will hold legal title to and act

as the registered holder of the Underlying Securities. Beneficial

ownership in the Underlying Securities, however, will be conveyed

to the Trustee in its capacity as agent and nominee. Upon this

conveyance and the issuance of any Certificates, the

certificateholders will hold beneficial ownership in the Underlying

Securities as tenants in common, under a co-ownership arrangement

between the Trustee as agent and the Certificateholders as

principals. You state that the Trustee's ownership interest is

valid against third parties and is, in your view, therefore

consistent with the requirements and obj ecti ves of paragraph (a) (4) (ii) of rule 3a-7. 1/ Rule 3a-7 excludes from the definition of "investment

company" certain issuers that pool specified eligible assets

and issue securities backed by those assets.

1/ Telephone conversation with Alberto G. Santos on

December 14, 1994.

The Trustee i s responsibilities are limited under a pooling

agreement to holding legal title to the Underlying Securities,

receiving payments thereon, and protecting and enforcing its legal

title and the rights of Certificateholders against adverse claims or actions. Consistent with paragraph (a) (4) (iii) of rule 3a-7, the Trustee will maintain a segregated account into which

distributions on the Underlying Securities will be deposited. The

Trustee will have no other managerial or administrative discretion

with respect to the Underlying Securities. You state that, under

the pooling. agreement, the Trustee will agree to perform its

rights, powers, and duties in accordance with a standard of care

substantially consistent with that agreed to by trustees in typical

United States structured financings. J/

A Canadian bank or trust company will act as co-agent

("Agent") for the Certificateholders to carry out ministerial and

administrative functions, including calculating payment amounts due

on the Underlying Securities, making distributions to

Certificateholders, preparing and sending monthly statements to

Certificateholders, and acting as registrar and transfer agent with

respect to the Certificates. The Agent will not be affiliated with

Global ECONS or Goldman Sachs Canada. !/

You state that both the conveyance of beneficial ownership to the Trustee as agent and the limitation on the Trustee i s functions are necessary under Canadian law to avoid income taxation at the

trust level. 2J You further state that, notwithstanding the

limitations on the Trustee's functions and the nature of its

interest in the Underlying Securities, you have been advised by

Canadian counsel that the Trustee will be subject to the fiduciary obligations of a trustee. ~ J/ You state that this standard of care is substantially

consistent with that imposed on indenture trustees under

section 315 of the Trust Indenture Act of 1939.

!/ Id.

2J In the United States, in contrast, mortgaged-backed

financings may achieve pass-through tax treatment by

qualifying as a real estate mortgage investment conduit or a

grantor trust.

~ The staff previously declined to interpret the term "trustee" to include a bank acting only as custodian. Brown

& Wood (pub. avail. Feb. 24, 1994). The staff's position

was premised on the absence of a fiduciary relationship

between a custodian and its clients.

-- -..~-----~.-----.-':-.------~.. ..... ~ .-~- --------.- '---::.'.~.--'~= ":.
-----... - -.~-.- .- --- "-- --- ----- ~ - - .... - -- .- - .- -----.-..-----.---- ------------ - -- .. .- .-. -..~~~=~4..-~.:-: .,~~~~:- .~~..~~~~~~~~~~~~~~7~~=~~:-~:O.~- .:;~--~::.-.~..;:.~.~~-~c-~~~:-..;.i~- ~-=~~~~~__~ On the basis - of the facts and representations in your letter - and the telephone conversation, we would not recommend enforcement action to the Commission if Global ECONS does not register as an

investment company under the 1940 Act in reliance on rule 3a-7.

-- ~CV'o~- ~~Ç¡3~~=-:~~~ ~--~--.:::.-o._ . . -. -, ... . r
-Sãrbãfa--.Chrëi:ïeri-;l)-r -::::::-::-:.---------- - ---:-:---- - --- ---
- Seni-ornC~unsel:.:;;.-.: -= -~ ~-::-:::: =:.: -;~ -;~.--__ -:.- --.

CLEARY, GOTTLIEB, STEEN & HAMILTON ONE LIBERTY PLA NEW YORK, N.Y. 10006 (212) 225-2000 GEORGE E. CLEARY (18"0-1"81) LEO GOTTLIEB (1."6-188'"

MELVIN C. STEEN
11807-1882)
"OWLER HAMILTON
(1811-884)
GEORGE W. BALL
LYMAN M. TON DEL, JR.
JAMES G. JOHNSON, JR.
JEROME E. HYMAN
MARK w. F"RAWLEY, JR.
GEORGE DESIPIO
WALTER S. ROTHSCHILD
RICHARD C. PUGH
THOMAS H. HAGOORT
PETER S. PAINE, JR.
COuNaeL
,...C..MILI: (.1:11 ..S-3...

TELDC WUI....S
Writer's Direct Dial: (212) 225-2422

BY HAD
17ai N STREET, N.W.

WASHINGTON, D.C. .oo~.

.1. AVENUE Dil ""ICDLAND

, aoo. ~.."I.
RUI DC LA LOI .oJ
10_0 ."U..I..

CITY PLACe Houae
.a aAlNOHALL aT"CCT

LONDON ItCIV al:H
ULMENaTfI..ii ",.".

e03.. P'flNKP'U"T AM MAIN

..TH "LOO". MNK 0,. CHINA TOWeR

ONE OA"OIEN ROAD
HONO KONO

aHIN KAaUMIOAac,u 8UILDINO

3.1, KAaUMIOAE'U 3-CHOME
CHIYODA-KU. TOKYO 100
RICHARD W. HULBERT
GEORGE WEISZ
NED B. STILES
ALAN APPELBAUM
EDWIN B. MISHKIN
GEORGE M. COHEN
STEPHEN L. DINCES
J. SPEED CARROLL
ANTHONY C. GOOCH
ROGER W. THOMAS
GEORGE J' GRUMBACH. JR.
PETER KARASZ

LOUIS KAHN
MARK A. WALKER
ALLAN G. SPERLING
PETER H. DARROW
JAMES F". MUNSELL
.ANDRA S. WEIKSNER

EVAN A. DAVIS
J. WEBB MONIZ
IIOBERT T. GREIG
ALAN S. DUNNING
CHRISTOPHER H. LUNDING
LAURENT ALPEIlT
BARRY M. F"OX
VICTOR I. LEWKOW
LESLIE N. SILVERMAN
IIOBERT L. TORTORIELLO
A. RICHAIlD SUSKO
STEPHEN H. SHALEN
IIICHARD... ZIEGLER
LEE C. BUCHHEIT
JAMES M. PEALEE
ALAN L. BELLER
THOMAS J. MOLONEY
November 11, 1994
ACT -. c i~
SEON
Office of Chief Counsel RUL '3 (~ - ).
Division of Investment Management Securi ties and Exchange Commission PUBLIC AVAILABILIT 1:: -~) () .C-ll 450 Fifth street, N.W. Washington, D.C. 20549 Re: Global Exempt Certificates Of Ownership

In NHA MBS Securities Inc.

Ladies and Gentlemen:

Global Exempt Certificates Of Ownership In NH MBS

. Securities Inc., an Ontario corporation ("Global ECONS") and a

wholly-owned subsidiary of Goldman Sachs Canada ("GS Canada"),

proposes to issue and sell series of securities (the "Certif icates" ) representing undivided co-ownerShip interests in specified pools of NH Mortgage-Backed Securities (the

"Underlying Securities") and the payments thereon. The Underlying Securities are fully guaranteed as to timely payment of principal and interest by Canada Mortgage and Housing Corporation ("CMHC") and carry the full faith and credit of Canada. The Certificates may be distributed in offshore transactions pursuant to Regulation S under the Securities Act of

1933, as amended, and in private placements in the United States,

in each case by or through GS Canada or a syndicate of securities

dealers managed by GS Canada. Goldman, Sachs & Co., an affiliate

EDWARD D. KLEINBARD
JONATHAN i. BLACKMAN
WILLIAM F". GORIN
MICHAEL L. RYAN
YAIlON Z. REICH
IIICHARD S. LINCER
JAIME A. EL KOURY
STEVEN G. HOROWITZ
ANDREA G. PODOLSKY
STEVEN M. LOEB
DONALD A. STERN
CRAIG B. BROD
JACQUES REDING"
SHELDON H. ALSTER
WANDA J. OLSON
MITCHELL A. LOWENTHAL
DEBORAH M. BUELL
EDWARO J. ROSEN
JAMES E. MILLSTEIN
LAWRENCE B. F"IIIEDMAN
NICOLAS GRABAR
SETH GROSSHANDLER
WILLIAM A. GROLL
JANET F". PLACHE
DANIEL A. BRAVERMAN
DAVID L. SUGERMAN
HOWARD ZELBQ
DAVID E. BRODSKY
.lic"".ill 0" THE ."USSELS "li ONLY ltEalDINT P'AtlTNCRa

SANDRA M. ROCKS
BRUCE D. GALLANT
ELLEN M. CREEDE
.,.leIAL COUNSEL

Division of Investment Management, p. 2

of GS Canada and a broker-dealer registered under Section 15 (b) of the Securities Exchange Act of 1934, as amended, would act as

the agent of GS Canada in the private placement of Certificates

sold in the United States.

On behalf of Global ECONS and GS Canada, we

respectfully request that the Staff of the Division of Investment

Management advise us that it will not recommend that the

Commission take any enforcement action if Global ECONS issues

Certificates as described herein without registering under the

Investment Company Act of 1940, as amended (the "Act"), in

reliance on rule. 3a-7 thereunder.

Global ECONS

Global ECONS was incorporated under the laws of the

Province of ontario, Canada, by GS Canada on February 11, 1994

for the purpose of purchasing NHA Mortgage-Backed Securities and

selling securities representing interests in or derived from NHA

Mortgage-Backed Securities. GS Canada is the sole owner of the

share capital of Global ECONS.

The UnderlYing Securities

Each Certificate will constitute evidence of the right

of the holder thereof in and to an undivided co-ownership

interest in the Underlying Securities and the right to receive a

specified portion of the payments made thereon. The Underlying

Securities, in turn, will evidence undivided co-ownership

interests in pools of residential mortgages originated by

financial institutions in Canada (the "MBS Issuers") and insured

by CMHC, the agent of the Government of Canada with respect to

the Canadian housing sector. CMC guarantees the timely payment

of principal, interest and penalty interest payments and

prepayment bonuses or indemnities payable on each NH Mortgage-

Backed Security. The obligations of CMC carry the full faith

and credit of Canada and constitute obligations of and by Canada.

Proposed Financina Structure

Global ECONS proposes to purchase pools of Underlying

Securities from time to time. Pursuant to a pooling agreement

relating to a series of Certificates (the "Pooling Agreement"),

Global ECONS will convey all of its right, title and interest in

a specific pool of Underlying Securities and the right to receive

all payments thereon to a corporate trustee (the "Trustee")

acting in varying capacities as agent, nominee and trustee for

Division of Investment Management, p. 3

and on behalf of the holders of the Certificates (the

"Certificateholders"). The Trustee, acting in its capacity as

trustee, will hold legal title to the Underlying Securities and,

as the registered holder thereof, will receive all payments

thereon, which it will hold in trust for the benefit of the

Certificateholders. Beneficial ownership in the Underlying

Securities (as distinct from legal ownership) will be conveyed to

the Trustee acting in its capacity as agent and nominee of, for

and on behalf of the Certificateholders. Canadian counsel to

Global ECONS and GS Canada has advised us that upon conveyance of

such beneficial ownership to the Trustee, acting as agent and

nominee of the Certificateholders, and the issuance of the

Certificates, the beneficial ownership in the Underlying

Securities will be owned directly by the Certificateholders, as

tenants in common, under a co-ownership arrangement (the "Co-

ownership Arrangement") between the Trustee as agent and the Certificateholders as principals.' The Trustee's responsibilities under the Pooling

Agreement, insofar as it is acting in its capacity as trustee,

will be limited to certain matters relating to the legal title to

the Underlying Securities, the right to receive payments thereon

and the responsibility to protect the rights of the Trustee and

the Certifica~ ~t ~lders therein. Specifically:

(a) the Trustee will be the sole registered holder of the Underlying Securities on the transfer books maintained

on behalf of the applicable MBS Issuers and CMHC i

(b) the Trustee will establish for the exclusive

benefit of Certificateholders a segregated account (the

"certificate Account") over which it will have sole dominion

and control and into which all monies payable on the

Canadian counsel to Global ECONS and GS Canada has further

advised us that there must be a conveyance of beneficial

ownership in the Underlying Securities to the Trustee as

agent in order to create the Co-ownership Arrangement under

Canadian law and that such a co-ownership arrangement is

necessary to achieve favorable Canadian income tax treatment

of the financing, as described below, and favorable Canadian

legal investment treatment of an investment in the

Certificates. In effect, as a result of the Co-ownership

Arrangement, the Certificateholders will be treated for

Canadian income tax and legal investment purposes as if they

had invested directly in the Underlying Securities.

Division of Investment Management, p. 4

Underlying Securities to the Trustee as registered holder

will be deposited; and

Certificateholders in the Underlying Securities in the event

of a payment default on an Underlying Security or the

assertion of a claim or the commencement of an action which

might adversely affect the rights of the Trustee or the

Certificateholders in the Underlying Securities, in each

case by an action or proceeding (a "Protective Action") as

determined by the Trustee to be most effectual to protect

such title or rights.

The Trustee will not take any Protective Action without receiving

instructions or directions from the certificateholders and the

provision of a reasonable indemnity, satisfactory to the Trustee,

against any costs or liabilities which may be incurred in the

exercise of such power. If, however, the Trustee deems a

Protective Action necessary to protect its rights or the rights

of Certificateholders in the Underlying securities, it may take

such action or proceeding prior to receipt of instructions or

indemnity from the Certificateholders. Except as described in

the preceding sentence, ~he Trustee will have no managerial,

administrative or other discretion with respect to the Underlying

Securities or the payments thereon, or any power to deal with

such assets.
Under the Pooling Agreement, Global ECONS will direct

the Trustee to appoint a Canadian bank or trust company to act as

a co-agent (the "Agent") for and on behalf of Certificateholders.

The Agent will carry out certain customary ministerial and

administrati ve functions in connection with the proposed

financing. For example, the Agent will calculate the amount of

payments on the Underlying Securities distributable to the

various classes of Certificateholders; make distributions to

Certificateholders from amounts on deposit in the Certificate

Account maintained by the Trustee; prepare and send to

certificateholders monthly remittance statements; maintain an

office where Certificates may be surrendered for registration of

transfer or exchange and where notices may be delivered; and act

as registrar and transfer agent with respect to the Certificates.

The Agent will have no property interest in the Underlying

Securities or the proceeds thereof.

The proposed financing and the responsibilities of the

Trustee and the Agent have been structured to avoid undesirable

Off ice of Chief Counsel,

Division of Investment Management, p. 5

Canadian tax consequences while permitting Global ECONS to rely

on the exemption from registration under the Act available under

rule 3a-7. Canadian counsel to Global ECONS and GS Canada has

advised us that income of a trust would be subj ect to enti tylevel income taxation in Canada if (a) the beneficial ownership

of securities is conveyed to a trustee in trust for designated

beneficiaries and such trustee issues certificates of beneficial

interest in trust property and (b) significant discretion is

granted to the trustee with respect to securities so deposited,

beyond the functions of the Trustee described above.2 The

imposition of an entity-level tax would require the payment of

Canadian income tax by the trust on all income earned by the

trust on its assets, in effect resulting in a double layer of

taxation on the assets backing the financing, with one layer of

tax imposed at the trust level and the other at the investor

level. Such additional cost could have the effect of making

Canadian structured mortgage financings economically infeasible.

By contrast, structured mortgage financings in the United states

are customarily structured in a manner which does not result in

any material double layer of income taxation.3

Consequently, unless Canadian issuers that seek to

offer their securities both in Canada and the united states have

the flexibility under rule 3a-7 t ~ structure their financings as

described above, such issuers could face significant incremental

costs compared to United states issuers availing themselves of

the REMIC Rules or the Grantor Trust Rules of the Internal

Revenue Code. In our opinion, the proposed financing by Global

ECONS conforms to the requirements of rule 3a-7. Because the

issue is not free from doubt, however, we respectfully request

your concurrence in our view.

2 As previously noted, such entity-level taxation would not arise if a Canadian co-ownership arrangement is created by the conveyance of beneficial ownership of securities to an enti ty acting as agent, rather than as a trustee, of security holders.

3 In the United States, structured mortgage financings are generally taxed under the rules governing either "real

estate mortgage investment conduits" pursuant to Sections

860A-860G (the "REMIC RUles") of the Internal Revenue Code

of 1986 or "grantor trusts" pursuant to Sections 671-679

thereof (the "Grantor Trust Rules"). Such entities are

generally not subject to entity-level taxation.

Division of Investment Management, p. 6

Basis for the No-Action Reauest

Rule 3a-7 excludes from the definition of "investment

company" any issuer that pools certain eligible financial assets

and issues securities backed bl these assets in accordance with

the requirements of such rule. An issuer relying on rule 3a-7

is required by paragraph (a) (4) thereof to (1) appoint a trustee

meeting the requirements of clause (i) of such paragraph; (2)

take "reasonable steps" to cause the trustee to have a perfected

security interest or ownership interest, valid against third

parties, in the assets principally generating the cash flow for

payment to security holders; and (3) take such actions as are

necessary to have the cash flows from the eligible assets

deposited periodically in a segregated account maintained or controlled by the trustee. Trustee aualifications. In the proposed financing, we

understand that Global ECONS will appoint a trustee that meets

the requirements of Section 26(a) (1) of the Act and otherwise

complies with the eligibility criteria for a trustee set forth in paragraph (a) (4) (i) of rule 3a-7.5 OwnershiD of Eligible Assets. Under the proposed

financing structure, the Trustee will ha-~~ an ownership interest

in the Underlying Securities consistent with the requirements and

objective of paragraph (a) (4) (ii) of rule 3a-7. Global ECONS

will convey and deliver legal right and title to the Underlying

Securi ties to the Trustee. Upon such conveyance and delivery,

the Trustee will have the sole ownership interest in the legal

right and title to the Underlying Securities, which ownership

interest will be valid against third parties. We have been

4 In our opinion, the Underlying Securities will constitute "eligible assets" within the meaning of paragraph (b) (1) of

rule 3a-7. In addition, we understand from Global ECONS that the requirements of paragraphs (a) (1), (a) (2) and (a) (3) of rule 3a-7 will be met in the proposed financing.

5 In Brown & Wood (pub. avail. February 24, 1994), by contrast, the Staff noted that rule 3a-7(a) (4) "specifically requires an issuer to appoint a trustee" and concluded that

a custodian bank, although performing the same functions as

a trustee, would not meet the requirements of the rule.

Under the proposed financing structure, certificateholders

will have the protection of a trustee appointed by Global

ECONS.

Division of Investment Management, p. 7

advised by Canadian counsel that such conveyance and delivery to

the Trustee is a transfer in trust for the benefit of the

Certificateholders, and that the Trustee will be subject to the

fiduciary obligations of a trustee with respect to the property

so transferred.6 The Pooling Agreement will provide that

Certificateholders may not deal with the Underlying Securities or

otherwise control the operation, ownership, disposition or

management of the Underlying Securities.

Deposit of cash flows. All monies distributed on the

Underlying Securities will be deposited promptly after receipt in

the Certificate Account, which is a segregated account that will

be maintained and controlled by the Trustee, consistent with

paragraph (a) (4) (iii) of rule 3a-7.

Based on the foregoing, it is our view that the

proposed financing structure adequately protects investors with

respect to the safekeeping of the Underlying Securities, thereby

serving the purposes intended by rule 3a-7 with respect to the

appointment of an independent trustee. See Exclusion from the

Definition of Investment Company for structured Financings,

Investment Company Act, Release No. IC-19105, 57 Fed. Reg.

56,248, at 56,255 (November 27, 1992) (the "Issuing Release").

The Trustee's functions are consistent with the T- ~C;J1iirements of

paragraph (a) (4) of rule 3a-7 and not contrary in Gny material

respect to market practice in structured financings in the United

States.7 The Certificateholders in the proposed financing, as

in the case of typical U.S. structured financings, will be

afforded the protection that the Trustee may act if its legal

right and title to the Underlying Securities is challenged or if

there is a default in payment with respect to the Underlying

Securities. Under the Pooling Agreement, the Trustee will agree

to perform its rights, powers and duties in accordance with a

standard of care substantially consistent with that agreed to by

6 Property which is the subject matter of a trust may consist of either a legal or equitable interest or both. See Austin W. Scott & William F. Fratcher, The Law of Trusts S 2.6

(1987) .
7 In a typical structured financing in the United States for "pass-through" securities, all legal title and beneficial

rights in assets backing the securities are transferred to a

trustee, in its capacity as trustee, and the trustee in turn

issues securities evidencing the security holders'

beneficial ownership of the assets so transferred.

...- ..... .. - - -- . - -:-r- .- .-----.-. .. .----- ... .... '-..' ."'- -_.. ~.

.- _. _. -- . - .

Off ice of Chief Counsel,

Division of Investment Management, p. 8

trustees in typical U. S. structured f inancings. 8

Certificateholders will have the added protection that the

Certificates will not be issued unless they are rated investment-

grade by at least one nationally recognized statistical rating

organization. To obtain such rating, the rating organization

~=-.;--õ:'--~~=--. __::ill closely evaluate the functions and responsibilities of the Trustee and the safekeeping arrangements for the underlying

assets.
We note that the staff observed in the Issuing Release

that, in proposing rule 3a-7, one of the Commission's objectives

was "to accommodate future innovations in the structured finance

market, consistent with investor protection." Issuing Release at

56,249. In accordance with such goal, the proposed financing

would enable united states investors to invest in securitizations

backed by Canadian government-guaranteed mortgage assets without

subjecting investors to additional structural risk.

Conclusion
For the reasons set forth above, we respectfully

request the concurrence of the Staff in our opinion that the

appointment of the Trustee in the manner contemplated in the

proposed financing complies with the requirements of para~rdph

(a) (4) of rule 3a-7.
8 Such standard of care is also sUbstantially consistent with

that imposed on indenture trustees under Section 315 of the

Trust Indenture Act of 1939, as amended.

Division of Investment Management, p. 9

Global ECONS would like the flexibility to proceed with

the offering of certificates as contemplated hereby at the

earliest possible time, and would therefore appreciate your

earliest consideration of this matter. If for any reason you do

not concur in our conclusion, we respectfully request a

conference with the Staff prior to any adverse written response

to this letter. If you would like to discuss any issues raised

in the foregoing, or would like further clarification, please do

not hesitate to call David L. Sugerman of this firm at (212)

225-2890 or the undersigned at (212) 225-2422.

Very truly yours,

- I .
  ¡lA-~ ( K
  ~7Perto G. Santos

cc: Monica L. Parry, Esq.

Jennifer G. Cooperman (Goldman, Sachs & Co.)