SEC Division of Investment Management staff letter: Bear, Stearns & Co. Inc.

UNITEO STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON.O.C 20549 ~ DivisiON OF' ~ATION FINANCE January 28 t 1992 Stuart H. eolElIal t Esq. Stroodc & Stroodc & LI!vai Seva1 Haiover Square New York, NY 10004-2594 tL --r (Y¡- 4. f1 ~(' ~ ..""==-.......-- lJ IU/If) ~~~ ~t0) t;~¡J'r;¡rr--- ~li!tr I n¡ /rJ.-. ..,-.;.; --~---,. .....--.....~-, I ..'-......~,., ./ f -=,1 -I Re: Bear, Steams & Co. Inc. Dear Mr. Coleman:
In regard to your letters of JUle 1B, July 24, and ) November 12, 1991 our response thereto is attached to the enclosed photocopy of your correspondence. By doing this, we avoid having to recite or summarize the facts set forth in your letter. Sincerely, , '1J.~~~ i , " " ". V"*"-,.. A _ ""'i "\ ~ . - ......-----..,., Abiqail Arms Deputy Chief Counsel

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RESPONSE OF THE OFFICE OF CHIEF COONSEL DIVISION OF CORPORATION FINANCE RE: Bear, Stearns' Co. Inc. (the -Company") Incoming letters dated June 18, July 24, and November 12, 1991 Based on the facts presented, this Division will not recoJlDllend enforcement action to the Commission if the Company operates the proposed custodial receipt proqram for SBA guaranteed Confirmations of Origination Pees ("COOP") as described in your letters, without registration under the Securities Act of 1933 ("1933 Act..). In reaching this position, the staff notes your opinion that COOFs are exempt from registration under .ection 3 Ca) (2) the 1933 Act. We further note the following: (1) the holder of a custodial receipt will have all the rights and privileges of ownership of the underlying COOF, C 2) the receipt holder, as a real party in interest, will have the riqht, upon default in payment on the underlying COOF, to proceed directly and individually against the SBA or PTA; and (3) the receipt holder will not be required to act in concert with other receipt holders or the custodian. 1L Our position is conditioned on the sponsor obtaining an opinion of counsel on the foregoing as well as to the following: (1) the custodial receipt will evidence an entire and undivided ownership interest in each COOF underlying the receipt; C 2) the custodian will perform only clerical and ministerial services on behalf of the holder of the custodial receipt; (3) neither the custodian nor the Company addi tionaiiy will either quarantee or otherwise enhance the creditworthiness of either the COOF or the custodial receipt; (4) the custodian will undertake to notify receipt holders in the event of a default, and to forward to receipt holders copies of all communications relating to any payment default on a COOF; (5) the CooFs underlying a custodial receipt will not be considered assets of the custodian or sponsoring firm; and (6) no other factors are present, .uch as remarketing agreeaents, that will require the custodial receipt holders to rely upon the custodian or other third party to obtain the benefit of their investment. ¡¿ 1L You should not that this position does not apply where either the SBA has officially disavowed any obliqation to the receipt holders or bas not fully and uncondi tionally guaranteed payment on the COOF. In this regard, we emphasize that, as described above, the custodial arrangements generally are structured to ensure that the custodian's role is essentially passive and that in all material respects the receipt holder is the real party in u

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The Division of Investment Manaqement bas asked us to inform you that it would not recoDend that the Commission take any enforcement action if the Company operates the Proposed Proqram wi thout reqiatration under the Investment Company Act of 1940, provided the Company operates the Proqram according to the representations and condi tions set forth in the foregoinq response of the Diviaion of Corporation Finance, particularly the representation that each custodial receipt will evidence and entire and undivided ownership interest in each COOF underlyinq the receipt. Because these positions are based on the representation ..de in your letter, any different facts aay require a different conclusion. Further, these positions only express the Divisions' posi tions on enforcement action and do not express a legal conclusion on the question presented. Sincerely, ohn c.' Brousseau CL~7~~ Special Counsel interest and otherwise treated as the beneficial owner of the underlying COOF. Any aaterial chanqes in the nature of the custodian receipt proqram could lead to a different result. b§, L.Sla., Garv Plastic packaging Corp. ~. Merri~l Lynch, Pierce. Fenner' Smith. Inc., 756 F. 2d 230 (2nd Cir. 19~5) and SEC y. American Board of Trade, 751 F. 2d 29 (2nd Cir.
1984) .
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  ... 11'7113 STIOOCX IV
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  212-806-6049
  Securities Act of 1933, Section S Investment Company Act of 1940,
  Section 3 (a)
  June 18, 1991 ~I::",.....,......:-iio. r.:.... '-.. =:. ; ".' l::. LJ Division of Corporation Finance I Office of Chie.f Counsel i ~'.::: :. Division of Investment Management i..:-::-.:':. .:.:.. . ...:.... Office of Chiê'f Counsel -.. .. - .--.. .. Securities and Exchange Commission .450 Fifth Street, N;W. Judiciary Plaza Washington, D.C. 20549 .~ :.... :~.~ '.)':' ... 1.,,' .. ._", -,,,,, i' I REOD S.E.C. , .......:-: 1 9 .Ci~;l i,. , ~ Re: . Bear, Stearns & Co. Inc. We are writing on behalf of Bear, Stearns & Co. Inc. ("Bear Stearns") in connection with its proposed Custodial ~cei?t Program for SBA-guaranteed Conf irma tions of Originator Fees (the . Proposed Program H ) . The custodial arrangements of the Proposed Program are similar in all material respects to those that formed the basis for no-action positions of the Division of Corporation Finance and the Division of Investment ~nagement relating to custodial receipts for components of stripped municipal bonds. Merrill Lynch, Pierce, Fenner & Smith Incorpora ted (September 26, 1990). According ly, we are seeking your advice not because we believe the Proposed Program differs significantly from the program described in the Merrill Lynch letter, but because we would appreciate receiving your advice addre~sed to the spe,ific facts of the Proposed Program. , ........ O.t.1D03I lIS2 usa SMntlt. SlttIl I.W. SCI25C 1M Aiiotln. CA 1OOI7.øa IDLi irMury Para Usl 11311l110O .....R.it131.. IOC SellllllllQylll ~ -351t1OO ...iasz........ry ~..11 .,,,...., mUC37

.. . '. . .... - . ...-' ~. --- -- --- ------.-~-~-..-- ~....--'"..~............-~1'l".....__...... .............-. '"';""'"....-.~.i,. . ; '.- .. .' .;." ..; ;....: '.. ,.. . :- .. ..... ...._- _.- .. .. . . . .. . .;' . . ..... ..... . . .. . .. . \ - . . .... - .. .~'... . .' '.. -',..- .. ." \ .'. . . '. --...S9t~ or sg,NOf or ~ ... . .. . ..' ....... ...;' ~-""':-~"7'T""'...'. .... ",:.. . ~.......~. .."- . . .. . . --:-- .,\ ..', . ~ ."j, . . ì Division of Corporation Finance June 1e, 1991 Pa;e 2 ) We respectfully request that you confirm that:
(i) the Division of Corporation Finance will not recommend that the Securities and Exchange Commission (the -Commission-) take any epforcement action under the Securities Act of 1933, as Amended (the -Securities Act-), against Bear Stearns or any other party involved in the Proposed Program, if the Proposed Program operates without registration of the custodial receipts under the Securities Act; and (ii) the Oi vision of Investment Management will not recommend that the Commission take any enfQrcement action under the Investment Compeny Act of 1940, as amended (the -Investment . Company Act to ), if, in connection with the Proposed Program, 'the Custodian described below operates without registration of the Proposed Program as an investment company under the Investment Company Act. We are not requesting relief with respect to the status of the COOFs under the securities laws. Pursuant to the Proposed Program, Bear Steerns would sell, f~om time to time, a custodial receipt, representing a 100\ ownership interest in a number of Confirmations of Origination Fees or -COOFs to, to a single institutional accredited investor in an amount expected to exceed Sl,OOO,OOO. Bear Stearns anticipates that, at any time, more than one investor would own separate custodial receipts, each representing 100% ownership interests in separate COOFs (but no two investors would own undivided interests in the same receipt). Each COOF represents the right to receive a portion of the future interest payments due on obligations guaranteed by the full faith and credit of the United Stetes government through the u. S. Small Business Administration (the - SBA" ) . The COOFs arise primarily from the process of pooling the SBA-guaranteed portions of loans intp SBA-guaranteed loan pool certificates and from the requirement ~hat all of the loans in a pool must have the same interest rate. Since the underlying loans generally are originated with different rates of interest, many of these loans ) , ..

. . -... -.- .; - .. - - ,... _. . . l ...... , . . . ~ ~ S"£øJ gr g.",., ....;.. . .. . ì Division of Corporation Finance June 1 e, 1991 . have interest rates exceeding the pool rate. This excess interest is .tripped from the loan by the SSA'. Fiscal and Transfer Agent (the -FTA.). The interest payments represented by each COOF are guaranteed by the full faith and credit of the U.S. government. Once the loans from which the interest is stripped are retired, the COOF is extinguished, but the quarantee continues in effect with respect to accrued, but unpaid, interest. Anticipating that the proposed investors desiring to purchase many CooFs would not want the inconvenience of receiving multiple payments or the administrative responsibilities of monitoring payments i Bear Stearns proposes to create a custody arrangement wi th an independent custodian, expected to be a financial insti tution (the .Custodian.), to provide. certain administrative services. For ease in' comparing the custodial arrangement with the arrangement described in the Herrill Lynch letter, we will analyze the nine factors deemed significant by the Staff in the Merrill Lynch letter based on the facts of the Proposed Program. We have enclosed a copy of the proposed form of custody agreement. We do not believe that any other facts are present which are i~corisistent wi th the facts deemed relevant in the Merrill Lynch letter:
i. The receipt holders 'will have all the rights and privileges as holders of the underlying securities.
Each custodial receipt represents a direct interest in a number of specific coors. While each coor will be registered on the books of the FTA in the name of the Custodien or its nominee for the benefit of the receipt holder i the custodial arrangement may be cancelled as to any coor by the receipt holder at any time upon notice to the Custodian. Upon cancellation, the Custodian promptly will arrange to have the relevant COOF reregistered in the name of the beneficial owner, to have the existing custodial receipt cancelled and to have issued to the beneficial owner a new custodial receipt evidencing ownership of the remaining COOFs represented by the cancelled custodial receipt. If the receipt holder no longer desi!ed the administrative benefits of the custodia 1 arrangement, it could request that all COOFs be reregistered in its name. In .. ..

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. . ... . . .. .....'; ..~...- ~'r¡;9:kJ~~ Division of Corporation Finance June 18, 1991 connection with the transfer of registration of the CooFS, the Custodian may require the custodial receipt holder to file certain information, execute certificates and make such representations and warranties as the Custodian reasonably may deem necessary or proper to comply with applicable law and to pay any taxes or governmental charges due in connection therewi th. It is anticipated that these requirements would not entail any material delay or burden on the receipt holders. The Custodian will charge only a nominal administrative fee for its services. ) .
2. Each receipt holder, as a real party in interest, will have
the right, upon default of the underlying securities, to proceed directly and 1Ddi vidually against the issuer of those securities. Eac~ receipt holder will retain the right to proceed directly against the SBA in the event of a default with respect to any COOF. The Custodian will be prohibited without the consent of the affected receipt holder from taking any action to enforce the SBA guarantee wi th respect to a COOF. If requested, the Custodian will use its best efforts to take such action, at the expense of the receipt holder, as may be necessary or appropriate to assist a receipt holder in proceeding against the SBA or the FTA or to prese~e the right of the holder to proceed against to SBA or FTA, but there is no reason other than the receipt holder's administra ti ve convenience for it to do so. ..
3. The receipt holder will not be required to act in concert wi tr.
other receipt holders or the custodian.
An individual receipt holder will not be obliga ted to join the Custodian or any other receipt ho~er to exercise any rights. Each COOF will rllate to a single loan in which no other person will have any interest in the excess interest applicable thereto. Again, the , ) ..

~."" . \ ..,;'-" ~.~....io._"~"'.~~"."" J y.... J. . ,.~~~t;~ . .1 i . .. . -..'. . Division of Corporation Finance June i B, 1991 ) Proposed Program is intended to create a discretionary arrangement whereby a COOF buyer is relieved of administrative burdens. It is designed to be used by each COOF buyer without the neces s i ty of acting in concert with any other COOF buyer. ~he position of the Division of Corporation Finance was further condi tioned on the sponsor obtaining an opinion of counsel to the effect of the three factors enumerated above; such an opinion will be obtained in connection with the Proposed Program.
4. Each receipt represents the entire interest in a discrete,
identified .interest payment or principal payment on the 'underlying securi ty. Each-custodial receipt will evidence a 100% ownership interest in each COOF covered by the custodial receipt. S. The custodian bank performs only clerical or ministerial' services on behalf of the receipt holders. ) As described above, the custodial arrangement is intended only as an administrative convenience to a' purchaser of more than one coor. The Custodian will perform only clerical or ministerial services on behalf of the receipt holders, such as collecting 'and distributing payments on the coors and notifying receipt holders of borrower defaults. For its services, the Custodian will be paid e nominal annual administrative fee, currently not expected to exceed $26 per COOF, which will be deducted annually from the payments to be delivered by the Custodian to the receipt holder. ..
6. Neither the custodian nor sponsor additionally will quarantee
or otherwise enhance the creditworthiness of the underlying security or the strip~ed coupon security. No third party guarantee is provided in connection wi th the Proposed Program. We ... ..

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Diviiion of Corporation Finance
June 18, 1991
ì understand that the purchaier will be buying iti beneficial intereit in the coors baied in large meaiure on the SBA guarantee that is an intrinsic part of a COOF.
7. ~he cuitodian undertakes to notify receipt holders in the
event of a default, and to forward to receipt holders copies of all communications from the issuer of the underlying security to the bondholders. The custody agreement will provide. that upon written notification by the FTA that a borrower has defaulted on payment of a COOF, or if the FTA fails to forward payment, the Custodian will give . prompt notice to the related receipt holder setting forth (a) the identifying number and l'orrower ' s name w~ th respect to the affected COOF, (b) the date of notice of . def&Ul t, (c) the face amount as to which such defaul t relates and (d) any other info~tion in the possession of the Custodian that the Custodian deems appropriate. ì e. An opinion of counsel is' provided indicating that the underlying securities will not be considered assets of either the sponsoring firm or custodian bank. Such an opinion will be provided in connection wi th the Proposed Program. ,
9. Other factors are not present, such as remarketing agreements,
the t would require the investors in the securities to rely upon the .sponsor to obtain the benefit of the their investment. Nei ther Bear Stearns nor any third party has agreed to make a market in the COOFs or the receipts on behalf of or in connection with the Proposed Program, although Bear Stearns understands that an independent market currently exists for SBA quaranteed loans and COOFs. Bear Stearns may, but is not obligated to, partic~ate in such market. . ) ..

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! . .~ " i t .Division of Corporation Finance June 18, 1991 Page' ì No other factors are present in the Proposed Program that would require receipt holders to rely on Bear Stearns to obtain the benefit of their investment. Based on the foregoing, we are of the opinion that the Proposed Program neither gives riie to any security separate from the COOFs for purposes of the Securities Act nor creates an investment company wi thin the meaning of the Investment Company Act. For the reasons set forth above, we request that you confirm that (i) the custodial receipts may be issued without registration under Section 5 of the Securities Act and (ii) the Custodian may operate without registration of the Proposed Program as an investment company under the Investment Company Act. If you determine that you are unable to render the requested advice i we would appreciate the opportunity to discuss our request wi th the Staff prior to the issuance of a Written reply to this letter. - Should members of the Staff have any questions or comments concerning this letter, please do not hesitate to telephone the undersigned at the number set forth above. ... '- . ) o.

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( ; j _.':: ;:: .'..,- .~i; ...:. t:¡: ;'11:...:~ r ,":~.' -. ::--"-;- . ' . ~~. - .' BEAR, STEARNS &" 'CO. .INC. and CHEMICAL BANK as Custodian and OWNERS OF CUSTODIAL RECEIPTS CUSTODY AGREEMENT Dated as of , 1991 )

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TABLE OF CONTENTS
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PREAMBLE. . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
Form, Execution and Delivery, and Transfer and Exchange of Custodial Receipts; Deposit of CooFs
Section 2.1 Form and Delivery of Custodial Receipts.. 2
Section 2.2
Section 2.3
Section 2.4
Section 2.5
Section 2.6
Section 2.7
Section 3.1
Section 3.2
Section 3.3
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Transfer and Exchange of Custodial Receipts . . . . . . . . . . . . . 3 Deposi t of COOFs; Execution and Delivery of Custodial Receipts. . . . . . . . . .. 4 Surrender of Custodial Receipts and Wi thdrawal of COOFs. . . . . . . . . 5 Mutilated, Lost, Stolen or Destroyed Custodial Receipts . . . . . . . 5 Cancellation and Destruction of Surrendered Custodial Receipts 6 Persons Deemed Owners. . 6
ARTICLE III
Payments With Respect to the COOFs and Custodial Receipts Payments of Amounts Received with Respect
to COOFS . . . . . .. ...... 6
Maintenance of Offices for Payment .
Receipt of Insufficient Funds. . . .

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ARTICLE iv
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The Custodian and the Depositor
Section 4.1 No Liability of the Custodian or the
Deposi tor on the COOFs; Owner to Proceed against SBA, l"TA or Lender . . . . . . . . 7
Section 4.2 Prevention of or Delay in Performance by
the Parties. . . . . . . . . . . . . . . . 8
Section 4.3 Obligation of the Custodian and Depositor. 9
Section 4.4 Charges and Expenses . . . . . . . 10
Section 4.5 Insurance. . . . . . . . . . . 10
Section 4.6 Indemnification and Contribution . . . . . 11
Section 4.7 Resignation and Removal of Custodian;
Appointment of Successor . . . . . . . 11
Section 4.8 Merger, Conversion, Consolidation or Succession to Business . . 12
Section 4.9 Termina tion . . . . . . . . . . . . . 12
ARTICLE V
Miscellaneous
Section 5.1 Amendmen ts . . . . . . . . . . . . . . 12
Section 5.2 Execution in Counterparts; Inspection of
Copies . . . . . . . . . . . . . 12
Section 5.3 Agreement for Exclusive Benefits of Parties. . . . . . . . . . . . . . . . 13
Section 5.4 Effect of Invalidity of Provisions . . . . 13
Section 5.5 Notices. . . . . . . . . . . . . . 13
Section 5 . 6 Owners of Custodial Receipts as Parties. . 14
Section 5.7 Successors . . . . . . . . . 14
Section 5.8 Survival . . . . . . . . . 14
Section 5 . 9 Governing Law. . . . . . 14
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SIGNATURES
Exhibit A
Exhibit B
Exhibit C
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Form of Custodial Receipt
Form of Order
Form of Opinion of Counsel to Depositor A-1 B-1 C-1 (iii)

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CUSTOpy AGREEMENT
This CUSTODY AGREEMENT, dated as of , 1991, among Bear, Stearns' Co. Inc. (the "Depositor"), Chemical Bank, a New York banking corporation, as custodian (the "Custodian" ), and all owners from time to time of Custodial Receipts delivered hereunder. lii.:rli~~~~:r1i :
WHEREAS, the Depositor desires to provide for the deposit of COOFs from time to time with the Custodian and for the delivery by the Custodian of Custodial Receipts evidencing ownership of all right, title and interest in such COOFs. NOW THEREFORE, in consideration of the premises and of the agreements contained herein, the Depositor and the Custodian agree as follows:
ARTICLE I
Def ini tions
The following definitions shall for all purposes, unless otherwise clearly indicated, apply to the related terms used in this Agreement:
"Business Day" shall mean any day other than (a) a Saturday or Sunday or (b) a day on which the offices of the Custodian in New York are authorized or obligated by law or executive order to be closed. "COOF" shall mean a the FT~ behalf of the ( "SBA" ) . Confirmation of Originator Fee issued ly u. S. Small Business Administration K \ "Custodial Receipt" shall mean a Custodial Receipt, substantially in the form set forth in Exhibit A hereto, evidencing ownership of all right, title and interest in one or more COOFs. "Custodial Receipt Series Designation" shall mean the series designation given to an issuance of Custodial Receipts. "Custodian" shall mean Chemical Bank, and any successor Custodian appointed pursuant to Section 4.7 hereof. "Face Amount" shall mean with respect to any COOF ~ Custodial Receipt, the principal balance at the time ~~he issuance of the COOF or COOFs as evidenced by the Custodial Receipt. )

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-Final Maturity pate- .hall mean the latest maturity date of a COOF underlying a Custodial Receipt. "FTA" shall mean the Fiscal and Transfer Agent appointed by the SBA with respect to the SBA's Section 7 (A) proqram. "Lender" shall mean the institution which made the loans underlying a COOF. "Order" shall mean a written order, .ubstantially in the form of Exhibit B hereto, delivered to the Custodian by the Deposi tor pursuant to Section 2.3 (b) and .iqned by any Senior MAnaging Director of the Depositor listed in a certificate of the Secretary or any Assistant Secretary of the Depositor delivered to the Custodian. "Payment" with respect to any COOF shall mean each scheduled interest payment due on such COOF. "Register" shall have the meaning given it in Section 2.2(a) hereof. "Series" shall mean the Custodial Receipt delivered hereunder bearing the Custodial Receipt Series Desiqnation and evidencing ownership of all right, title and interest in the COOFs deposited with the Custodian pursuant to the Order authorizing such Custodial Receipt Series. "Weighted Average Maturity Date" shall mean the weighted average maturity date of the COOFs underlying the Custodial Receipt.
ARTICLE II
Form and Delivery of Custodial Receipts; Transfer and Exchange of Custodial Receipts; Deposit of COOFs
Section 2.1 Form and Delivery of Custodial Receipts.
(a) The Custodial Receipt of each Series shall be substantially in the form set forth as Exhibit A annexed to this Agreement, with appropriate insertions, modifications and omissions as hereinafter provided. The Custodial Receipt of any Series may be endorsed with or have incorporated in the text thereof such legends, recitals, disclosure provisions or changes not inconsistent with the provisions of this Aqreement as may be required to comply with any applicable law or regulation.

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(b) The Custodial Receipt of each Series may be delivered hereunder only in the Face Amount specified in the Order authorizing the Custodial Receipt of such Series. (c) Each Custodial Receipt shall be executed by the Custodian by the manual aiqnature of one of its duly authorized officers. No Custodial Receipt shall be entitled to any benefits under this Agreement or be valid or obligatory for any purpose unless such Custodial Receipt shall have been executed as above provided by a duly authorized officer of the Custodian.
Section 2.2 Transfer and Exchange of Custodial Receipts.
(a) Custodial Receipts shall be deliverable in registered form only. The Custodian shaii keep at an office designated by it in. the City of New York a register (the -Register") in which it shall record for the Custodial Receipt of each Series the name and address of the registered holder of the Custodial Receipt of such Series, the Face Amount and Final Maturity Date of the Custodial Receipt of such Series, and such other information furnished to the Custodian as may be required by applicable law or regulation. Custodial Receipts shall be transferable only upon the Register, subject to such reasonable regulations as the Custodian may prescribe. (b) Upon surrender for registration of transfer of any Custodial Receipt at an office designateè by the Custodian in the Ci ty of New York, the Custodian shall execute and deliver, in the name of the transferee, a new Custodial Receipt evidencing ownership of the same COOFs and having the aggregate Face Amount as the Custodial Receipt so surrendered. (c) Custodial Receipts surrendered for registration of transfer shall be duly endorsed by the registered holder thereof, or be accompanied by a written instrument of transfer, in form reasonably satisfactory to the Custodian duly executed by such registered holder or by its attorney-in-fact duly authorized in wri ting. As a condition to the registration of transfer or exchange of any Custodial Receipt, the Custodian will require the certified taxpayer identification number of the registered holder of the Custodial Receipt (or certification satisfactory to the Custodian that a certified taxpayer identification number is not required to be obtained under applicable laws and regulations), and payment by such holder of a sum sufficient to cover any tax or other governmental charge imposed in connection therewith. As a further condition, each proposed transferee of a Custodial Receipt shall furnish to the Custodian a certification that (i) such transferee is a corporation, and files its income tax returns as a corporation and (ii) such transferee is an -accredited investor" as defined in Rule SOI(a) of the Securities Act of 1933, as amended. As a condition to the delivery of any

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CU8todial Receipt upon transfer, the Custodian may require payment of a reasonable aervice charge.
Section 2.3 Deposit of CooFs: Execution and Delivery of
Custodial Receipts.
(a) Each Custodial Receipt of a Series shall evidence the ownership of all right, title and interest in the COOFs deposited hereunder with respect to such Series (and with respect to no other Series), including all the Payments due thereon. (b) The Depositor, for its own account or as agent, at any time and from time to time and subject to the consent of the Custodian, may deliver one or more Orders for a Custodial Receipt of a Series to the Custodian directing the Custodian to execute and deliver the Custodial Receipt evidencing ownership of the CooFs described therein, upon deposit of such CooFs with the Custodian, on the date specified therein. Any such Order shall be delivered to the Custodian not less than three days prior to the date on which the applicable Custodial Receipt is to be delivered. Each Order shall contain the information set forth in Exhibi t B hereto. (C) The Depositor represents and warrants that the Deposi tor will be duly authorized to deliver any CooFs deposited wi th the Custodian hereunder, and that immediately prior to the deposi t of any COOFs hereunder, the Depositor will own such COOFs free and clear of any right, charge, security interest, lien, pledge, encumbrance or claim, other than such as may have been granted to the purchaser under the Purchase Agreement to which this Agreement from time to time may be an exhibit. The foregoing representations and warranties shall survive the delivery to the Custodian of any COOFs deposited hereunder, and the deli very by the Custodian of the Custodial Receipt of the related Series. The Custodian shall have no responsibility for the information supplied by the Depositor in any Order or any descripti ve memorandum. (d) The Custodian shall execute and deliver to the Depositor for the benefit of the purchaser thereof, on the date any COOFs are deposited hereunder, at the Depositor'S offices located at 245 Park Avenue, New York, New York, or to a safekeeping account in the Depositor'S name at Chemical Bank, the Custodial Receipt that conforms in all respects to the specifications set forth in the Order authorizing such Custodial Receipt Series. It shall be a condition to the Custodian's obligation to deliver each Custodial Receipt of a Series hereunder that the Depositor shall have previously delivered to the Custodian the opinion of its internal counsel, substantially in the form attached hereto as Exhibit C (provided that the first such opinion shall be rendered by Stroock & Stroock & Lavan).

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(e) The Custodian shall have no obligation to effect transfers or pledges of CooFs or parts thereof in accordance with
Section 8-320 of the Uniform Commercial Code.
Section 2.4 Surrender of Custodial Receipts and Withdrawal
of COOFs. Upon surrender at an office designated by the Custodian in the City of New York of the Custodial Receipt evidencing ownership of the underlying COOFs, the owner of such Custodial Receipt shall be entitled to have the registration of any or all the related CooFs transferred to the name of the person or entity desiqnated by such owner. As promptly as practicable after such surrender, the Custodian shall cause the surrendered Custodial Receipt to be cancelled and cause the reregistration of the COOFs that are being transferred, and shall deliver (a) to the person or entity designated by the owner of the surrendered Custodial Receipt, the COOFS that have been reregistered, together with executed assignment forms and such description of the COOFs provided by the FTA as required by applicable law or regulation, and (b) to the owner of the surrendered Custodial Receipt, a new Custodial Receipt of the same Series evidencing ownership of the remaining COOFs of such Series (to the extent any COOFs represented by the surrendered Custodial Receipt are to remain registered in the name of the Custodian). As a condition to so transferring registration of any COOFs, an owner of the Custodial Receipt may be required to provide such proof of residence or other information, to execute such certificates and to make such representations and warranties as the Custodian may reasonably deem necessary or proper to comply with applicable law, and to pay any reasonable service charges of the Custodian and any taxes or other governmental charges due in connection therewith. Any COOFs received in exchange for the Custodial Receipt subsequently may be deposited hereunder by the Depositor for a Custodial Receipt of a new Series pursuant to Section 2.3, but may not be exchanged by any other person for a Custodial Receipt of any Series.
Section 2.5 Mutilated, Lost r Stolen or Destroyed Custodial Receipts. In case any Custodial Receipt is mutilated, lost,
stolen or destroyed, the Custodian, in its discretion and upon payment by the registered holder of such Custodial Receipt of all related expenses and any reasonable fee which the Custodian may impose, may execute and deliver a Custodial Receipt of the same Series and Face Amount evidencing ownership of all right, title and interest in the same COOFs in exchange and substitution for such mutilated Custodial Receipt upon cancellation thereof, or in lieu of and in substitution for such lost, stolen or destroyed Custodial Receipt, upon the registered holder thereof filing with the Custodian evidence satisfactory to the Custodian of the destruction, loss or theft of such Custodial Receipt and the authentici ty thereof and of the registered holder's ownership thereof and furnishing the Custodian with indemnification satisfactory to it.

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Section 2.6 Cancellation and Destruction of Surrendered
Custodial Receipts. A Custodial Receipt surrendered to the Custodian shall be cancelled by the Custodian. The Custodian is authorized to destroy Custodial Receipts so cancelled.
Section 2.7 Persons Deemed Owners. Prior to due
presentment of a Custodial Receipt for reqistration of transfer, the Custodian may treat the person in whose name such Custodial Receipt is registered as the owner of such Custodial Receipt for the purpose of receiving payment on such Custodial Receipt and for all other purposes whatsoever, whether or not payment of such Custodial Receipt is overdue, and neither the Custodian nor any agent of the Custodian shall be affected by notice to the contrary.
ARTICLE III
Payments with Respect to the COOFs and Custodial Receipts
Section 3.1 Payments of Amounts Received with Respect to
COOFs.
(a) The Custodian, by itself or acting through an agent, shall establish and maintain with respect to the Custodial Receipt of each Series a special account, separate from all other assets of the Custodian or such agent (including the assets of any other owner of a Custodial Receipt), for all of the Payments received by it on the related COOFs. (b) Any Payment received by the Custodian on a COOF deposi ted hereunder shall be applied by the Custodian to the payment of the Custodial Receipt evidencing ownership of such Payment subject only to any applicable tax or other governmental or FTA charges. Subject to the preceding sentence and to Section
4.4 hereof, all Payments received by the Custodian on a COOF
deposi ted hereunder shall be held by the Custodian without interest in the special account for the COOFs of such Series until required to be disbursed in accordance with the provisions of this Agreement or as otherwise required by law, and such moneys shall be segregated by separate recordation on the books and records of the Custodian. (C) The Custodian, acting directly or through any agent appointed pursuant to Section 3.2, shall make all payments with respect to a Custodial Receipt (to the registered holder as of the 15th day of the month) by check, or upon the written request of the owner of a Custodial Receipt with the consent of the Custodian, by wire in Federal funds at a charge of $15.00 per wire, on the last day of the month with respect to payments )

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I' received on or before the 27th day of auch month. If the last day of the month falls on a day that is not a Business Day, the Custodian will forward the check or transmit the wire on the next Business Day. Payments received after the 27th day of the month will be paid by check or wire on the payment date in the following month.
Section 3.2 Maintenance of Offices for PAyment. So long as
any Custodial Receipts remain outstanding, the Custodian ahall ..intain an office in the City of New York. The Custodian has initially designated the office of Chemical Bank, located at S5 Water Street, Room 610, New York, New York 10041, in the City of Mew York as the office for such purpose. In the event the Custodian shall designate or appoint a new office or aqency for payment of a Custodial Receipt of a Series theretofore delivered hereunder, in place of the office or agency referred to in the preceding sentence, notice of auch designation ahall be given in the manner prescribed in Section S. S.
Section 3.3 Receipt of Insufficient Funds. If the funds
received by the Custodian in respect of any Payment due on any COOF deposited hereunder are insufficient to pay the Custodial Receipt evidencing ownership thereof, the owner shall bear any loss. Nothing in this Agreement shall require the Custodian to advance, expend or risk its own funds.
ARTICLE IV
The Custodian and the Depositor
Section 4.1 No Liability of the Custodian or the Depositor
on the COOFs i Owner to Proceed Against SBA, FTA or Lender. (a) Neither the Custodian nor the Depositor shall have an obliga tion on or with respect to the COOFs or parts thereof, except as provided in Section 3.1 with respect to the Custodian. The respective obligations of the Custodian and the Depositor wi th respect to a Custodial Receipt shall be solely as set forth in this Agreement. ( b ) Upon written noti fica tion by the FTA tha t a borrowe r has defaulted on the payment of a COOF or if the FTA fails to forward payment, the Custodian shall promptly give notice to the owner of the related Custodial Receipt, setting forth (a) the FTA identifying number and borrower's name with respect to the COOF affected thereby, (b) the date of the notice of default from the PTA, (C) the Face Amount to which such default relates, and (d) any other information in the possession of the Custodian that the Custodian may deem appropriate. In cases where the Custodian has received notice of default, the Custodian may, upon receipt of a request from the owner of the related Custodial Receipt, submit

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, the appropriate coor and the redemption fee to the PTA on behalf of 8uch owner for the final distribution payment. The redemption fee payable to the PTA will be deducted from the monthly payment required to be paid to the owner of the Custodial Receipt. ( c ) The Custodian and the Depositor are prohibited from proceeding against SBA, FTA and/or the Lender in the event of a default and asserting the rights and privileges of owners of coors, and neither has a duty to do 80, except that the Custodian, at the request of any owner of a Custodial Receipt, but at the expense and risk of such owner, shall use its best efforts to take such action as may be necessary or appropriate (a) to assist such owner in proceeding aqainst SBA or PTA, or (b) to preserve the right of such owner to so proceed. As a condi tion to taking any such action, the Custodian may require that the owner of a Custodial Receipt provide the Custodian with security or indemnity deemed satisfactory and sufficient in the sole. judgment of the Custodian. Nothing herein shall in any way limi t the right of an owner of Custodial Receipts to request wi thdrawal of the coors represented by such Custodial Receipts, as provided in Section 2.4, and to proceed against SBA, rTA and/or the Lender.
Section 4.2 Prevention of or Delay in Performance by the Parties.
(a) The Custodian undertakes to perform only such duties as are expressly set forth in this Agreement. The Custodian shall not incur any liability to any owner of Custodial Receipts or to the Depositor if by reason of any provision of any present or future law or regulation or any action of any governmental authori ty, or by reason of any act of God or war or other circumstance beyond its control, the Custodian shall be prevented or forbidden from, or subjected to any civil or criminal penalty on account of, doing or performing any act or thing which by the terms of this Agreement is to be done or performed by it. The Custodian shall not incur any liability to any owner of Custodial Receipts by reason of any non-performance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of this Agreement is to be done or performed by it, to the extent of and for the duration of the aforesaid disability. (b) The Depositor undertakes to perform only such duties as are expressly set forth in this Agreement. The Depositor shall not incur any liability to any owner of Custodial Receipts or to the Custodian if by reason of any provision of any present or future law or regulation or any action of any governmental authori ty, or by reason of any act of God or war or other circumstance beyond its control, the Depositor shall be prevented or forbidden from, or subjected to any civil or criminal penalty on account of, doing or performing any act or thing which by the terms of this Agreement is to be done or performed by it. The )

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Deposi tor shall not incur any liability to any owner of Custodial Receipts by reason of any non-performance or delay, caused as foresaid, in the performance of any act or thing which by the terms of this Agreement is to be done or performed by 1 t, to the extent of and for the duration of the aforesaid disability.
Section 4.3 Obligations of the Custodian and the cepe'i tor.
(a) Hei ther this Agreement nor the Custodial Receipts ahall be deemed to evidence or to create any fiduciary relationship between the Custodian or the Depositor and the owners from time to time of Custodial Receipts. (b) Neither the Custodian nor the Depositor assumes any obligation or shall be subject to any liability under this Agreement to owners of Custodial Receipts, other than by reason of willful misconduct, bad faith or gross negligence, in the performance of such duties as are specifically set forth in this Agreement. Hei ther the Custodian nor the Depositor shall be liable for indirect, special or consequential damages arising in connection with their obligations under this Agreement. Hei ther the Custodian nor the Depositor shall be under any obligation to take any action hereunder which may tend to involve it in any expense or liability, the payment of which wi thin a reasonable time is not, in its reasonable opinion, assured to it. (C) Subject to their liability for willful misconduct, bad faith or gross negligence as provided in paragraph (b), neither the Custodian nor the Depositor shall be liable to any owner of a Custodial Receipt for any action or non-action by it in reliance upon the advice of or information from legal counsel, accountants, such owner of a Custodial Receipt or any other person believed by it in good faith to be competent to give such advice or information. The Custodian and the Depositor may each rely and shall be protected in acting upon any written notice, order, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. Any such document evidencing the authority of various persons to act for or on behalf of the Depositor or the Custodian may be considered as in full force and effect until notice to the contrary is given to the Custodian or the Deposi tor, as appropriate. (d) The Custodian or the Depositor (for itself or others) may own and deal in the COOFs or parts thereof and in the Custodial Receipt of any Series. (e) For the benefit of the Parties, including any owner from time to time of the Custodial Receipt of any Series issued hereunder, the Parties have agreed to allocate federal tax reporting duties relating to a Custodial Receipt as set forth in this subsection. Such allocation of duties in connection with

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. the issuance or maintenance of a Custodial Receipt or the performance of any other duties hereunder ahall not relieve any owner of a Custodial Receipt of any tax reporting or payment obligation arising from the ownership or transfer of a Custodial Receipt, or assume any state or local tax obligation otherwise imposed on the owner of a Custodial Receipt. Subject to the foregoing, (i) upon execution of this Agreement the Depositor will furnish to the Custodian an opinion of counsel confirming that no tax reporting requirement is then applicable to Custodial Receipt Series One, (ii) the Custodian hereby confirms that it will maintain arrangements with a qualified national accounting firm to monitor future developments in tax law for changes which may apply to or affect Custodial Receipts outstanding from time to time, and such accounting firm will be obligated to advise the Custodian of such requirements and procedures to comply therewi th, (iii) to the extent required in order for the Custodian to satisfy any future reporting requirements arising out of the issuance or maintenance of any Custodial Receipt, the Depositor will provide to the Custodian a schedule of original issue discount based upon the assumption of prepayment rate determined by the then owner of each respective Custodial Receipt so affected from time to time, or any other information in the Oeposi tor's possession which the Custodian deems necessary to satisfy any future reporting requirements and (iv) in accordance with the advice of the accounting firm retained by it, the Custodian will comply with any applicable tax reporting responsibili ties arising out of the issuance or maintenance of the Custodial Receipts.
Section 4.4 Charges and Expenses. The Depositor wi 11 pay
all the fees and expenses of the Custodian in connection with the delivery of the Custodial Receipts in accordance with the written agreements to be entered into by the Oeposi tor and the Custodian from time to time. Any charges of the Custodian under Section 2.2(c), 2.4 or 2.5 and any annual administration fees related to the performance of the Custodian's duties hereunder shall be paid by the owner of the applicable Custodial Receipt. Such annual administration fees shall be in the amount set forth on Schedule B of the Purchase Agreement to which this Agreement from time to time may be an exhibit, and shall be paid by deduction from the amounts otherwise required to be delivered by the Custodian to the owner of the applicable Custodial Receipt pursuant to Section
3.1 on January 1st of each year. The Custodian in no event shall
acquire any lien upon any COOFs deposited under this Agreement, or upon any moneys received with respect thereto, nor shall the Custodian acquire any claim against the owners from time to time of Custodial Receipts, by reason of the failure of the Depositor to pay any charges or expenses of the Custodian that the Deposi tor may be required to pay.
Section 4.5 Insurance. The Custodian shall at all times
maintain a fidelity bond in reasonable form and amount to protect )

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Section 4.6 Indemnification and Contribution.
The Depositor agrees to indemnify the Custodian against, to defend, and to hold it harmless from, any losses, claims, damages, expenses or other liabilities, joint or aeveral, arising from any reason (including, without limitation, violation of applicable laws or trademarks or service marks) (referred to in this Section 4.6 as "liabilities"), and any related out-of- pocket expenses (including, without limitation, reasonable fees and expenses of legal counsel), which ~y arise out of acts performed or omitted in accordance with this Agreement, as the same may be amended, supplemented or modified from time to time, in relation to the COOFs, or the Custodial Receipts delivered in respect of such COOFs, other than any liabilities and expenses arising out of the Custodian's gross negligence, willful misconduct, or bad faith. If the indemnification provided for in the preceding paragraph is invalid or unenforceable, then the Depositor shall contribute to the amount paid or payable by the Custodian as a resul t of such liability in such proportion as is appropriate to reflect the relative benefits received by the Depositor, on the one hand, and the Custodian, on the other, from the delivery and sale of the COOFs and the related Custodial Receipt of the Series to which such liability relates. For this purpose, the benefits received by the Depositor shall be the aggregate amount received by it upon the sale of the COOFs and the related Custodial Receipt of such Series, less the costs and expenses of such sale, incl uding the cost of acquisition of the COOFs, and the benefits received by the Custodian shall be the aggregate amount of fees recei ved by it as Custodian, less the costs and expenses incurred by it as Custodian in respect of the Custodial Receipt of such Series and the COOFs evidenced thereby. If, however, the allocation provided by the immediately preceding sentence is not permi t ted by applicable law, then the Depositor shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Depositor, on the one hand, and the Custodian, on the other, in connection wi th the actions or omissions which resulted in such liability, as well as any other relevant equitable consideration.
Section 4.7 Resignation and Removal of Custodian;
Appointment of Successor.
(a) The Custodian ~y resiqn at any time as Custodian hereunder by written notice of its election to do 80, delivered to the Depositor, such resignation to take effect only upon the appointment of a successor custodian and its acceptance of such

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~. appointment as hereinafter provided. In the event the Custodian resigns hereunder i the Custodian ahall use its best efforts to assist the Depositor in obtaining a aucc.asor cuatodian. ì (b) If at any time the Custodian ahall become incapable of acting or shall be adjudged bankrupt or insolvent or a receiver of the Custodian or of its property ahall be appointed or any public officer ahall take charge or control of the Custodian or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Custodian ahall promptly notify the Depositor of auch disability, and the Depositor may, upon 30 days' written notice to the Custodian, remove the Custodian and appoint a auccessor custodian meeting the qualifications set forth in paragraph (C). (c) In case at any time the Custodian acting hereunder shall resign or be removed i the Depositor ahall use its best efforts to appoint a successor custodian within 30 days after the delivery of a notice of resignation or a notice of removal. Any successor custodian shall be a bank or trust company organized and doing business under the laws of the United States of America or of any State thereof i authorized to act as custodian. If no successor custodian has been appointed as successor custodian wi thin 30 days after the Custodian has given written notice of its election to resign, the resigning Custodian may petition any court of competent jurisdiction for the appointment of a successor custodian. (d) Notice of each resignation and each appointment of a successor custodian shall be given by the mailing of notice to the Depositor and to the registered holders of Custodial Receipts. (e) Every successor custodian appointed hereunder shall execute and deliver to the Oeposi tor and the retiring Custodian an instrument accepting such appointment and thereupon the resignation of the retiring Custodian shall become effective and such successor custodian shall become vested with all the rights and duties of the retiring Custodian. Consistent with the written agreement to be entered into by the Depositor and the Custodian referred to in Section 4.4 and the provisions of such
Section, the retiring Custodian shall (i) upon payment of its
charges, duly assign, transfer and deliver to such successor custodian all records i COOFs and rights to all unmatured interest thereon and moneys held by such retiring Custodian hereunder, and (ii) pay over to such successor custodian any fees or charges previously paid to the Custodian in respect of duties not yet performed under this Agreement which remain to be performed by such successor custodian. Any Custodial Receipts issued by the Custodian that remain outstanding at the time of retirement of the Custodian will remain valid notwithstanding the appointment of a successor custodian. )

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Section 4.8 Merger, Conversion, Consolidation or Succession
to Business.
(a) Any corporation into which the Custodian may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Custodian shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Custodian, shall be the successor of the Custodian hereunder, provided such corporation shall be otherwise eligible under Section 4.7(c) hereof, without the execution or delivery of any paper or any further act on the party of the parties hereto. (b) Any corporation into which the Depositor may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Depositor shall be a party, or any corporation succeeding to all or substantially all of the securities business of the Depositor or its parent, shall be the successor of the Depositor hereunder, provided such corporation shall be otherwise eligible to conduct the securities acti vi ties of the Depositor and its affiliates, without the execution or delivery of any paper or any further act on the part of the parties hereto.
Section 4.9 Termination. This Agreement shall terminate
one year following thE payment in full of the Payments due on the COOFs deposi ted hereunder or the loan underlying the COOF having been retired from the secondary market.
ARTICLE V
Miscellaneous
Section 5.1 Amendments. This Agreement may be amended from
time to time by the written agreement of the Custodian and the Deposi tor to effect any change which they may deem necessary or desirable. No amendment to this Agreement shall affect the obligations of the Custodian under Section 3.1 or otherwise adversely affect the rights of owners of Custodial Receipts of Series theretofore issued or cause Custodial Receipts to be anything other than evidences of the ownership of all right, title and interest in the COOFs deposited hereunder.
Section 5.2 Execution in Counterparts; Inspection of
Copies. This Agreement and any amendment hereto may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. Copies of this Agreement shall be open to inspection ) -13-

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ì during business hours at an office designated by the Custodian in the City of New York by any registered holder of Custodial Receipts.
Section 5.3 Agreement for Exclusive Benefits of Parties.
This Agreement is for the exclusive benefit of the parties hereto and their respective successors hereunder, and shall not be deemed to qive any legal or equitable right, remedy or claim to any other person whatsoever.
Section 5.4 Effect of Invalidity of Provisions. In case
anyone or more of the provisions contained in this Agreement or in any Custodial Receipt of any Series should be or become invalid, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no wise be affected, prejudiced or disturbed ther~by.
Section 5.5 Notices. Any and all notices to be given to
the Depositor shall be deemed to have been duly given if personally delivered or sent by cable, telex, telecopy or facsimile transmission confirmed by letter, addressed to the Depositor at its offices at 245 Park Avenue, New York, New York 10167, Attention: ( ), telecopy number: ( ), or, upon notice given in accordance with the provisions of this Section 5.5, to any other place to which it shall have transferred its main of f i ce, with a copy to the Custodian in the case of any notice given by the owner of a Custodial Receipt. Any and all notices and orders to be given to the Custodian shall be deemed to have been duly given if personally delivered or sent by cable, telex, telecopy or facsimile transmission confirmed by letter, addressed to the Custodian at its designated office at 55 Water Street, Room 610, New York, New York 10041, Attention: Mortgaged-Backed Securities, telecopy number: (212) 820-5898, or, upon notice given in accordance with the provisions of this Section 5.5, to any other place to which the Custodian shall have transferred its designated office in the City of New York. Any and all notices to be given to any owner of a Custodial Receipt shall be deemed to have been duly given if personally delivered or sent first class mail postage prepaid, addressed to such registered holder at the address of such registered holder as it appears on the Register. Delivery of a notice to any owner of a Custodial Receipt sent by mail or by cable, telex, telecopy or facsimile transmission shall be deemed to be effected at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telecopy, telex or facsimile transmission message) is deposited, first class mail postage prepaid, in a post-office letter box. )

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Section 5.6 Owners of Custodial Receipts as Parties. The
owners of Custodial Receipts from time to time ahall be parties to this Agreement and .hall be bound by all of the terms and condi tions hereof and of the Custodial Receipts by their acceptance thereof or by their execution of the Purchase Agreement to which this Agreement from time to time may be an exhibit.
Section 5.7 Successors. This Agreement shall bind the
parties hereto and their respective successors.
Section S. B Survival. The provisions of Sections 2.3 (c) ,
4.3 (b) and 4.6 shall survive any termination of this Agreement.
Section 5.9 Governing Law. This Agreement and the
Custodial Receipts and all rights hereunder and thereunder and all the provisions hereof and thereof .hall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to principles of conflict of laws. IN WITNESS WHEREOF, the Depositor and the Custodian have duly executed this Agreement as of the day and year first above wri tten and all owners of Custodial Receipts shall be parties hereto by virtue of the acceptance by them of such Custodial Receipts or by their execution of the Purchase Agreement to which this Agreement from time to time may be an exhibit. BEAR, STEARNS & CO. INC. By:
Ti tle: Senior Managing Director
CHEMI CAL BANK
By:
Ti tle:
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July 24, 1991
.- . lIZ a sa ' :. ' . .' ..ÎiiiIn H. caieman , . a: . .112 DIDi&S lIZ aiiiiii ..-" - .. . . .. iiza. 1iIIc V7III miaacic ur Securi ties and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 . .'---'. . -...-..-..--S----- r-ic!i...... ......... ~ S -- --" ~ i:JUl,2:i ''':a 1
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Attn: Thomas A. Jones, Esq.
Gentlemen:
Refe=ence. i~made to our letter of June .18, 1991 rega=c~ng Bear, Stearns & CQ. Inc. (-Bear Stearns-) and its proposed Cus~odial Receipt Program from SBA-guaranteed Confirmations of Originator Fees. A copy of our June 18th letter is attached and capitalized t~rms defined therein are used herein with their defined meanings. ) In response to a telephone conversation today with Thomas Jones of the Commission's Staff, we wish to provide certain additional information, as follows:

1. The COOF--which is the government guaranteed secu=itýi to be
   deposited in the proposed custodial a==angement--is create¿ pursuant t~ SaA authority in connection with the assembling of SBA-guaranteed loan pools and not pursuant to the proposed custodial arrangement.. ror your info~ation, we enclose a July 15, 19S5 opiníon of the SBA's Gene=al Counsel which we believe provides useful background information concerning coors and the process resulting in their forma tion. We also enclose a June 20, 1991 letter from the SBA's Acting General Counsel advising of the continued applicability of ~e July 15, 19S8 opinion. In cur earlie= letter, we stated on page 3 that the Fiscal and Transfer Agent (the -FTA-) strips the loans to create the coors. As more preciselY'described on page 5 of the July 15th opinion, the rTA allows pool assemblers to ~trip the loans and the SBA has supported the FTA' s actions. Bear Stearns is an approved SEA pool assembler and coors in respect of pools it assembles would be. included in the proposed custcdial arranqement. , .. ) ........ D.C. 2'llCISo4S2 1'I5G Sc...... sa-1l.W. S2Wmo Us AiigeieS. CA 1OOI7.3llI6 ., CøDry ,.,. biz ic 551110Cl ..... Fl :DU1.23&S IDD S. Jisi:Iyiie .....",
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L~Y#~øo.,~ . 10'~.."'....~.":"'.~'""-4....... ,"'; . . . .". . ... ...... . 0#. .' \ , I t i /' l ~he custodial arrangement vill hold only coors and. their .;: . proceeds. It will not hold SaA loans or other interests ~erein or any other aecuri ties. We hope the foregoing has been helpful. Should members of the Staff have any further quest~ons or comments concerning this or our earlier letter, please do not hesitate to telephone me at ~e number aet forth above. ~ t - .' snw Ene. -
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~.~.=: Oy ri.:il lad ~:i~~ti: A"At of ~r~,~=.;:: F.. ." Thi. 1. 1" :"'0:'1 to ~ou: riqvi.t II to Vhiihir ~. f~ii f.ii~ i=~ e:.i of the VDitid Stiti. iypporti the A;.::y' I IYi:I=:.. to t~. bolde: of I: -ori;iA.tO: f.i- II C.t~ft.~ b.lo..... '0 r ti". rl.IO:. CUiC'".zI'I~. thi IAIVI: to 7'OYf 1=ei:i:y 1~' 71'. %n 0:4.: to riici, thi. ditirmin.t1oft, it 1. ~i.t~i := ~.?:..... the ~.c~;:ou of the Sma ii .~iin.i. ~a1.i:.iion' s piri~cip.iio= 1~ tbe .'CO~&:y .irk.:. S.ction 'Ci) o~ ~h. sa.:i IYJ1ft.11 Act (Act) (15 g.S.C. -S '3.Ci)), .1ac. i:s .aIC~'Dt 1A I'll (~. ~. 15-521), his '~t~::1ild tb. SL~ to ,~i:.=i.. the :,p'~fti of ,e:tio~i c! 101:. mid. ~ piriic1pli1a; i.ftdiri. 'ri.e=tly. tå. A;i::y fyi:.:iy CI~Ot ez:'I~ 'ft ~~i of 150C.OCC. ~ C"c:ibld i:
sa£ :'i~iltio=n (13 C.T.I. 5 1iO.J-3) . ~':lftt.e~ le.: 1. .id. ~y 1 il=~ß: to 1 .=11: ~.1:1.. ~.: i ru':I~ty i;r.-=i~: ~i~n.n th. 1.:d1: .~£ SIA. -:bi te~i: id.i=:.s the totAl f~~~n icr the lol~ 'A~ SIA .,r.i. to '~:Chii., u?== dami~£ by th. t.ndi: .~£ '~~j.ct to .,lcif1c eoA£1 i10~., an i;:..~ ,ertio: oi ~i O~t'~IA£ia, ~.iiace.- Q!O:1tC:.:.n =til'DJJ, .um sic 1c:.:2Ii:S - lAa~ %a 1"2. the ~~t:oiil: Clairii ic~i.e,ed the iaportiac. of U. "C:Oad&i."'7 aarålt I. . "c~I~1.. for t!li ..ii .~ ,y:c~a.. of IJU~ ivi:aat.ie ,e:i1oa. of 10aal, aad d..c:i~.~ t~. .z:.~t ot the ~a:aaty JIA ~ke. 911 i 91. . third 'i::y '~:=h...r ot the ~arIDt.,d ,0:l1oD. %a ~ii o,i~io~ (51 Comp. Gee. 4'4 ¡, tbi Comptroll,r Gia,:.l rul.. that t~. SIA co~id "7 i ~clde: (1c...to:) of 18 'IA ,uaraat.ed ,0ri1oa -v!lir. SIA .1. kftcvi'd;. of t~i ,0'.1~1i1f7 .f ..Cii,iac.. i:iy~, 0: ai.:eptei.atltion oa thi ,a:t of (tAe lOad.:i. ~:
vhi:e t~e ':'I.~t '014.: of th. aote did .ot ,lrt!c1,lte in aad VI' aet ivi:. of .QCh ."li,lacl. friud. er a1.r.p:e.efttlt10ft It thi t1.. it pureh.... t~i ao~. f:oa th. . 'iak.. T!le Comptroile: Geairal idde.: -z. e~: .piaioft, 'I~ftt to ie tanoe'ftt ~oldef of ae SIA ,uaraatl.4 101ft DOtl £. ci":17 d1't!ft,Y1'h.~1. t:oa ,iyseat to I ~aftk v~1~ alY ~. ) i.c ~ J.5èU c:i:lO::i )Ø.GO 9i-:~! te. aQ "''=''-1

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,yl1ty of a.,lt,iaei. friud. or aiiripriiintition 1a o~tl~~~~; tai S.A loin 'uiriatli.. ~ail opiaion ii thi ~iiii for t~. now of~-i~icid diciirltion thlt thi SIA '~I:lftCY to the iayi.:o r i~ YftCOftd1 clonil vbi 11 thi 'Ui r incy 0~11'ltioft to :~t pirt~cipa:lft; lladl: 11 coaditionil .iaci thi A'iftey cinno: piy I iindi: which ~y ~ ,uiity of al,11,lncl. friud or :ilrl~rilintl:10ft. ~hi A,.aey', ,uirinty. 1a 111 eiiii It~ i~ 111 doc~mintlt10n (iacludia; thi tri-pirty .icoadary ~:ki:
i;rii~i~:i). izcindi to thi ,irm-at of aii ,r1aei,li aad incirllt due on thi out.tiadin; .lllac. unde: thi aoti vhi~ tai A,.ney .iki. it. ,urc~i.i. In 42 Cpo A.C. 21 (i"1). thi Attorniy a.a.ril aotid thlt i' ,i:iii of Attorniy Ciniril opiaioa. 1..yed 'itviea i'$3 in~ 1'5' -ai. elti~ii.hid thic i lyirlDty ~ i Govir=miat i,e~:y co~::ie:e~ puriuiat to I coa,:ellionil ,riat of iutao:ity 1::
c=ns:1t~t!oftll ,urp..ii i. in o~ii,ation fuiiy .in41a, Oft t~. Onitl~ S:ltl. diipiti the i~iinee of .titutOry iin,ui,e ezp:iiily ,114;1n, itl 'fiith' 0: 'cridit' to t~i ridemptio~ of thi ;uirin:y ind deipite thi po..i~il1ty t~.t I future ipp:opriltion mi,h: bi niciiiiry to cirry out .ueh re~.=p:ion.. ~he A,iney hi. interprltid thii 0,in10n to .e.~ thit the A;in=y ;uirinty vith riipict '0 '(i) 10iai 1. .uppc::id ~y thi full faith ind cridit of thi Onitid Stltll. i C=~r::oiil: of thi Cur:iney, II thi 1inlltrltor of ai t i oail binki. on Aw,ult 2. 1"2. ruled thlt thi lUlrlatie~ portions of SJA 10ini iri ,iairil o~il;ltioal of thi g~it.~ St.~.s a~~ ts ir. .li;1~il for uie by nlt10aal ba:ka IS c=iia:.:ii .1r1ty for ua1:.1Ii14 tr~lt fundi. (10: '1:1:.:
r~iii of the Com,troiiir of thi C~r:lft=Y ia ~Àii ri.pic:. I.. 1: C.,. l. 5 5 i . 110 i nd ,. i a . ) . ) I~ l"~, t~1 A;i~=y .o~;ht thi ippro.il of thi COæJtroilir G.neril for iuthority to putChl.1 from ia l:.lltor thi S1A fuirintll~ portioa it . loin vbi: thi borrow.: bid aot ~efauitid ~~t the ,ri~i:y iinder ~14 fi1114 to forvir4 ~o rrowi: 'i piymi:tl to thi l:.I.tor. Ia ia 0,1a1on 11.~1~ ~ici~er 3. i,'. (1-1.0"2), thi C4aptroiie: Giniril ii.intid. Ia siki:, thi ri~e.t. the A,iney bid Ic~oviI4;.! thlt thi ..contar,r .i:klt Vii e.iiatiai to thi Ictl.lt1el of thi ,irtlclpltl:; iender. iad t~lt ia~ lmpiirmeat voyld drllticiii~ ~rtai1 thi ,uir.atied loia ,ro,r~. ~i A,in:y alio ,ro~ied to 8On!tOr eioiii~ the ,.:fir.siaei of the iendiri ,irtleipitln, 1: t~e ,ro;ri.. ~he Comptroller Cinirii, 1: bl. o,ialo:. rico;n!ii' the ~roid luthOrlty Con,riii ,ive thi IIA Admialltrltor to 'ike IB~ iad ill ictio~i ditermined ~y him to be alCilllrr or ...iribli 1n si~in;. .ervici:;, eospromillft'. eodify1a" :1~.14It1~;, ::
othitviie d1111n, with 10iai (Siction i(~) (" of ,'e Act. 15 U.S.C. 134 (~) t')). ~~e Coaptroller Geftiril 1110 r.firtl~ ~ick to aft o,inlon bi had iiIUI' October 12, 1'5', la which h. )

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'-- bid 1:ICld thlt thi pOVI: wadi: le::1on , o! thi Act co ei~. 10ini 1. ~roid ind .llt. ift thi ~siftiltficor .coftii..ra~:. ictltion I. to thi dltaili for laic~:13' thi 101ft i:rlft;imints. · en "irch .. 1"'. thi Securitiii ind Eachin,i Coftaliilon i.iu.~ I fto.ac:ion iittir with ri.,ic: to thl IIA ,wiriati.. ,ort~oni 1014 by plrtic1,ltia, lindiri. tbi. VII .iiid on t~1 i,'. C~æ;::olllr Ceftiril o,laioft to'lthl: vi,~ t~1 IIA ri,:iiin:ltion thlt it iatindid to ia,lemeat it. fUlriatll t~ III cire~mltineii vbiri difiultl Oft thi SIA-fYirlatie4 ,0::10nl of loin. oc=~r. Thi rulla, Islrll'lY esclw41. f::~ 1 t. 1,,1 ici~i 1 i ty .thoii .i tuition. ia whlch ,ri.ltl llad.:1 fo fa poo 1. of S.~.,ui: Ifttiid loia. Iftd .111 ,artici,ition latl:I.:S 1ft iueh poo11 to 1..I.torl.. In in 0,1ft10ft ii.uid AUfult ii, 1'" (l.l.14i2), thi C't:olli: Ceniril rulld thlt SIA hi. thi authority to i"oint a privati iati:y II a fiicil i;iat to 'irvi II i cintril rl;1It:y of holdiri for thi l1a41ri iAd SIA. Thi f ~ iCI 1 I'lftt vou 1d hlvl thi rll'Oftll~1 li ty of r.cii .1ft; 10'~ piymint. from thi rl.,le:1.1 lla4lr. iAd rl.1ttla, thi IF; :0,:1 I tl imountl to thi ':0'1: 1..I.tor.. rur~i:, t~i A;lft~ c=uld ,~iriatll thl 1a.llto: 1,li.I' thl fiiluri by I~thi: thi iindi: 0: thi fiieil i,iat to forwird thi tavi. tor · i ihi ri of t~1 ~o:rovir'l ,irmint Oft thl ,uir.fttll~ po:tion of thi 101ft. Cft .O.~I: 2. 1"'. thl lirit111 i i%:~in;i Comm~..ion IS~I~.ld itl 11:111r fto-ictloft rul1ft; to i~el1 11111 of thi S&A.lyirl~tll~ ,0r:1ofts of 101~. .ide t~ liiri th:ou;~ SIA'1 i 1lell i,iat. %a .llklB' t~i. IStir.1 i:~ t~ A;in=y hi~ .rip:ISlfttl~ to thi SIC thl: thi A,iaey wo~l~ V~I:Ir.:11 thi 1n.lltOr 1,ll:lt thi f1leal l'IBt". fl~i~:1 to p::;iirly io:vi:~ 10lB PIY=I~tl. (~ult II thi A'lftCT bi. ii:lii:
vuirintll~ lnvistori 1;I1alt t~1 1IB~lr'l failuri to !o:va:~ IUCh loin PI1=I::1 dlric:ly). Ai dl'=:1~ld 1ft t~i o,lalo~ of t~i Co.,trol1.: a.airal. t~1 proeiduri .workid 1a the foiiovia, .IUi:. Wh.B thi 11Bdl: . .1111 thi SIA ,uiriat.id ,ortloft of i 101B, th. .11. 1. .vidincid ~ i t:i,irtlt. .,riemea: (prl'IBt17 IIA 'ora ieii) ~Itvllft ~h. 1.Bdir, t~i lB.i.tor (r.I1.tir.4 bol.ir), iad SIA. ~h. IIA IB4 the i.adir virrlBt to tb. lB..ltor ~~It. ii of t~1 diti of lb. iir.emeat, i ciriila 1,lclf1.. IUS of ~r.IY ii ovid ~ thi ~rrow.r to thi 11B4lr with i 1,lc1111d ,irelfttl" of tb. ,riacipil beia, ,uiriat..d ., IIA vith iftt.ri.'. ~h. liadi: ,:oajl., to ,ro.,t17 forwir. to thi . ii 1.1. 1.1.. .~. ..~... -a~i ~ .~. ~_..~.. ('1.1 I.. .. .. . -..... '-4 .-..... - - .1 .- ..... .. ... .irviciftl char,i.) Ift4 thi fi.cal i,iat ,romj... to forwi:d tho,. 'l1ftiat. to th. la...tor (1... la1 ..r.iclat f..). SIÀ would ,yi:ia:ii thi 1..I'tor i,iia.' 1 fillvr. ar thi 'orrovi:
to miki t1..17 ri,iymeat or 1 filluri ~ .ith.r thi i.ntir or "

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.. 4 ~,- thi ti 1~.1 .,int to forwird t~1 ~o rrovir. I ,irment or. thi i~irintiid ,ort1on. S:A~.~=IY Ai-:HCI:~ 101 POetj ~hi .ie,ndiry .irki: in SIA i~.rintiid ,ortioft. ot 10ini o,irltid undir t~i I~OVi a~t~orit111 uftt1i 1"4 v~.: ::~;:.ss tiri~ Itltytorilr iuthorizid IIA to iiiow '0011 to .. fo:~I~ eonlilt1ft' of thi SIA-iuirlDtild ,ortloftl ., 101al. Ilc::o~ IC,) of th~ ~ci (15 U.S.C. S '24(g)) luthor1.11 ~hi Aiincy ::
il.UI eartitiCltl1 :I,:I.lnt1a; ownirlhi, of ua4iyidid 1fttl:lltl ift IIA-iuiriatiid ,ort10nl ~ICkld ~ aa SIA.ip,:ovl~ pool of .uc~ iui:intiid po::ion.. Iictioa ICg) (2) of thi A:~ provida. t~ii thi -full fiit~ iad crad1t of thi Oaitad Stl:IS ii ,lid;id to t~i piymlftt ot .1' imeuntl vh1ca .ir ~ :i~i:i~ to ai "id undir inr iyirlfttai- of .uc~ cirtif1cltii iiIUI~ ty IIA or itl .,int Cim,hl'ii addid). Iictloa 5(h) of t~i Aci C 15 V. S. c. 5 134 (~)) iuthorizi. thi Aiia=7 to ,romul"tl ri;ylltioni ind to coatrict with. liicil iad trin.tir i,iro:
to ie: I. i cint:il rl;1lt=7 for ill IIA lyi:i:iiie portioros iold 1n thi iie=ndi:y mirklt whithir or aot 41.tiaid for pooi.. Sic:ion 5(t)(3) of thi Act (15 O.I.C. S .34(f)(2)) iuthorizii SIA to -diviio, iuch ,rociduri. ii iri aicisiary fo: t~1 I Ic1 1 i tlti on, 1~1~i.t: I t1on, ind ,romotioa of iic=ndlr,y mirka: Opl:ltioni.- Toward thlt ind, thi A;in=r his p:omui'ltad 1mpil~lntin, ra,u1lt10al vblc~ iri louad in :~tii 12, Codi of ridi:ii .a;uiat10nl, 'irt 1:0: Iy~,irt r _ C.~::ai liiiitratic~ fc: SI:CA~lry Mi:klt: lu~p.:i G - ico~i~; of SIÁ G~arant.id 'o:iion: Spl:t H - %aelY1li SIA CUI:I~:lld 'cri10a soi~ 1a lbi S'C=~lry Marklt. On A~:ii ~3 r i'J', t~1 S.:1t111 in~ Ei=~an;. C=~il.10a i..~a~ i Dc-ieiloa ilttl: to SIÅ 1ntl:~0IlA; ao oietlcn 1f tha A;i~:y i.suas, t~:=u;h 1tl f1leal an~ t:i~.f.: aiint, SIÁ ,yi:ant..~ ca:i~t1eltll riptlll~tiA; frict1cai1 ua~iYidld 1nta:lltl in S!Å.;yl:l~ia.~ ,ortioni of 10lAI .Idi by ,riYltl iin~a:i. :hi si: ~iiid this ~i1A; 0: thi ri,riiintltion that aoth thi piymiatl dui on thi SlA iua:IAt.id portion. i~~ thi ,i~ir.ts dui on thi cartlficlti. iri pirl:tiid lIT thi full fiith ir.~ crid1 t of thi ODi tid Itltll. CI:C:R.~. n:z ~in thi AIIACY ,rl~i'ltld thi ,irtla.at ~.,u1Itloal to ,. di.criai ~i opiritlon of '0011 of IIA iviriati.d ,o:tioni, .. .idi I ,01i=7 dic1.ioft on thi iatir.,t ~It. ..1111~11 to iftVI.tOrl la thi '101. %t dieldid thit t~1 ~.ti on i ,Dol cirtificlti ~It ,. e~ii to thi loy": .et rlti on in . 1Ddiyid~.i ,~I:lnt'ld ,ortiia 1a tAl '001 (5 120.'0",) of ~A ~e,yi,t1onl, i2 c.r.i. 5 120.'01(,)). 'or eal.,l.. if i '00 Contiiftid i...ril loia., lilf vith i COU'Oft rlti of ,ri~i ind bilf with I Cou,on rici of ,rl.. ,1YI tvo. the rit. on ill

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'001 certificat.i wovld ~I the ,rlm. ra:.. Thir.for.. ,vrivia: to 13 c.r... 5 i:0.'06(,). two ,oiatl f:oa bilt 0:
t~1 ,viriat..d ,ortioai 1ft thi ,ool co~id not ,. ~ilt:i~~~.~ to hold.ri of c.rti!1clt.. ~ick.~ by the ,~ira~ti.d ,or~i:~ i~ tai poo1. ~hii rl;~:ltorr framiwork crlltl~ I ,ot.ntial ,robiia for pc::
.'II~ll:. vho layi to ,iy ~rk.t ,rieii for thi loaai th.y ,vrchll.: ..ini:i thi pri.i ,lvi tvl loan. lD thi .~O.i iaampli colt ~ri thin thi ,ri-. 101DI. If thi '001 ..ii~lira Viri Dot .bli to 1111 thi leco.i .tri.. OD the IS::. plrcia:.,1 ,ointi on thi ,rise ,lui ~o 10.nl. tbiy ai,ht ~i forcid to .bior~ 10111.. .nd iindiri would Dot ba.. t~. l!eYidi ty vbich thi ..condiry mark.t contemplat.i. ~h~s. thi SIA ,ooli:i r.qulatioD. ai,ht ~lc.llar1iy hind.: the flc11itltion. .4miailtrl:ion. ind ,romotion of .icondary .i:k.t op':ltion.~ (Sll 5 l(f)(3) of the ACt.' COft..eu.r.:~y. SIA'I fiicil .nd t:I~I!I: .,int (r:A). with SIA', kftovi.4;.. i: o:di: to .m.1io:lt. the ,ro~llm inhirl:t 1~ 13 c.r .1, 5 120. '06 Ci). hai illov.d '001 ..iambli:. to .t:i, of! thi 'Z::i ,lrClftCI'1 ,oi:tl from loin. ci:r,yini 1ntl:llt I~Oyl t~i cirtificati riti .at to .111 thi. iacom. .tr.i. to third ,i::iii: th1. It:ii~ 11 eiiiid in .0:1;ial:o: f.i.. SIA. ,u:.uint to itl iutho:i:y la Siction ief) of th. Act. hii luPpo:t.d thii ic:lon of i:. rtA i..n thouih thi .ic=:da~ ,ir:icipltlon i,:iimia~ (IIA ro~ 10'" doi. Dot ,:..intly ri!ir :0 .uch o:i,i~lto: ti.. Thi. Vi' til: to ~i ,:epi:
iinci .upper: for thi T:A'. iction. 1~ this r.;.:~ emi:a:is from t~1 1:lt~:.. aot from t~. to:=. . In" CI.i of i d.fiult by . ~o::ov.r on . '10.n who.. ,ui:int..~ po:tio~ ~11 ~.in pli='~ 1n i ,oel, t~i F:A. oa ~ihilf of t~. iavllto: of in SIA-,y.:int..d ,ortlon .old in the .icon~lry mi:k.t. mik.. d.mind on thi li~d.: to r.purch.... If the iind.: r.fu..i. the F:A .ik.. demi~ OD SIA. ~hi A;. .lrlf1.1 t~. .ao~~t of ou:.ti~din, ,r1:cl,ll .~d i=::uid lnt.:..t d~. OD the 101: iD4 .ik.. ,iymeat to the F:A for d1Ii:1~utlo~, If thi:. ~i. belft DO 0:111:ltor f.i. fo:
vhlt.v.: r.iio~. ~i F:A, it:.: d.ductlDI itl ..rviciDI f.i. v111 tria.mjt the fVDda to t~i r.i1.t':'d bold.r, If .ir1ppi~, bi. oc~rr.d. the FrA will ..,ir.t. thl .tri, in~ t:in.~t Ivad. r.,r.i.ntlft' ,rlDci,li iad iDt.r..t to dlt. te both th. r.,1.:.:.d bold.r iDd to the iDy..tor .f t~1 oriii~.:or f.. i:co.. .tr.as. ID elth.r c.... thi iil~ll1:y of the A,.a~ OD itl ,viraat7 bi. aot bl'D iDcr....d. Th. imouft: cal=i.ilat.d ~ the A,iney i' due i. the ...., n. f':À ii '111ft' .ff cwo i:v..tori lD th. iame ,virant..d ,ortion ii indicit.d ia itl ca:tril r.ii.trr. .ach iDv..tor boldiDI i . ..,irlt. lftt.r..t iD itl Ihir. .t the S.A-,~iraat..d ,ortion.

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It i. our .iew t~lt t~i iimi iln,u.,1 w~1=~ iupport. t~i f~~~ faith .ft~ e:I~1t o~ii,.tion to '111 throu,~ pirm-At of ill ,rincipil 'ft~ incirelt to i ri,i.tired bolder of a fUafant.l~ portion .1.0 .upportl t~e full Iiith aad cr.dit ..1i'.tion of t~i A,en~ to, "IS .t~rou,~ thi o:i,ialto: I.. to th. OVBe: o! t~. ori,ialto: fei, T~i A,lncr'l full flith aDd crl4it ,uirintei of the ua4lrlrin, o~ii,ltioa ia i '001 laeludii t~i piymefttS of thi oriiiiiltor feis which "r u., irii.a iii thi i"imbl.,. of i '001.- F~rth.r. thi FrA'1 aetioai ia 'IY1ft' thi oriiiiilto: fii incomi Itri.m iri fully coai11teat w1t~ the A,.ncy '.1 .indi,i to erlltl '001. lalS iet ,olic1.1 w1t~ riipec, thiri,o. Theritore. IIA i. I ~tt.r .f iiw ,uarintl.S thi lollSer of the orii1iiltor fe. 1'11a.t the FrA'. fiiluri t:
,rope:ly forvi:~ thi ipprop:iiti &Deuat. % b.ltea to 144 t~lt. II ve have previouily 1S1lculled, VI iatead to follow throu,h vi t~ you: i,itf to di.ilo, riiuiltioai lalS forms aecei.ary to doc~int th. .ffict of this ~i1ai. á'~ ~ .1'~;. i ~irry I. 'Irx1nlon Ciiier.i cou:uii

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"u-.s. SMALL BUSINESS AOMINISTRATION W"''''''',O.C. ZCWIl i'.~,i \r;¡ '. A,,:,",..; ì -lJN 20 199\ Wi25b:1 Ms. Lauren Austin Stroock , Stroock ¡ Lavan Seven Hanover Square New York, NY 10004-2594 Dear' Ms. Austin:
You have requested, in your letter of June 17, 1991, the status of a 1988 opinion that the full faith and credit of the United States supports the Small Business Administration quarantee to the holder of an oriqinator fee. This is to advise you that such opinion continues to reflect the position of this Office. Sincerely, ~¡;Ç.j) ~~ Martin O. Teckler Acting General Counsel .

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ì Bovember 12, 1'91 e- sa a.t K. CdIiIiM lit... . . lS2 II. sn. ØlIXlCK Nr -.. . '.curt tie. and Ixehange Comm1..1on .50 rifth Street, ..". Washington, D.C. 20549 :':"'l..! !~j .. ". . . ) Ie. .lta;, Stearn. I Co, Inc. Gentlemeft. a.ference i. mad. to Cur letter. of June 18 and July 24, 1991 regarding Bear, Stearn i I Co. Inc. (-Bear Stearns.) and 1 ts propo..d Custodial Receipt Program for SBA Guaranteed Confirmations of Originator Fees, In response to conversations with ~emberi of the Divisions of Corporation Finance, Market aegulation-And Investment ~nagement, we are providing the information .et forth belew. Terms defined in our June 18 and July 24 le~teri are, used herein with their detined meanings.

1. PursUAnt to Section 7(a) of th~ Small lusines. Act (15 V.S.C. S '36(a)) (the .Act.), the SBA i. ~tted to quarante. the
   paymen t of portions of loans IUde by certain eligible lenders, 'These guaranteed portion. of 10ana may be told individually or may be pooled. Pursuant to Section 5(9) of the Act (15 U.S.C. S 634(9)), the SBA ii permitted to t..ue certificates representing ownership interests in an Sal-approved pool of iuch guaranteed portions. Section 5(9)(31 of t:he Act provide...that the -full faith and credit of the On ted States 1. pledqed to the payment of All amounti which may be required to be paid unc1er any guarantee- of '.uch certificates issued by the SSA 0: the FTA (emphasii added). Section 5(h) of the Act (15 U.S.C. 5 634(h)) authorizes the SBA to contract with a fiscal and transfer a;ent, here the iU.- w. understand that when the BBA promulqated regulations to describe the operation of pool. of SaA guaranteed portions, it mad. a poli~ decision on the intereit rate available to .. . -. ..... . ..~.~.~::~..:.: , " -" f . !'hes. arranq6ent. have been the .ubject of the following SEC no-action letteri. O.S. Small Business Administration (Avail. April 13, 1987), U.S. Small Busines. Administration (Avail. December 4, 1978), and SaA Guaranteed Loan. (Avail. Karch 6, 1975). ) "SO SM...-i... M." . at ~ ""!M ... 1:10 Si:I.fi......, "'4 . .............ø.e... . ...t.cie~.CAJllllI1"'.. ....1\1IØt... ." ~r:"""'~.. ". ~ .. ac_ 110_. ... .,'11'. ZO'd 810.0N 8Z:Z1 16'ZI nON ¿6lS-908-Z 1 Z : 131 OS ~3nON~H ¿ ~JOO~lS

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  1irrestorl 1D ~. pool. It d~lde.eS that the rat. on a pool certlfic.te au.t be equal to the lowtit net rate on any bcUYidually vuaraiitMd loan iA the pool. ft. folleving example of the operation of ~i. nle ft. given ì.n . MJ' lS, 1'88 opinion of ue SIA'. General couns.l, . copy of which ft. .ncloi.s with our July 24th iettar (U. .Oplnloil-). -if a pool conta1nec! ..veral loan" half with . coupon rate of priM and half with. coupoft rat. of priM pI'l' two, the rate on all pool cert.if1cate. would ))e the pr1me rate. .n.nfon . . ., uo po1ntl froa half of ~e vuaranteed port1on. 1D the pool could Dot be cU.tributed to bolder. of cert1flca tei backed ~ the . th.- Opinion continues .1 follows. guaranteed portion 1n the pool.- . . !hi. requlatory framework created a potential problem for pool a.iemblers who have to pay auket price i for the loans they purchase; meaning the prime plus two 10ani in the above example cost more than the prime loani:- If t-he pool assembleri were not able to iell the 1ncome itream on the extra percentaqa pointi on the prime -plul two 10anl, they might be forced to 'abiorb . . los St., and lenderi would. not have' tha l1quicU ty which the ieeondary market contemplate.. . .. Coniequently, . the (FTAJ, with S!A'. knowledge, . . . hai allowed pool assemble:i to .trip off the extrapereentage points from loani c~ry1ng interest above the certificate rate and to .ell thii income itream to third partieii thii itream 11 called an .oriqinator tee.. We refer to the oriqlnator fee in our propeial ai a COO,. ~ The Opinion concludei. It 11 cu: view that the aame langua;e which .upports the full faith and credit obligation. to pall throu9h payment of all principal and intereit to a regiitered holder of a vuaranteed portion alio IUpportl the full fa1th and credit obligation of the (SSA) to pall throufih ~. originator fee to the owner of the originator fee. . .. !herefore, SSA ai a matter of law vuarantee. the holder of the orlqinator -tee agalnlt the 1rrA'. failure to Proper17 fo~ard the appropriate amount. \ w. requ.ited that the SIA'. General Coun..l confirm iti 1988 op1.n1on. On :Un. 20, 1"1, th~ Act.ing General Counsel did 10, Al evidenced by hllM letter attached to.our July 24th letter~ ~ we dllcussed WIth t1'e Staff member., we are of the opinion that, a8 . . . . . . 0" £O'd eIO'ON ei:tl 16'll ADN l6lS-908-tii : 131 OS ~3~ON~H L ~)OOölS

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• reiult, the COOPi are ...-pt from the prov1sions of the
  lecurJ.t.l... ~ b7 yJ.rtu~ of 8ectiOll 3(a)(2) thereunder. Z. W. wllh to confim that each cultodial receipt vll1 evldenc.
• lOOt ownership 1ntenit 1il. .ach coor covertKI bY the cuiiodJ.ai
  noe1,t. ~ 1naiY1daal ncelpt bolder .,111 not be obllgated to ,o1n the eultodlan or any othe~ receipt holder ~o exereiie any zo1ght. Bach coor vil1 relate to a .ingle loan 1ft which no other pe~'OD will he.. &n;r Intereit 1D ~. exceii interest applicabl. thereto. A receipt holder "J' canc.l the cultodial arrangement .1 to any coor at any t1ae UPOIl notice to the Cuitodian. . Upon caneell.tloD, the Cuitodlan wlll be obligated to arrange to have the relevant COOl promptly nteqi.tered 1ft the Ilue of the beneticl.l owner, to haY~ the .xl.tlft9 cultodial receipt cancelled and to have i..ued to the beneficial owne~ a new custOdial receipt evidencing ownerihlp of the remaining coora repre.ented b;r the cancelled custodial receipt. ,

3. AI 1Ie discussed, we do not believe that the element. of the

• .. . . . propoied ar;anqement are the .ame a. the elements present in .G!.a
  'le'tic PAckaqiDg C0tP. v. Mirrill Lynch. Pierce, lenner , Smith, In£a., a -ca... in which a certificate of deposit (-,CD-) snarketlng program wa. found to involve th. i.iuane. of . .eparate, .' unregistered f8lcurity. In Gary 'laltls, . (ai CD 11.uerl were reviewed an~ approved by ~errill Lynch and .on tored by Merrill Lynch on a regular baSil' . (b) Herrill Lynch offered to maintain a' iecondary, market which would enable it. cuitomeri to ..11 their CDI beck to Herrill Lynch at prevailing market rate, without payment _f prepayment penal tiei impoied by the i.iuinq banks ~ and (e) Kerrill Lynch euitomeri wer.discouraged from dealing directly with the llluing banki. The Court in Ga~ Ploeti; found that by inveitigating i.Juers, marketing the CD. a.nd creating. iecondary market, Merrill Lynch vas engaged iii . common enterpri.e within the meaning of the rel.vant precedent. !'he Court also tound that customer. expected profit. derived lol.1y from the efforts of Herrill Lynch and the participating bank. and that Merrill Lynch'. activity vai iignifieantl;r 9reAter than that of an ordinary broker or .alei agent, particular~ becau.e Merrill Lynch poe.eased .igniflcant economic power that permitted it to negotiate with the issuing bank. to obtain favorable rates. AI. result, the court found that a .eparate ..~rity had been cr,ated. . '. 4\ . . ) .n'~ ~Tn'ow ~7.:Z1 t~'Zl AON l6lS-908-Z1Z : 131 ns ~3nON~H L ~JOO~lS

,-. ....,..,... VÅNJ ~ 51A.J ~ g¿,.",. I _ '. ~ l ... . '8CV1 tJ.e.. and Z, uge - Coal..loft ".. _.. j _ .. . , - 'age 4 ..' . ì '-' . . In COfttralt, ... we ha.. outl1ned 1ft our earlier letter., the lJ:oPO'ec! 'roc¡raa 11 ..r.ly loft adm! alltraU" convenience t.o cuitod1al receipt bolden. ft. COOl. an not .ltahlilhed punuant to the propo.ed cu.tocl1ai arrangement, but nthe:
pinuant to IBA author1 ~ 1D connection W1 til the a.sembling of lBl-guaranteed loazi pool.. "J.the: leU Iteam. DO~ any th1rd JUtY hai agrHcl to aake .. IlUket iD the coor. or the cu.tocU.al nc.lpu Oft behalf of or in COMecUOIl .1th t.h. Proposed Program. In tact, .. -ark.t for coor. Wit. independent of lear It.un.. .. r.bally, aa1ther 8eU' Ite&rJ. aor any tli.l.zid putr hai guaranteed ur return to COOl or CUltodlal hcelpt bolder. or to PZ'9teet them tZ'Oll 101' beyond the 90vernment guarantee. AccoZ'cUngly i we do not bel!eve that the eiement.. that ~Z'Oubie4 the court in ~ V.,t!,;. are pre.ent in the Propoied progr~.
l. We have ~en advl'ied' that. lear Stearni 11 not the .ole source
of coors and that coor. can be purchased from others 1n the urket. S. We understand that. COSIP number Vill not be asi!c¡ned to any cu.todial rëce1pt. w.., hope the - foreqo1ng hai responded to the Staff', queltJ.on.. Should .ember. of ~he Staff have any furth.~ que.tJ.on., please do Dot he.itate t.o telephope me at the number .et forth above. ve, truly yours, J()~ n-M~cÎ-- ¡LA \ 4C2I4eoe ., ~ ) . . SO'd 8l0.0N 8Z:Z1 16'Zl nON ¿6lS-908-ZtZ : 131 os ~3nON~H l ~JOO~lS