Advisory Opinion 1999-05A

Dear Ms. Rothenberg:

This is in response to your request on behalf of the Federal Agricultural Mortgage Corporation ("Farmer Mac") for an advisory opinion regarding the application of the "plan assets" regulation issued by the Department of Labor (the Department) under the Employee Retirement Income Security Act of 1974 ("ERISA") to certain mortgage pool certificates offered by Farmer Mac. Specifically, you request an advisory opinion that guaranteed mortgage-backed certificates issued by Farmer Mac are "guaranteed governmental mortgage pool" certificates within the meaning of 29 C.F.R. 2510.3-101(i)(2). You also request an advisory opinion as to whether certain parties performing various services with respect to the assets underlying the mortgage-backed certificates would be parties in interest under section 3(14) of ERISA or disqualified persons under section 4975(e)(2) of the Internal Revenue Code of 1986 (the Code) with respect to investing employee benefit plans.⁽¹⁾ In addition, you ask for an advisory opinion that the certificates would be deemed to meet a particular condition of a group of prohibited transaction exemptions (the Underwriter Exemptions),⁽²⁾ granted to provide relief for the origination and operation of certain asset pool investment trusts, including guaranteed governmental mortgage pool certificate investment trusts, and for the acquisition, holding and disposition of asset backed pass-through certificates representing undivided interests in those trusts.

You represent that Farmer Mac is a federally chartered corporate instrumentality of the United States established in 1987 for the purpose of promoting a secondary market for agricultural mortgage loans, similar to the secondary markets in residential mortgage loans established by the Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac").⁽³⁾ The Board of Directors of Farmer Mac consists of fifteen members, five of whom are elected by holders of common stock of Farmer Mac that are banks, insurance companies, or other financial institutions or entities; five of whom are elected by holders of common stock of Farmer Mac that are Farm Credit System institutions; and five of whom, including the Chairman of the Board, are appointed by the President of the United States and confirmed by the Senate.

Farmer Mac is authorized under the Farm Credit Act to purchase several different types of agricultural and real estate mortgages, mortgage pass-through certificates and other mortgage- backed securities evidencing interests in or secured by agricultural real estate mortgages, and to resell them, primarily in the form of mortgage-backed certificates ("Certificates") representing undivided interests in pools of mortgages purchased by Farmer Mac.⁽⁴⁾ You state that while Farmer Mac Certificates are not guaranteed directly by the United States, Farmer Mac guarantees the timely payment of principal and interest on such investments to all Certificate holders. Farmer Mac Certificates provide for periodic (monthly, quarterly, semi-annual or annual) payment of interest and the pass-through of principal based on collections with respect to the underlying mortgages.

You state further that Farmer Mac Certificates are offered from time to time in one or more series. Each series of Certificates represents, in the aggregate, the entire beneficial ownership interest in a segregated pool of mortgages held in a trust fund managed by Farmer Mac Securities Corporation ("Depositor"), a wholly-owned subsidiary of Farmer Mac. The Certificates are purchased from the Depositor by an underwriter or placement agent that offers the Certificates from time to time in public offerings registered under the Securities Act of 1933, and in private placements. The Certificates may be sold in negotiated transactions, at varying prices determined at the time of sale.

The trustee of the trust funds managed by the Depositor is currently U.S. Bank Trust National Association.⁽⁵⁾ The assets of the trust funds consist of segregated pools of fixed rate or adjustable rate agricultural real estate mortgage loans ("Qualified Loans"); portions of loans that are guaranteed by the United States Secretary of Agriculture ("Guaranteed Portions"); mortgage pass-through certificates or other mortgage-backed securities evidencing interests in or secured by Qualified Loans or Guaranteed Portions; or any combination thereof (collectively, "Qualified Assets").⁽⁶⁾ Qualified Loans are secured by parcels of land, which may be improved by buildings or other structures permanently affixed to the parcels, that are used for the production of one or more agricultural commodities and consist of a minimum of five acres or are used in producing minimum annual receipts of at least $5,000; or by a mortgage on a principal residence that is a single-family moderately priced residential dwelling located in a rural area.⁽⁷⁾

You represent further that the sellers of Qualified Assets ("Sellers") are banks and other financial institutions, including member institutions of the Farm Credit System and insurance companies. The Sellers may be the financial institutions that originally made the Qualified Loans ("Originators") or they may be purchasers of the Qualified Loans from one or more Originators. Farmer Mac selects the Qualified Assets that it wishes to purchase from a Seller, after determining that the Qualified Assets meet Farmer Mac's underwriting standards. The Depositor then purchases the Qualified Assets from the Seller, assigns the Qualified Assets transferred to it by the Seller to a segregated pool in a trust fund,⁽⁸⁾ causes the trust fund to issue one or more series of Certificates, and receives the proceeds of the sale of the Certificates. Farmer Mac guarantees the timely payment of principal and interest on the Certificates upon their issuance by the Depositor. To assure its ability to fulfill its guarantee obligations, Farmer Mac is required to establish reserves upon issuance of a guarantee. Farmer Mac's charter provides that, in the event that Farmer Mac's own reserves and capital are insufficient to enable it to meet its guarantee obligations, the Treasury will purchase up to $1.5 billion of Farmer Mac's obligations.⁽⁹⁾

You state that Farmer Mac acts as Master Servicer of the Qualified Loans in each loan pool and is ultimately responsible for the servicing of the Qualified Loans, though it has contracted with banks and other financial institutions (collectively, "Central Servicers") to perform the servicing functions on its behalf, including the distribution of principal and interest payments on the Qualified Loans in each pool and the distribution of any yield maintenance charge (the amount payable by a borrower under a loan in connection with a principal prepayment or acceleration by the lender) to the Trust Fund, on behalf of the holders of Certificates.⁽¹⁰⁾ Pursuant to the contracts, Central Servicers establish and maintain separate accounts on behalf of the Trust Fund for the collection of payments on Qualified Assets and foreclose upon or comparably convert the ownership of properties of any Qualified Loans that continue in default.⁽¹¹⁾ The Central Servicers are compensated for their services out of the interest payments received on each Qualified Loan and also retain certain late fees, servicing charges assessed against borrowers, and other fees. Central Servicers may subcontract their servicing functions with respect to the Qualified Loans to qualified agricultural mortgage servicers ("Field Servicers"), some of whom may be Sellers or Originators.

The Farm Credit Administration (FCA), acting through the Office of Secondary Market Oversight (OSMO), has general regulatory and enforcement authority over Farmer Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac and to apply its general enforcement power to Farmer Mac and its activities. In accordance with its statutory mandate, Farmer Mac's loan standards were submitted to Congress for approval before they were adopted in 1990. The Director of OMSO, who is selected by and reports to the FCA Board, is responsible for the examination of Farmer Mac and the general supervision of the safe and sound performance by Farmer Mac of the powers and duties vested in it by Title VIII of the Farm Credit Act of 1971, as amended.⁽¹²⁾

The Farm Credit Act requires the FCA to examine and audit Farmer Mac's books and financial transactions and to perform an evaluation of the safety and soundness of Farmer Macs operations at least annually. Farmer Mac is required to file quarterly reports of condition with the FCA, as well as copies of all documents filed with the Securities Exchange Commission under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934. While the FCA is not required to approve the payment of dividends on Farmer Mac common stock, the Farm Credit Act provides that no dividend may be declared or paid unless the Farmer Mac Board determines that adequate provision has been made for the corporation's reserve against guarantee losses and that no obligation issued by Farmer Mac to the Secretary of the Treasury remains outstanding.⁽¹³⁾ Under its general regulatory and supervisory authority, the FCA regularly reviews new programs and activities of Farmer Mac involving the purchase, sale, servicing of, lending on the security of, or otherwise dealing in conventional agricultural mortgages. In addition, the Farm Credit Act requires the Comptroller General of the United States to perform an annual review of the actuarial soundness and reasonableness of the guarantee fees established by Farmer Mac.

It is expected by the Board of Directors and management of Farmer Mac that the Depositor will not have any relationships to investing employee benefit plans, other than through their transactions with respect to the Certificates. However, you state that obligors with respect to Qualified Assets Collateralizing the Certificates ("Borrowers") may be related to sponsors of investing employee benefit plans. For example, a Borrower may also be the plan sponsor of an investing employee benefit plan. You state that it is also possible that a Central Servicer, Field Servicer, Seller, or trustee of a trust fund managed by the Depositor may be related to investing employee benefit plans and may therefore be a party in interest or fiduciary with respect to such plans.

The Department's plan asset regulation at 29 C.F.R. 2510.3-101 describes the circumstances under which the assets of an entity in which a plan invests will be considered to include assets of the plan for purposes of ERISA's reporting and disclosure and fiduciary responsibility provisions and the related prohibited transaction provisions of the Internal Revenue Code. Section 2510.3-101(i)(2) defines a guaranteed "governmental mortgage pool certificate" as "a certificate backed by, or evidencing an interest in, specified mortgages or participation interests therein and with respect to which interest and principal payable pursuant to the certificate are guaranteed by the United States or an agency or instrumentality thereof." The regulation specifically refers to mortgage pool certificates guaranteed by Ginnie Mae, Freddie Mac, or Fannie Mae,⁽¹⁴⁾ but makes clear that the exception may also apply to similar governmental mortgage pool investments. As explained in the preamble to the final regulation, the regulation provides in section 2510.3-101(i)(l) that, when a plan invests in a guaranteed governmental mortgage pool, its assets include its investment, but do not, solely by reason of such investment, include any of the underlying mortgages. Thus, the sponsor or manager of a governmental mortgage pool would not be a fiduciary of a plan solely by reason of the plan's investment in the pool. The regulation specifically states that interests in Freddie Mac, Ginnie Mae and Fannie Mae are among the investments to which the regulations general rule applies.⁽¹⁵⁾ Accordingly, the term "guaranteed governmental mortgage pool certificate" in section 2510.3-101(i)(2) is not limited to securities of the three entities specifically listed, but encompasses any certificates backed by, or evidencing an interest in, specified mortgages or participation interests therein and with respect to which interest and principal payable pursuant to the certificate are guaranteed by the United States or an agency or instrumentality thereof.

It appears to the Department from your representations that, for purposes of the definition of plan assets, Farmer Mac was established and is operated in a manner substantially similar to that of Fannie Mae and Freddie Mac. Like those entities, Farmer Mac is a Federally chartered instrumentality of the United States that issues guarantees on pools of mortgage loans in order to increase the availability of mortgage credit. Although Farmer Mac Certificates are not guaranteed by the United States, in light of the significant Federal involvement in the management of the Farmer Mac, it is our view that investments in Certificates issued by Farmer Mac should be treated in the same way as investments in certificates issued by Fannie Mae and Freddie Mac. Based on your representations and in view of the foregoing, it is the view of the Department that the mortgage pool Certificates guaranteed and issued by Farmer Mac meet the definition of a "guaranteed governmental mortgage pool certificate," as defined in 29 C.F.R. 2510.3-101(i)(2).

The Department notes that ERISA's general standards of fiduciary liability apply to any investment by a plan covered by Title I, including an investment in a guaranteed governmental mortgage certificate as defined in 29 C.F.R. 2510.3-101(i)(2). Section 404(a)(1)(B) of ERISA requires that a fiduciary discharge his duties to a plan solely in the interests of the plan participants and beneficiaries, and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man would use in the conduct of an enterprise of like character and with like aims. Accordingly, the fiduciaries of an investing plan must act "prudently" and "solely in the interest" of the plan's participants and beneficiaries when deciding whether or not to invest in a Certificate.

You also requested an opinion as to whether trustees of a trust fund managed by the Depositor, Central Servicers, Field Servicers or Borrowers would be parties in interest under section 3(14) of ERISA or disqualified persons under section 4975(e)(2) of the Code. In this regard, we note that the mere investment of plan assets in the Certificates issued by Farmer Mac would not, by itself, make those entities parties in interest or disqualified persons, since it is our view that it is only the Certificates, and not the assets underlying the Certificates, that are plan assets. However, to the extent any of these entities have other relationships to the investing plans that are described in ERISA section 3(14) or Code section 4975(e)(2), such entities may be parties in interest or disqualified persons with respect to such plans.

Further, because it is our view that the Certificates are "guaranteed governmental mortgage" certificates within the meaning of that term as defined at 29 C.F.R. 2510.3-101(i)(2), transactions between these parties and a Farmer Mac trust fund that relate only to the assets underlying the Certificates, and that do not involve the Certificates themselves, would not constitute prohibited transactions under sections 406 or 407 of ERISA or section 4975(c)(1) of the Code.

We are unable to provide you guidance on your final question regarding the Underwriter Exemptions. Specifically, you asked for an opinion that the Certificates are deemed to meet the condition that the "certificates acquired by the plan have received a rating at the time of such acquisition that is in one of the three highest generic rating categories from either Standard & Poor's Structured Rating Group, Moodys Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, L.P." We do not have authority to deem that a transaction satisfies a condition set forth in an individual exemption. To the extent that the prohibited transactions provisions of ERISA or the Code are implicated by transactions involving the Certificates, we suggest that you discuss this matter with the Office of Exemption Determinations of this agency.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Section 10 of the Procedure describes the effect of advisory opinions.