Proposed Exemptions; The Banc Funds Company, LLC (TBFC)
[Notices] [05/23/2000]
Proposed Exemptions; The Banc Funds Company, LLC (TBFC)
[05/23/2000]
Volume 65, Number 100, Page 33360-33376
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10624, et al.]
Proposed Exemptions; The Banc Funds Company, LLC (TBFC)
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. ____, stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N-5638, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
The Banc Funds Company, LLC (TBFC), Located in Chicago, IL
[Application No. D-10624]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990.) \1\
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\1\ For purposes of this proposed exemption, references to the
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of sections 406(a)
and 406(b) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(D) of the Code, shall not apply to (1) the purchase or redemption of
interests in the Banc Fund V, L.P. (the Partnership) by employee
benefit plans (the Plans) investing in the Banc Fund V Group Trust (the
BF V Group Trust), where TBFC, a party in interest with respect to the
Plans, is the general partner of MidBanc V, L.P. (MidBanc V), which is,
in turn, the general partner (the General Partner) of the Partnership;
(2) the sale,
[[Page 33361]]
for cash or other consideration, by the Partnership of certain
securities that are held as Partnership assets to a party in interest
with respect to a Plan participating in the Partnership through the BF
V Group Trust, where the party in interest proposes to acquire or merge
with the portfolio company (the Portfolio Company) that issued such
securities; and (3) the payment to the General Partner, by Plans
participating in the Partnership through the BF V Group Trust, of an
incentive fee (the Performance Fee) which is intended to reward the
General Partner for the superior performance of investments in the
Partnership.
This proposed exemption is subject to the following conditions as
set forth below in Section II.
Section II. General Conditions
(a) Prior to a Plan's investment in the BF V Group Trust and the
Partnership, a Plan fiduciary which is independent of TBFC and its
affiliates (the Independent Fiduciary) approves such investments on
behalf of the Plan.
(b) Each Plan investing in the BF V Group Trust and the Partnership
has total assets that are in excess of $50 million.
(c) No Plan may invest more than 10 percent of its assets in the BF
V Group Trust, and the interests held by the Plan may not exceed 25
percent of the assets of the BF V Group Trust.
(d) No Plan may invest more than 25 percent of its assets in
investment vehicles (i.e., collective investment funds or separate
accounts) managed or sponsored by TBFC and/or its affiliates.
(e) Prior to investing in the BF V Group Trust and the Partnership,
each Independent Fiduciary contemplating investing therein receives a
Private Placement Memorandum and its supplement containing descriptions
of all material facts concerning the purpose, structure and the
operation of the BF V Group Trust and the Partnership.
(f) An Independent Fiduciary which expresses further interest in
the BF V Group Trust and Partnership receives --
(1) A copy of the BF V Group Trust Agreement outlining the
organizational principles, investment objectives and administration of
the BF V Group Trust, the manner in which shares in the Group Trust may
be redeemed, the duties of the parties retained to administer the BF V
Group Trust and the manner in which BF V Group Trust shares are to be
valued; and
(2) A copy of the Partnership Agreement describing the
organizational principles, investment objective and administration of
the Partnership, the manner in which the Partnership interests may be
redeemed, the manner in which Partnership assets are to be valued, the
duties and responsibilities of the General Partner, the rate of
remuneration of the General Partner, and the conditions under which the
General Partner may be removed.
(g) If accepted as an investor in the BF V Group Trust and the
Partnership, the Independent Fiduciary is--
(1) Furnished with the names and addresses of all other
participating Plan and non-Plan investors in the Partnership;
(2) Required to acknowledge, in writing, prior to purchasing a
beneficial interest in the BF V Group Trust (and a corresponding
limited partnership interest in the Partnership) that such Independent
Fiduciary has received copies of such documents; and
(3) Required to acknowledge, in writing, to the General Partner
that such fiduciary is independent of TBFC and its affiliates, capable
of making an independent decision regarding the investment of Plan
assets, knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an
informed decision concerning participation in the BF V Group Trust and
the Partnership.
(h) Each Plan, including the trustee (the Trustee) of the BF V
Group Trust, receives the following written disclosures from the
General Partner with respect to its ongoing participation in the BF V
Group Trust and the Partnership:
(1) Within 90 days after the end of each fiscal year of the BF V
Group Trust as well as at the time of termination, an annual financial
report containing a balance sheet for the BF V Group Trust and the
Partnership as of the end of such fiscal year and a statement of
changes in the financial position for the fiscal year, as audited and
reported upon by independent, certified public accountants. The annual
reports will also disclose the remuneration that has accrued or is paid
to the General Partner.
(2) Within 60 days after the end of each quarter (except in the
last quarter) of each fiscal year of the Partnership and the BF V Group
Trust, an unaudited quarterly financial report consisting of at least a
balance sheet for the Partnership and the BF V Group Trust as of the
end of such quarter and a profit and loss statement for such quarter.
The quarterly report will also specify the remuneration that is
actually paid or accrued to the General Partner.
(3) Such other written information as may be needed by the Plans
(including copies of the proposed exemption and grant notice describing
the exemptive relief provided herein).
(i) At least annually, the General Partner will hold a meeting of
the Partnership, at which time, the Independent Fiduciaries of the
participating Plans will have the opportunity to decide on whether the
Partnership, the BF V Group Trust, the Trustee or the General Partner
should be terminated as well discuss any aspect of the Partnership, the
BF V Group Trust and the agreements promulgated thereunder with the
General Partner.
(j) During each year of the BF V Group Trust and the Partnership,
representatives of the General Partner will be available to confer by
telephone or in person with independent Plan fiduciaries to discuss
matters concerning the BF V Group Trust or the Partnership.
(k) The terms of all transactions that are entered into on behalf
of the Partnership remain at least as favorable to a Plan investing in
the BF V Group Trust as those obtainable in arm's length transactions
with unrelated parties. In this regard, the valuation of assets in the
Partnership that is done in connection with the distribution of any
part of the General Partner's Performance Fee will be based upon
independent market quotations or (where the same are unavailable)
determinations made by an independent appraiser (the Independent
Appraiser).
(l) In the case of the sale by the Partnership of Portfolio Company
securities to a party in interest with respect to a participating Plan
that occurs in connection with the acquisition of a Portfolio Company
represented in the Partnership's portfolio (the Portfolio), the party
in interest may not be the General Partner, TBFC, any employer of a
participating Plan, or any affiliated thereof, and the Partnership
receives the same terms as is offered to other shareholders of a
Portfolio Company.
(m) As to each Plan, the total fees paid to the General Partner and
its affiliates constitute no more than ``reasonable compensation''
within the meaning of section 408(b)(2) of the Act.
(n) Any increase in the General Partner's Performance Fee is based
upon a predetermined percentage of net realized gains minus net
unrealized losses determined annually between the date the first
contribution is made to the Partnership until the time the Partnership
disposes of its last investment. In this regard--
(1) Except as provided below in Section II(o), no part of the
General Partner's Performance Fee may be
[[Page 33362]]
withdrawn before December 31, 2006, which represents the end of the
Acquisition Phase (the Acquisition Phase) for the Partnership, and not
until the BF V Group Trust has received distributions equal to 100
percent of its capital contributions made to the Partnership.
(2) Prior to the termination of the Partnership, no more than 75
percent of the Performance Fee credited to the General Partner may be
withdrawn by the Partnership.
(3) The debit account established for the General Partner to
calculate the Performance Fee (the Performance Fee Account) is credited
annually with a predetermined percentage of net realized gains minus
net unrealized losses, minus Performance Fee distributions.
(4) No portion of the Performance Fee may be withdrawn if the
Performance Fee Account is in a deficit position.
(5) The General Partner repays all deficits in its Performance Fee
Account and it maintains a 25 percent cushion in such account prior to
receiving any further distribution.
(o) During the Acquisition Phase of the Partnership only,
(1) The General Partner is entitled to take distributions with
respect to the Performance Fee in the amount of any income tax
liability it or its affiliates become subject to with respect to net
capital gains of the Partnership, provided such gains are based upon
the sale of Portfolio Company securities that is initiated by a third
party in connection with a merger, tender offer or acquisition, and
does not involve the exercise of discretion by the General Partner.
(2) The tax distributions are deducted from the Performance Fee.
(3) The General Partner repays to the Partnership any tax refund
received to the extent a distribution has been made to such General
Partner.
(4) The General Partner provides the Trustee and the Plans with an
annual report and accounting of all distributions and repayments
attributable to income taxation of the General Partner and its
affiliates, including written evidence that the distributions have been
utilized exclusively to pay the income tax liability.
(p) The General Partner maintains, for a period of six years, the
records necessary to enable the persons described in paragraph (q) of
this Section II to determine whether the conditions of this exemption
have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the General
Partner, the records are lost or destroyed prior to the end of the six
year period; and
(2) No party in interest other than the General Partner shall be
subject to the civil penalty that may be assessed under section 502(i)
of the Act, or to the taxes imposed by section 4975(a) and (b) of the
Code, if the records are not maintained, or are not available for
examination as required by paragraph (q) below.
(q)(1) Except as provided in section (q)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (p) of this
Section II shall be unconditionally available at their customary
location during normal business hours by:
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(B) Any Independent Fiduciary of a participating Plan or any duly
authorized representative of such Independent Fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of
this paragraph shall be authorized to examine the trade secrets of the
General Partner or TBFC or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption,
(a) The term ``TBFC'' means The Banc Funds Company and any
affiliate of TBFC as defined in paragraph (b) of Section III.
(b) An ``affiliate'' of TBFC includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with TBFC.
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) An ``Independent Fiduciary'' is a Plan fiduciary which is
independent of TBFC and its affiliates and is either a Plan
administrator, trustee, named fiduciary, as the recordholder of
beneficial Interests in the BF V Group Trust or an investment manager.
(e) The term ``Portfolio Companies'' include commercial banks and
other depository institutions such as savings banks, savings and loan
associations, holding companies controlling those entities (together,
the Bank Companies), and companies providing financial services in the
United States, which include, but are not limited to, consumer finance
companies and demutualizing life insurance companies (together, the
Financial Services Companies).
(f) The term ``net realized gains'' refers to the excess of
realized gains over realized losses.
(g) The term ``net realized losses'' refers to the excess of
realized losses over realized gains.
(h) The term ``net unrealized losses'' refer to the excess of
unrealized losses over unrealized gains.
(i) The term ``net unrealized gains'' refers to the excess of
unrealized gains over unrealized losses. For a gain or loss to be
``realized,'' an asset of the Partnership must be sold for more than or
less than its acquisition price. For a gain or loss to be
``unrealized,'' the Partnership asset must increase or decrease in
value but not be sold.
Preamble
On September 22, 1993, the Department granted PTE 93-63 (58 FR
49322), a temporary exemption which is effective for a period of eight
years from the date of the grant. PTE 93-63 permits a series of
transactions relating to the (a) sale by the Bank Fund III Group Trust
(the BF III Group Trust) in which Plans invest, of certain securities
which have been issued by Bank Companies and are held in the BF III
Group Trust's portfolio, to a party in interest with respect to a Plan,
where the party in interest proposes to acquire or merge with the Bank
Company that issued such securities. In addition, PTE 93-63 permits the
BF III Group Trust to purchase Bank Company securities from the Midwest
Bank Fund I Limited Partnership (MBF I LP) and the Midwest Bank Fund
II, Limited Partnership (MBF II LP), two entities organized by The
Chicago Corporation (TCC), the company from which TBFC was spun off.
Further, PTE 93-63, allows Plans investing in the BF III Group Trust to
pay a performance fee to TCC.
On March 5, 1997, the Department granted PTE 97-15 at 62 FR 10078.
PTE 97-15 permits Midwest Banc Fund IV Group Trust (the BF IV Group
Trust) in
[[Page 33363]]
which Plans invest, to sell certain securities that are held in the BF
IV Group Trust Portfolio to a party in interest with respect to a
participating Plan, where the party in interest proposes to acquire or
merge with a bank company or a financial services company. In addition,
PTE 97-15 permits TCC to receive a Performance Fee from Plans investing
in the BF IV Group Trust.\2\
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\2\ In 1986, TCC organized the MBF I LP. The general partners of
MBF I LP were two partnerships (MidBanc I and MidBanc II), whose
general partners were corporate affiliates of TCC and whose limited
partners were members of TCC's staff. Less than 25 percent of the
assets of MBF I LP were provided by Plans. On December 31, 1994, MBF
I LP was liquidated.
In 1989, TCC organized the MBF II LP. This partnership had the
same general partners as MBF I LP. Also, less than 25 percent of the
assets of MBF II LP were provided by Plans. On December 31, 1997,
MBF II LP was liquidated.
Finally, in 1993, TCC completed the organization of BF III which
was structured as both a limited partnership (the BF III
Partnership) and a group trust (the BF III Group Trust).
In 1996, TCC organized BF IV as a limited partnership (the BF IV
Limited Partnership) and as a group trust (the BF IV Group Trust).
Each entity has or had investment policies and strategies similar to
the proposed investment vehicle (i.e., the Partnership).
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The pooled investment vehicle that is described herein is similar
to four investment funds that were organized by TCC in 1986, 1989, 1993
and 1996 and described in PTEs 93-63 and 97-17. These four vehicles
have been operated by TCC, and since April 30, 1997, the date TBFC was
spun-off from TCC, by TBFC.
Summary of Facts and Representations
1. TBFC is a Chicago, Illinois-based investment advisory firm
founded in 1997 as a spin-off from, and by the individuals who managed
the financial services company advisory division of TCC.\3\ TBFC is a
registered investment adviser under the Investment Advisers Act of
1940, as amended, and it has a single line of business. TBFC currently
provides institutional investors with investment management services
through BF III and BF IV and it acts as a fiduciary with respect to
these clients. TBFC currently manages $81 million in assets of plans
that are covered under the Act, $129 million in the assets of
governmental plans and $65 million in non-Plan assets.
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\3\ During 1997, TCC's parent was acquired by ABN AMRO North
America, Inc., a subsidiary of ABN AMRO Bank N.V., a global bank
headquartered in the Netherlands. The acquisition did not involve
the purchase of the assets of TCC's parent and TCC retains its
separate corporate identity.
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TBFC's relevant specialty is its expertise in the banking industry.
In this regard, TBFC employees provide management, investment and
capital formation services to collective investment vehicles which
invest in commercial banks and other financial institutions and expend
significant resources to research specific financial institutions.
As described below, TBFC requests an administrative exemption from
the Department with respect to the purchase or redemption of interests
in the Partnership by Plans investing in the BF V Group Trust, where
TBFC, a party in interest with respect to such Plans, is the general
partner of MidBanc V, which is, in turn, the General Partner of the
Partnership. In addition, TBFC requests exemptive relief to permit the
sale, for cash or other consideration, by the Partnership of certain
securities that are held as Partnership assets to a party in interest
with respect to a Plan participating in the Partnership through the BF
V Group Trust, where the party in interest proposes to acquire or merge
with the Portfolio Company that issued such securities. Further, TBFC
requests that the exemption apply to the General Partner's receipt of a
Performance Fee from the Partnership that is based upon a debit account
structure (i.e., the Performance Fee Account) which will keep track of
the General Partner's compensation for managing the Partnership but
will not represent actual dollars that are reserved or set aside for
the General Partner.
The BF V Group Trust is intended to be a ``pooled fund'' as that
term is defined in 29 CFR 2570.31(g) and a ``group trust'' as that term
is defined in Rev. Rul. 81-100, 1981-1 C.B. 326. All investors that are
beneficiaries of the BF V Group Trust must evidence the following
characteristics in order to acquire beneficial interests: (a) Each
investor must commit to making at least $1 million in initial capital
contributions; (b) each investor must be a Plan; (c) each Plan must
have at least $50 million in assets; (d) each Plan must agree to
incorporate the terms of the Group Trust Agreement into its own trust
agreement; (e) no Plan may invest more than 10 percent of its assets in
interests in the BF V Group Trust and such interests held by a Plan may
not exceed 25 percent of the BF V Group Trust; and (f) no Plan may
subscribe for beneficial interests which, when aggregated with all
other Plan assets that are subject to investment funds or separate
accounts managed by TBFC and/or its affiliates, is valued in excess of
25 percent of such Plan's net assets. The BF V Group Trust will not be
organized unless $25 million in capital contribution commitments are
subscribed for by investors in such Group Trust and the Partnership
described below.
3. The trustee (the Trustee) of the BF V Group Trust will be
Citibank, F.S.B. Although TBFC may have and may have had business
relationships with the Trustee, there will be no control relationship
or ownership affiliation between TBFC and the Trustee. The Trustee will
be responsible for monitoring the Trust's investment in the Partnership
and for policing TBFC's adherence to the provisions of the Partnership
Agreement. In addition, the Trustee will serve as custodian for the
Partnership.
For services rendered, the Partnership will pay the Trustee (a) an
annual base fee of $1,500; (b) a custodial fee based upon the market
value of the Partnership at the beginning of each quarter (e.g., 0.02
percent annually of the first $100 million, 0.01 percent annually of
any amount over $100 million, and 0.005 percent annually of any amount
over $200 million); (c) a transaction fee of $12 per purchase or sale
and (d) a disbursement fee of $8 per payment of funds. No charges will
be levied for income collection, item storage, statement preparation or
other transactions.
In accordance with the provisions of the Trust Agreement, the
Trustee may be removed by a vote of Plans holding a majority of
beneficial interests in the BF V Group Trust, provided such Plans give
the Trustee 30 days' advance written notice of their intent to
terminate the Trustee. The Trustee may resign at any time by giving 30
days prior written notice to TBFC for transmittal to the Plans.
4. Approximately 5-10 Plans may invest in the BF V Group Trust.
However, no Plan may invest more than 25 percent of its assets in the
BF V Group Trust and every other pooled investment vehicle sponsored by
TBFC, as measured on the date of such investment.\4\ Each Participating
Plan must invest a minimum of $1 million in the BF V Group Trust.
Further, no Plan benefitting employees of TBFC or the Trustee will be
permitted to invest in the BF V Group Trust.\5\
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\4\ The Department is not proposing, nor is TBFC requesting,
exemptive relief for the purchase and sale of beneficial interests
in the BF V Group Trust between the investing Plans and the Trustee
beyond that provided under section 408(b)(8) of the Act.
\5\ Although TBFC and the Trustee will not be affiliated with,
or under the control of, or controlling, any participating Plan, it
is likely that certain Plans will have a preexisting relationship
with TBFC in the form of an investment in MBF I, MBF II, BF III or
BF IV, investment vehicles managed by TBFC, and it is possible that
a participating Plan may utilize the services of the Trustee with
respect to plan assets other than those invested through the Trust.
In this regard, TBFC is not requesting, nor is the Department
providing, exemptive relief with respect therefor.
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[[Page 33364]]
5. Pooled investments for Plans investing in the BF V Group Trust
will be made through the Partnership. The maximum capital contribution
commitment of the Partnership will be $300 million. The primary purpose
of the Partnership is to engage in the business of providing capital
to, acquiring equity and debt interests in, and making available
consultative services to Portfolio Companies such as Bank Companies and
Financial Services Companies having assets under $7 billion. The
Partnership may also invest in insurance contracts, short term
investments, derivatives (for hedging purposes only) and covered put
and call options. Further, the Partnership may make loans of
securities. In short, it is anticipated that the Partnership will share
the same basic investment strategy as was held by MBF I, MBF II, BF III
and BF IV, and in many ways, the operations and fee structures of these
entities.\6\
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\6\ According to TBFC, there are circumstances militating
against investments by the Partnership in either BF III or BF IV.
First, the Partnership will be structured as a separate investment
entity apart from BF III and BF IV. BF III, BF IV and BF V
(collectively, the Funds) will all have somewhat different charters
with respect to what investments each can make. Second, many
companies in which BF III, BF IV and BF V invest are (or will be
acquired) by larger banks within three years of the particular Fund
making an investment. Therefore, something acquired by an earlier
Fund is unlikely to be acquired by a later Fund. Third, the
Partnership will not come into existence until BF II and BF IV are
fully invested, so concurrent purchases are deemed impossible.
Fourth, BF IV may complete its wind-up and termination before the
Partnership becomes invested. Fifth, there is an outright
prohibition against the Partnership buying investments in BF III and
BF IV and also against investing directly in BF III and BF IV.
Sixth, the Partnership will invest in an area in which the
availability of Portfolio Company securities will be extremely
limited. For the Partnership to invest in any of the same investment
vehicles as BF III and BF IV, it would mean that none of the
investment circumstances described above would apply.
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6. The General Partner of the Partnership will be MidBank V, LP.
The general partner of MidBank V, LP will be TBFC and individuals
employed by TBFC. The General Partner will acquire a one percent
interest in the Partnership, for cash. The General Partner will also
serve as the Administrator of the BF V Group Trust but it will not
receive any fees from such entity. As described later in this proposed
exemption, all fees that are paid to the General Partner and/or its
affiliates will be paid by the Partnership and not by the BF V Group
Trust.
The principal place of business of the Partnership will be 208
LaSalle Street, Chicago, Illinois or at such other location as the
General Partner may select. The Partnership is expected to terminate on
December 31, 2007, unless terminated sooner.
7. The Limited Partners of the Partnership will generally consist
of non-Plan investors, which will acquire, by making capital
contributions in cash directly to the Partnership, a Limited Partner's
interest in such Partnership. However, as noted above, another Limited
Partner in the Partnership will be the BF V Group Trust, the
beneficiaries of which will be Plans covered under the provisions of
the Act, and governmental plans. These Plans will acquire, for cash,
both a beneficial interest in the BF V Group Trust and a Limited
Partner's interest in the Partnership. It is expected that upon the
creation of this structure, the BF V Group Trust will own 65.6 percent
of the equity interests in the Partnership. Because none of the
exceptions to the plan asset regulations will apply, the assets of the
BF V Group Trust as well as the assets of the Partnership will
constitute plan assets.\7\
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\7\ See 29 CFR 2510.3-101(a)(2)(ii) and (f).
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Neither the General Partner nor the Trustee will have any control
over the decision to cause any Plan to invest in the Partnership
through the Group Trust. Under these circumstances, the decision to
participate in the BF V Group Trust or the Partnership will be made by
a Plan fiduciary which is independent of the Trustee and the General
Partner. In each instance, even though the Trustee or the General
Partner may present a Plan fiduciary with information concerning
investment in the Group Trust and in the Partnership, the Plan
fiduciary who makes the investment decision will agree not to rely on
either the advice of the Trustee or the General Partner as the primary
basis for a Plan's investment and the Independent Fiduciary will be
specifically required to do so in every instance.\8\ The General
Partner assumes that a Plan will invest in the BF V Group Trust only if
the fiduciaries of the Plan determine that investment performance is
anticipated to be superior.\9\
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\8\ The Department notes that the general standards of fiduciary
conduct promulgated under the Act would apply to the participation
in the BF V Group Trust and the Partnership by an Independent
Fiduciary. Section 404 of the Act requires that a fiduciary
discharge his duties respecting a plan solely in the interest of the
plan's participants and beneficiaries and in a prudent fashion.
Accordingly, an Independent Fiduciary must act prudently with
respect to the decision to invest in the BF V Group Trust and the
Partnership. The Department expects that an Independent Fiduciary,
prior to investing in the BF V Group Trust and the Partnership, to
fully understand all aspects of such investments following
disclosure by the General Partner of all relevant information.
\9\ The Department is not expressing an opinion on whether the
Trustee or the General Partner would be deemed to be fiduciaries
under section 3(21)(A)(ii) of the Act with respect to a Plan's
investment in the BF V Group Trust or the Partnership. The
Department is also not proposing relief for the rendering of
investment advice in connection with the acquisition of interests in
either BF V Group Trust or the Partnership.
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8. The contribution provisions for the BF V Group Trust and the
Partnership will be identical. For example, capital calls for Plans
participating in the BF V Group Trust will be concurrent and in the
same proportional amount as are capital calls by the Partnership from
Limited Partners that are not Plans.\10\ In pertinent part, the BF V
Group Trust Agreement provides that each Plan's commitment to
contribute will be divided into 20 equal segments. The General Partner,
in its capacity as Administrator of the BF V Group Trust, may call any
amount of these installments, upon 10 days' advance written notice,
when cash is needed to fund the acquisition of Portfolio Company
securities by the Partnership. However, there are two limitations upon
the General Partner's power to call contributions. First, no more than
50 percent of the contribution commitment may be called in any twelve
month period. Second, the General Partner cannot call any contributions
after the sixth anniversary date of the inception of the BF V Group
Trust (the period running from the date on which initial capital
contributions are made to such sixth anniversary date being referred to
as ``the Acquisition Phase'').
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\10\ Because of the multi-tiered structure (i.e., investing Plan
to BF V Group Trust to Partnership), it is represented that capital
calls will be handled as follows:
On the same day, the General Partner will notify the Limited
Partners, including Plans investing in the BF V Group Trust that
capital is being called. All investors will have 10 days to forward
the appropriate amount of cash.
As a matter of practice, all Limited Partners will wire their
contributions to the Trustee on the same day (the Trustee will serve
as the custodian for the Partnership's assets).
Plan investors' contributions will be credited to a separate
Trust account and the non-Plan investors' contributions will be
credited to the Partnership's Capital Account.
On the same day, the Trustee transfers the funds from the Trust
account to the Partnership's Capital Account.
The General Partner will then instruct the Trustee to utilize
the Partnership's Capital Account to acquire the appropriate
securities until the Partnership account is exhausted, at which
time, another capital call will be made.
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If an investing Plan cannot or does not meet a capital call, the
Partnership Agreement and the BF V Group Trust Agreement provide that
ten days after the investor receives notice of default on a capital
call, the General Partner/
[[Page 33365]]
Administrator may (a) permit the investor's continued participation in
the Partnership (or BF V Group Trust) with a commensurate reduction in
both the investor's proportionate interest in such Partnership (or BF V
Group Trust) and aggregate size of the Partnership (or BF V Group
Trust); \11\ (b) declare the investor's entire capital commitment due
and pursue collection of the same; or (c) expel, at fair market value,
the defaulting investor and offer its interest in the Partnership (or
BF V Group Trust) first to the non-defaulting investors and then to
non-investors who are qualified to invest in such Partnership (or BF V
Group Trust). In making the choice between these alternatives, it is
represented that the General Partner/Administrator will be guided by
then-current investment strategies and the best interest of the non-
defaulting investors.
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\11\ Reductions in a Limited Partner's participations are based
upon the relative amount of capital contributions that are omitted.
For example, if a Limited Partner subscribes for a 10 percent
interest in the Partnership and neglects to honor 25 percent of its
commitment, the Limited Partner will only have a 7.5 percent
interest in the Partnership if it is permitted to continue its
investment.
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9. The terms of the Partnership control the duties and authority of
the General Partner. For example, the General Partner, at its own
expense, will provide the Partnership and the BF V Group Trust with
personnel who are able to undertake the investment strategies for these
entities as well as perform their clerical, bookkeeping and
administrative functions. In addition, the General Partner, at its own
expense, will provide the Partnership and the BF V Group Trust with
office space, telephones, copying machines, postage and all other
necessary items of office services. Further, the General Partner will
control proxy voting on all portfolio securities.\12\ The Partnership
Agreement permits the General Partner to allocate securities
transactions to broker-dealers of its choice.
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\12\ The Department is not providing exemptive relief herein for
any prohibited transactions that may arise as a result of proxy
voting on the part of the General Partner. The Department also notes
that the general standards of fiduciary conduct promulgated under
the Act would apply to such voting practices.
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The General Partner will prepare, or cause to be prepared on behalf
of the Partnership, the following reports: (a) annual audited financial
statements; and (b) quarterly unaudited financial statements. In
addition, the General Partner will keep the accounts of the Partnership
in its capacity as Administrator of the Trust.\13\
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\13\ Some examples of the types of accounts that will be
maintained by the Partnership for each Limited Partner are (a) the
Capital Account, which reflects the original capital paid into the
Partnership by the Limited Partner and any adjustments thereto; (b)
the Income Account, to which will be credited income, interest,
dividends, fees for services (i.e., consulting services provided by
the Partnership to financial institutions) and any other income
items (other than gains or losses on the sale or other disposition
of securities or other assets and other than income from high yield
investments) and to which will be debited any expenses of the
Partnership other than those which are to be taken into account to
determine gains and losses; and (c) the Gain Account, to which will
be credited or debited gains or losses after expenses of sale, when
and as realized from the sale or other disposition by the
Partnership of securities or other assets, whether or not any such
gain or loss is recognized or constitutes long-term or short-term
capital gain or loss or ordinary income or loss for Federal income
tax purposes.
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10. Under the Partnership Agreement, two types of fees will be
payable to the General Partner by the Partnership. These fees are a
management fee (the Management Fee) and the Performance Fee, the
components of which are described below.
The General Partner's Management Fee is payable as a percentage of
the aggregate capital contributions to the Partnership. The fee will be
equal to 5 percent of the first $20 million in capital contributions,
1.74 percent of the next $230 million of capital contributions and 2
percent on amounts in excess of $250 million. On average, the fee will
not exceed 2 percent of committed capital when all capital is
contributed, even if the Partnership is capitalized at less than $250
million.\14\
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\14\ It is represented that the Management Fee is covered by the
statutory exemptive relief available under section 408(b)(2) of the
Act. However, the Department expresses no opinion herein on whether
the General Partner's receipt of the Management Fee will satisfy the
terms and conditions of section 408(b)(2) of the Act.
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Although Limited Partners will receive distributions from the
Partnership throughout its duration, if, as a result of distributions
to the Limited Partners, paid-in capital contributions are reduced to
50 percent or less of the original aggregate capital contributions to
the Partnership after December 31, 2006, the Management Fee will be
reduced to 70 percent of the amount otherwise payable, effective for
fiscal years subsequent to the year in which said reduction was
achieved. Upon the return to the Limited Partners of capital
contributions so as to reduce their capital contributions to 25 percent
or less of the total capital contributions paid-in, the Management Fee
will be reduced to 50 percent of the amount otherwise payable,
effective for fiscal years subsequent to the year in which said
reduction was achieved.
11. In addition to the Management Fee, the General Partner \15\
will be entitled to receive the Performance Fee, which will accrue
annually in a debit account (i.e., the Performance Fee Account) between
the date the first contribution is made to the Partnership until the
time the Partnership disposes of its last investment. As noted above,
the Performance Fee Account will provide a mechanism for measuring the
General Partner's compensation for managing the Partnership. Such
account will be a ``moving'' balance that will reflect the activity of
the Partnership instead of actual dollars that are reserved or set
aside for the General Partner. Until distributions from the Performance
Fee Account are made, funds that the debit account credits represent
will be invested for the benefit of the Limited Partners.
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\15\ As briefly alluded to in Representation 1, certain
employees of TBFC, generally those who take an active part in the
management of the Partnership, are limited partners in MidBanc V,
the General Partner of the Partnership. MidBanc V will be entitled
to receive the Performance Fee to the extent that it is earned.
MidBanc V will then allocate the Performance Fee among TBFC and the
employees of TBFC who are limited partners in MidBanc V.
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The Performance Fee will be paid during the final two years of the
Partnership. Simply stated, the Performance Fee will equal 20 percent
of the excess of net realized gains minus net unrealized losses of the
Partnership, minus allowed distributions determined annually between
the date of the first contribution to the Partnership until the
disposition of the last Partnership asset.
In addition, the General Partner's Performance Fee will subject to
the following terms and conditions:
(a) Fee Base. As noted above, the amount credited to the General
Partner as the Performance Fee will be equal to a percentage of net
realized gains minus net unrealized losses. The fee will be annually
credited to the General Partner.\16\
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\16\ Any payments of the Performance Fee will reflect realized
gains inuring to the Partnership. For the Partnership to make a
Performance Fee payment to the General Partner, it must sell a
Partnership investment for a price exceeding the purchase price for
such investment. Therefore, the proceeds of the sale will reflect
the source of Performance Fee payments.
After the Partnership has invested its capital, it will have two
sources of cash. One is income received from its investments, such
as dividends or interest. The other is money received when it sells
an investment.
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(b) Reduced Availability. Prior to the termination of the
Partnership, only 75 percent of the General Partner's Performance Fee
may be drawn from the Partnership. (This limit will also apply to
special income tax draws as described in Representation 13.)
(c) Limited Deferral/Return of Capital. Again, with the exception
of the General Partner's income tax liabilities that are described in
Representation 13,
[[Page 33366]]
distributions of the Performance Fee cannot be made until January 1,
2007, which is after the completion of the Partnership's Acquisition
Phase. Withdrawals with respect to the Performance Fee cannot be paid
until investors have received distributions equal to 100 percent of
their capital contributions.\17\
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\17\ Where a partnership, such as the Partnership described
herein, makes a distribution to the Limited Partners, that
distribution can include any of the following: income, realized
gains, and/or return of capital. Income and gains can arise at any
time during the partnership's life. Although income and gains occur
after the initial investment phase of a partnership, in the case of
the Funds, such distributions have occurred during the Acquisition
Phase. However generally, the contributed capital that gives rise to
a gain attributed to the Partnership during the Acquisition Phase
will be reinvested by the General Partner. Conversely, the
contributed capital that gives rise to a gain attributed to the
Partnership after the Acquisition Phase has been completed, will be
distributed to a Limited Partner if the gain is realized after the
Acquisition Phase expires.
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(d) Debits. The General Partner's Performance Fee Account is
debited for the appropriate percentage of realized losses and net
unrealized losses and distributions pursuant to the formula. The
Performance Fee cannot be drawn when the Performance Fee Account is in
a deficit position. Thus, if a gain is realized when the Performance
Fee Account is in a deficit position, no Performance Fee can be paid to
the General Partner and accrue in the Performance Fee Account.
Sufficient gains must be realized to restore the deficit, restore the
25 percent cushion and generate surplus before any part of the
Performance Feet can eventually be drawn down.
(e) Unrealized Gains. Although net unrealized losses are subtracted
from net realized gains before the Performance Fee is calculated, net
unrealized gains are excluded from the calculation of the General
Partner's Performance Fee. In essence, the exclusion of net unrealized
gains serves as an additional reserve ensuring that the General Partner
will not be permitted withdrawals based on early gains that are subject
to offset by later losses. The exclusion of net unrealized gains and
the inclusion of net unrealized losses in the Performance Fee
calculation operate to create a moving threshold or hurdle. If the
General Partner draws on its Performance Fee Account and the
Partnership experiences a later loss, the General Partner cannot take
another fee until that loss is made up.
(f) Distribution Repayment. The General Partner must prepay any
deficit in the Performance Fee Account such that if the Partnership
were to terminate at any time, the General Partner would not have
received a Performance Fee in excess of that which reflects the
Partnership's performance to that date.
12. The following examples illustrate the calculation of the
General Partner's Performance Fee. Although the Performance Fee may be
drawn annually for the specific purpose of satisfying the General
Partner's tax liabilities under certain limited circumstances (see
Section II(o) and Representation 13), generally the Performance Fee can
only be drawn during 2007 and 2008, the final two years of the
Partnership's anticipated term. However, for purposes of illustration,
four draw years have been assumed in the examples.
Example #1
----------------------------------------------------------------------------------------------------------------
Cumulative net Performance
Year position fee account Maximum draw Draw or refund
----------------------------------------------------------------------------------------------------------------
1............................................... $800 $160 $120 $120
2............................................... 200 40 30 (90)
3............................................... 1,000 200 150 120
4............................................... 700 140 105 (45)
----------------------------------------------------------------------------------------------------------------
Year 1 Assume that when the Performance Fee first becomes drawable in
2007 the Partnership's Cumulative Net Position is $800. The General
Partner's Performance Fee is 20% of $200 or $160. The General Partner
may draw 75% of the $160 or $120.\18\
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\18\ The assumption is, for purposes of this example, that all
Limited Partners investing in the Partnership have received a 100
percent return of their capital contributions.
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Year 2 The Partnership's Cumulative Net Position at the end of Year 2
is $200. The General Partner's Performance Fee is 20% of $200 or $40.
The General Partner is entitled to draw $30, but since it has
previously drawn $120, it must refund $90.
Year 3 The Partnership now has a Cumulative Net Position of $1,000.
The General Partner's Performance Fee is $200 with a permitted draw of
$150. Because the General Partner has previously drawn a net amount of
$30 at the end of Year 2 (i.e., $120 - $90), it may now draw an
additional $120.
Year 4 The Partnership's Cumulative Net Position falls to $700 and the
General Partner's Performance Fee falls to $140. The 75% draw equals
$105, but the General Partner has previously drawn a total of $150
(i.e., $120 - $90 + $120). Therefore, the General Partner must make a
refund to the Partnership of $45.
Example #2
----------------------------------------------------------------------------------------------------------------
Cumulative net Performance
Year position fee account Maximum draw Draw or refund
----------------------------------------------------------------------------------------------------------------
1.............................................. $2,000 $400 $300 $300
2.............................................. 1,000 200 150 (150)
3.............................................. 500 100 75 (75)
4.............................................. 900 180 135 60
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Year 1 Assume that when the General Partner's Performance Fee first
becomes drawable in 2007, the Cumulative Net Position for the
Partnership is $2,000. The General Partner's Performance Fee is 20% of
[[Page 33367]]
$2,000 or $400. The General Partner may draw 75% of the $400 fee or
$300. $100 or 25% of the draw amount must be left in the Partnership as
a cushion.\19\
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\19\ The assumption is again, for purposes of this example, that
all Plans investing in the BF V Group Trust have received a 100
percent return of their capital contributions.
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Year 2 The Cumulative Net Position for the Partnership at the end of
Year 2 has fallen to $1,000. The General Partner's Performance Fee is
20% of $1,000 or $200. TCC is entitled to draw $150, but since it has
previously drawn $300, it must refund $150.
Year 3 The Cumulative Net Position for the General Partner has fallen
to $500. The General Partner's Performance Fee now falls to $100 (i.e.,
20% of $500) with a permitted draw of $75 and a cushion of $25. Because
the General Partner has previously drawn $150 ($300 - $150), it must
make a refund to the Partnership of $75.
Year 4 The Cumulative Net Position for the Partnership is $900 at the
end of Year 4. The General Partner's Performance Fee is 20% of $900 or
$180. The General Partner's 75% draw on the Performance Fee equals
$135. However, since the General Partner has previously drawn a total
of $75 ($300 - $150 - $75), it may now draw a Performance Fee of $60.
13. The General Partner has been informed by its counsel that gains
realized by the Partnership will, to the extent that they are allocable
to the General Partner's Performance Fee Account, be taxable to the
General Partner in the year gains are realized by the Partnership, even
though the distribution of gains attributable to the General Partner
will be deferred. Therefore, to enable the individual owners of the
General Partner or its affiliates (collectively, referred to as the
General Partner) to discharge their obligations to state or federal
taxing authorities, it is proposed that an amount sufficient to pay
taxes (representing approximately 5 percent of the gains of the
Partnership) be distributed to the General Partner solely during the
Partnership's Acquisition Phase. The sale of the Portfolio Company
securities that gives rise to the early distribution of such gains may
only occur in connection with a third party merger, acquisition or
tender offer and not through an exercise of discretion by the General
Partner.
Such distributions will be charged against the General Partner's
Performance Fee Account and will reduce the balance that is used to
calculate the 25 percent cushion required before actual distributions
can be made to the General Partner.\20\ In the event the General
Partner receives a tax refund, the amount will be repaid by the General
Partner to the Partnership to the extent a distribution has been made
to such General Partner.
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\20\ With the exception of the General Partner, all Limited
Partners will receive distributions of gains when they are realized.
(As noted previously, this could occur prior to the ending of the
Acquisition Phase for the Partnership.) For example, if at any time
during the Partnership's existence, a Portfolio Company security is
purchased for $1 million and sold by the General Partner for $3
million, a $2 million gain will be realized by the Partnership. The
Limited Partners will own $1.6 million of the gain while the General
Partner will own $400,000 of the gain (i.e., 20 percent of the
Performance Fee). Both Plan and non-Plan Limited Partners will
receive an aggregate distribution of $1.6 million which will be
allocated among such Limited Partners. Depending on whether the
Limited Partner receiving a portion of the $1.6 million gain is a
taxable or non-taxable entity, the amount allocated to the Limited
Partner will be taxed. Although the $400,000 gain attributable to
the General Partner will be deferred, the Service will view the
General Partner as having received taxable income of $400,000. If
the tax rate is 25 percent, the General Partner will owe the Service
$100,000. It is the $100,000 that the General Partner seeks to
obtain as a tax distribution. The General Partner's remaining
Performance Fee amount of $300,000 will stay in the Partnership even
though the Limited Partners will receive their proportionate share
of the $1.6 million.
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To ensure that tax refunds are repaid, the General Partner will
retain an independent accounting firm to calculate the tax liabilities
and credits. If a tax payment is owed by the General Partner, it will
appear as an asset (i.e., a receivable) on the Partnership's financial
reports that are given to the Limited Partners.
In addition, the tax distributions will be in the exact amount of
the General Partner's tax liability. All funds received in the
distribution will be forwarded to the Service and no portion will be
retained by either the General Partner or the Limited Partners.
Therefore, there will be no gain by the General Partner.
Finally, TBFC notes that all of the Limited Partners were made
aware of the tax distribution feature of the Partnership. TBFC states
that this disclosure was made before the Limited Partners determined to
commit capital to the Partnership.
14. The Partnership will terminate upon the earliest to occur of
(a) the complete distribution of its assets, (b) a vote in favor of
termination by 75 percent of the Limited Partners,\21\ or (c) December
31, 2008. If it would be to the financial benefit of the Limited
Partners to extend the term of the Partnership beyond 2008, extensions
of up to two years may be initiated by the General Partner. Any further
extension must be approved by the Limited Partners holding a majority
of the Limited Partnership interests. Neither the General Partner nor
the Partnership may acquire additional Partnership investments at the
time of an extension. The purpose of the extension will be to allow the
General Partner to liquidate the Partnership's existing investments,
distribute the cash proceeds received from the liquidation to the
Limited Partners, and terminate the Partnership.
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\21\ A vote of 75 percent of the Limited Partners to remove the
General Partner will also result in the termination of the
Partnership.
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Upon termination of the Partnership, all portfolio positions will
be liquidated, Partnership expenses will be paid and distributions will
be made (including any remaining portion of the General Partner's
Performance Fee). If all assets cannot be converted into cash or if it
would be disadvantageous to liquidate every asset, remaining assets may
be distributed in-kind, at the discretion of the General Partner. The
General Partner will then receive a fractional portion of its fee, in-
kind. To ensure that the General Partner will not select higher income-
generating Partnership assets for itself, each Limited Partner, as well
as the General Partner, will receive a proportionate share of each
Portfolio Company security that is distributed in-kind.
15. The following example illustrates the manner in which in-kind
distributions will be made by the General Partner:
Assume that there are only two Limited Partners investing in the
Partnership and that each has received a full return of capital.
Non-Plan A investor has a Partnership interest worth $60 and the BF
V Group Trust has a Partnership interest worth $40.
The Partnership holds 100 shares of Bank X stock which it
acquired for $5 per share. Upon termination of the Partnership, Bank
X stock is worth $7 per share.
The total unrealized gain attributable to Bank X stock is
($7-$5) x 100 = $200.
The General Partner's Performance Fee is equal to $200 x 20% =
$40.
The General Partner receives $40 <divide> $7 = 5.7 shares of
Bank X stock.
The non-Plan investor receives 60% x 94.3 = 56.6 shares of
Bank X stock.
The BF V Group Trust receives 40% x 94.3 = 37.7 shares of Bank
X stock. Therefore, the Plans investing in the BF V Group Trust
share proportionately in the 37.7 shares of Bank X stock.
16. In general, Partnership interests will not be assignable, and
no Limited Partner may assign or otherwise transfer, pledge or
otherwise encumber any or all of its interest in the Partnership
without the prior consent of the General Partner. However, a Limited
Partner may transfer its interest only after extending to the
Partnership and
[[Page 33368]]
the other Limited Partners the right of ``first offer.''
In addition, because the BF V Group Trust's investment philosophy
is inconsistent with at-will withdrawals, redemptions of Partnership
interests are limited to situations where (a) a replacement Plan is
available from either current Plans investing in the BF V Group Trust
or there are new, qualified investors;
(b) a Plan submits to the General Partner and the Trustee, a
written opinion of counsel to the effect that the Plan's continued
participation in the BF V Group Trust would violate the Act and that
relief from the violation cannot be obtained;
(c) the Plan loses its tax-exempt status and that loss threatens
the tax-exempt status of the BF V Group Trust; and (d) the BF V Group
Trust loses its tax-exempt status or fails to obtain the exemptive
relief proposed herein for the necessary operation of such Group Trust.
This information will be disclosed to investors.
17. The BF V Group Trust Agreement requires that the General
Partner, as Administrator of the BF V Group Trust, provide the
Independent Fiduciary of each Plan proposing to invest in the BF V
Group Trust with a copy of the Private Placement Memorandum by the
General Partner. The Private Placement Memorandum describes all
material facts concerning the purpose, structure and operation of the
BF V Group Trust.
If the Independent Fiduciary expresses further interest in
participating in the BF V Group Trust, such Independent Fiduciary will
be provided with copies of the BF V Group Trust Agreement outlining the
organizational principles, investment objectives and administration of
the BF V Group Trust, the manner in which Trust shares could be
redeemed, the duties of the parties retained to administer the BF V
Group Trust and the manner in which Group Trust assets would be valued.
The Independent Fiduciary will also be provided with a copy of the
Partnership Agreement which describes the organizational principles,
investment objectives and administration of the Partnership, the manner
in which Partnership assets will be valued, the duties and
responsibilities of the General Partner, the rate of remuneration that
the General Partner will be paid and the conditions under which the
General Partner may be removed. Once the Independent Fiduciary has made
a decision to invest in the BF V Group Trust, the General Partner will
provide such Independent Fiduciary with the names and addresses of all
other participating Plans as well as non-Plan investors.
18. The Independent Fiduciary will be required to acknowledge, in
writing, prior to purchasing a beneficial interest in the BF V Group
Trust that such fiduciary has received copies of the foregoing
documents. The Independent Fiduciary will also be required to
acknowledge, in writing, to the General Partner that such fiduciary is
independent of the General Partner and its affiliates, capable of
making an independent decision regarding the investment of Plan assets,
knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the BF V Group Trust.
With respect to its ongoing participation in the BF V Group Trust,
each Plan and the Trustee will receive the following written
disclosures from the General Partner, as the Administrator of the BF V
Group Trust:
(a) Within 90 days after the end of each fiscal year of the BF V
Group Trust as well as at the time of termination, an annual
financial report containing a balance sheet for the BF V Group Trust
and the Partnership as of the end of such fiscal year and a
statement of the changes in the financial position for the fiscal
year, as audited and reported upon by independent, certified public
accountants. The annual report will also disclose the remuneration
actually paid or accrued to the General Partner.
(b) Within 60 days after the end of each quarter (except in the
last quarter) of each fiscal year of the BF V Group Trust and the
Partnership, an unaudited quarterly financial report consisting of
at least a balance sheet for the BF V Group Trust and the
Partnership as of the end of such quarter and a profit and loss
statement for such quarter. The quarterly report will also specify
the remuneration that is actually paid or accrued to the General
Partner.
In addition to the foregoing reports, the General Partner will prepare
and distribute to the BF V Group Trust and each Plan such other
information as may be reasonably requested by the Plans to comply with
the reporting requirements of the Act or Code (including copies of the
proposed exemption and grant notice with respect to the exemptive
relief granted herein).
At least annually, the General Partner will hold a meeting of the
Partnership, at which time, the Independent Fiduciaries of
participating Plans will have the opportunity to decide on whether the
Partnership, the BF V Group Trust, the Trustee or the General Partner
should be terminated as well as discuss any aspect of the Partnership
and Group Trust and the Agreements promulgated thereunder. Finally,
during each year of the BF V Group Trust, representatives of the
General Partner will be available to confer by telephone or in person
with Independent Fiduciaries on matters concerning the BF V Group Trust
or the Partnership.
19. The terms of all transactions that are entered into on behalf
of the Partnership by the General Partner will be at least as favorable
to an investing Plan as those obtainable in arm's length transactions
with unrelated parties. In this regard, valuations of (and for) the
Partnership will be needed for general accounting purposes, to
determine the value of the Partnership's assets for reports to the
Limited Partners, for distributions of securities and to calculate the
General Partner's Performance Fee when the General Partner seeks to
draw upon it. The General Partner, subject to the review and approval
of the Valuation Committee, will determine the fair market value of the
assets and liabilities of the Partnership as of each fiscal date.\22\
The Valuation Committee, which is the same advisory committee that
served MBF I and II and currently serves BF III and IV, will also serve
as the Independent Appraiser. The Valuation Committee is composed of
three members who are experienced in valuing the securities of
Portfolio Companies. None of the members of the Valuation Committee has
an ownership or creditor relationship with the General Partner.
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\22\ It is represented that the General Partner will gather all
requisite information to produce the valuation. This information may
include pricing information on any exchange-traded securities plus
more voluminous operating and financial data on the companies for
whose securities there is a thinner market. The General Partner will
then compile this information into a report which is submitted to
the Valuation Committee. After reviewing the submitted information,
the Committee will meet with the staff of the General Partner to
discuss the valuation materials. At the end of this meeting, the
Valuation Committee will set the valuation for all portfolio
hedgings. Thus, from both a legal and operative standpoints, the
Partnership Agreement will control the valuation process and the
Valuation Committee will value the Fund.
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As the Independent Appraiser, each member of the Valuation
Committee must not be controlled by (or control) TBFC or the
Partnership and must not receive more than 5 percent of their lowest
annual income from the General Partner or the Partnership, either
during the term of the Partnership or in the three years preceding its
creation. Individual members of the Valuation Committee or the entire
committee may be removed by the General Partner only for cause and with
or without cause by Limited Partners holding a majority of the Limited
Partnership interests. A
[[Page 33369]]
majority of the Limited Partners must approve a replacement Independent
Appraiser. If the Limited Partners and the General Partner cannot agree
upon a replacement Independent Appraiser, the firm of KPMG Peat Marwick
LLP will be appointed.
Although the General Partner will nominate the Independent
Appraiser, the Limited Partners will be given the option of either
approving or disapproving the nominee. The Independent Appraiser will
not be appointed absent the affirmative written approval of a majority
of the Limited Partners. However, the Limited Partners will have no
veto power over the General Partner's decision that an Independent
Appraiser is required.
If applicable, the Independent Appraiser will use the principles
set forth in Revenue Ruling 59-60 and the Department's proposed
``Adequate Consideration'' regulations (53 FR 17632, May 17, 1988) to
determine fair market value. The valuations made by the Independent
Appraiser will be binding upon the General Partner. In addition, the
Independent Appraiser will issue a report to the General Partner which
sets forth the Independent Appraiser's pricing methodology and
rationale for securities it has been asked to value. Such report will
be issued after each required valuation and will comply with the
aforementioned regulations.
With respect to securities for which a market exists, the
Independent Appraiser will determine their value according to the
following principles:
(a) National Securities Exchange. Any security which is listed on a
national securities exchange generally will be valued based on its last
sales price on the national securities exchange on which the security
is principally traded on the valuation date.\23\ If no sale of a listed
Security occurred on the valuation date, the value will be based on the
last bid price.
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\23\ TBFC explains that the phrase ``principally traded'' means
that if a security is traded on more than one exchange and if the
trade prices differ between exchanges, the value will be taken from
the exchange on which the largest volume of that security has
traded.
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(b) No Listing. Any security which is not listed on a national
securities exchange will be valued upon the last publicly available bid
price.\24\
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\24\ TBFC explains that the most recent trade price is not used
to value a security in this instance because it may be too dated to
provide an accurate estimate of value. Instead, TBFC considers the
bid price to be indicative of the current value at which someone
would be willing to acquire a security on the valuation date. TBFC
further notes that the use of the bid price rather than the previous
trading or closing price in valuing a Security provides a
conservative valuation approach which will result, in most
instances, in a lower Performance Fee paid to the General Partner.
The Department assumes that the bid price described herein
represents active bids and is a true indicator of market prices.
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(c) Discount for Illiquidity. Anything herein to the contrary
notwithstanding, the Independent Appraiser in its discretion may apply
a discount for illiquidity, on the valuation of securities that have a
thin public market.
In the event that there is no independent market for a security or
the security is not listed on a national securities exchange, the
Independent Appraiser will be required to value such securities. Under
such circumstances, the securities will be valued at the time of
acquisition at their cost. The Independent Appraiser will continue
valuing the securities at their cost until a determination is made that
a different valuation level is indicated by the occurrence of (a) a
significant change in book value, (b) a significant change in a
Portfolio Company's business, (c) a significant third-party
transaction, or (d) any other significant change in the Financial
Company, its industry or the general market.
20. With respect to transactions that may arise during the
existence of the Partnership and which involve parties in interest with
respect to participating Plans, the General Partner requests exemptive
relief from the provisions of section 406(a) of the Act. Specifically,
TBFC requests exemptive relief where the Partnership sells securities
in the Partnership Portfolio for cash or other securities to a party in
interest with respect to a participating Plan in the context of an
acquisition or merger by the party in interest, provided the party in
interest is not an affiliate of the General Partner. TBFC represents
that the Partnership will receive the same offer that other
shareholders of Portfolio Companies will receive. Because the
Partnership will always be a minority shareholder in such situation,
TBFC states that the Partnership will be in the position of a
beneficiary of the acquisition offer and it will not be in the position
off an active player in the merger or acquisition transactions.
21. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The participation by a Plan in the BF V Group Trust and in the
Partnership will be approved by an Independent Fiduciary.
(b) Each Plan investing in the Partnership through the BF V Group
Trust will have assets that are in excess of $50 million.
(c) No Plan will invest more than 10 percent of its assets in the
Partnership through the BF V Group Trust and a Plan's respective
interests in both entities will not represent more than 25 percent of
the assets of either the BF V Group Trust or the Partnership.
(d) No Plan will invest more than 25 percent of its assets in
investment funds and separate accounts managed or sponsored by TBFC
and/or its affiliates.
(e) Prior to making an investment in the BF V Group Trust and the
Partnership, each Independent Fiduciary contemplating investing therein
will receive offering materials which disclose all material facts
concerning the purpose, structure and operation of the BF V Group
Trust, the Partnership and the fees paid to the Trustee and the General
Partner.
(f) Each Plan investing in the BF V Group Trust and the Partnership
will be required to acknowledge, in writing, prior to purchasing
interests that such fiduciary has received copies of such documents and
to acknowledge, in writing, to the General Partner that such fiduciary
is (1) independent of the General Partner and its affiliates, (2)
capable of making an independent decision regarding the investment of
Plan assets and (3) knowledgeable with respect to the Plan in
administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the BF V Group
Trust.
(g) The General Partner will make quarterly and annual written
disclosures to participating Plans with respect to the financial
condition of the Partnership and the total fees that it will receive
for services rendered to such Partnership.
(h) The General Partner will hold annual meetings and conduct
periodic discussions with Independent Fiduciaries to address matters
pertaining to the BF V Group Trust or the Partnership.
(i) The terms of all transactions that are entered into on behalf
of the Partnership by the General Partner shall remain at least as
favorable to an investing Plan as those obtainable in arm's length
transactions with unrelated parties. In this regard, the valuation of
assets of the Partnership will be based upon independent market
quotations or determinations made by an Independent Appraiser.
(j) As to each Plan, the total fees paid to the General Partner and
its affiliates will constitute no more than reasonable compensation.
(k) Any increase in the General Partner's Performance Fee will be
based upon a predetermined percentage of net realized gains minus net
unrealized
[[Page 33370]]
losses. In this regard, (1) Except as described in item (1) below, no
part of the General Partner's Performance Fee may be withdrawn before
December 31, 2006, which represents the completion of the Acquisition
Phase of the Partnership and not until the Limited Partners have
received distributions equal to 100 percent of their capital
contributions to the Partnership.
(2) Prior to the termination of the Partnership, no more than 75
percent of the Performance Fee credited to the General Partner may be
withdrawn from the Partnership.
(3) The Performance Fee Account established for the General Partner
will be credited with net realized gains and charged for net unrealized
losses and Performance Fee distributions.
(4) The General Partner will repay all deficits in its Performance
Fee Account and it will maintain a 25 percent cushion in such account
before receiving any further distribution.
(1) The General Partner will be entitled to take distributions with
respect to its Performance Fee in the amount of any income tax
liability it or its affiliates become subject to with respect to net
capital gains of the Partnership (i) only during the Partnership's
Acquisition Phase and (ii) provided such gains are based on the sale of
Portfolio Company securities that is initiated by a third party in
connection with a merger, tender offer or acquisition.
(m) The General Partner will be obligated to repay to the
Partnership any tax refund received to the extent a distribution have
been made to such General Partner.
Notice to Interested Persons
Notice of the proposed exemption will be given to Plans intending
to invest in the Partnership through the BF V Group Trust within 3 days
of the date of publication of the notice of pendency in the Federal
Register. Such notice will include a copy of the notice of proposed
exemption, as published in the Federal Register, as well as a
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),
which shall inform interested persons of their right to comment on and/
or to request a hearing. Comments and hearing requests with respect to
the proposed exemption are due 33 days after the date of publication of
the proposed exemption in the Federal Register.
For Further Information Contact: Ms. Jan D. Broady of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Standard Insurance Company (Standard) Located in Portland, OR
[Application No. D-10705]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act (or ERISA) and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR
32836, 32847, August 10, 1990).\25\
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\25\ For purposes of this exemption, reference to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply, effective April 21, 1999, to (1) the receipt of
common stock (the Stock) of the StanCorp Financial Group, Inc. (the
Holding Company), the parent of Standard, or (2) the receipt of cash
(Cash) or policy credits (Policy Credits), by or on behalf of any
eligible policyholder (the Eligible Member) of Standard which is an
employee benefit plan (the Plan), including the Standard Group Life,
Supplemental Life and AD&D Plan for Employees and Agents (the Standard
Group Life Plan) and the Standard Group Term and Short Term Disability
Employees Plan (the Standard Disability Plan; together, the Standard
Welfare Plans), in exchange for such Eligible Member's interest in
Standard, in accordance with the terms of a plan of demutualization
(the Plan of Demutualization or Demutualization Plan) adopted by
Standard and implemented pursuant to Section 732 of the Oregon Revised
Statutes. \26\
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\26\ Unless otherwise noted, the client Plans and the Standard
Plans are collectively referred to as the Plans.
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In addition, the restrictions of section 406(a)(1)(E) and (a)(2)
and section 407(a)(2) of the Act shall not apply, effective April 21,
1999, to the receipt or holding, by the Standard Welfare Plans, of
employer securities in the form of excess Holding Company Stock, in
accordance with the terms of the Demutualization Plan.
The proposed exemptions described above are subject to the
following conditions:
(a) The Plan of Demutualization was implemented in accordance with
procedural and substantive safeguards that were imposed under Oregon
Insurance Law and was subject to review and supervision by the Director
of the Department of Consumer and Business Services of the State of
Oregon (the Director).
(b) The Director reviewed the terms of the options that were
provided to Eligible Members of Standard, which included, but were not
limited to the subject Plans, as part of his review of the
Demutualization Plan, and only approved such Demutualization Plan
following a determination that the Plan was fair and equitable to all
Eligible Members and was not detrimental to the public.
(c) Each Eligible Member had an opportunity to vote to approve the
Plan of Demutualization after full written disclosure was given to the
Eligible Member by Standard.
(d) One or more independent fiduciaries of a Plan that was an
Eligible Member received Holding Company Stock, Cash or Policy Credits,
pursuant to the terms of the Demutualization Plan, and neither Standard
nor any of its affiliates exercised any discretion or provided
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c), with
respect to such acquisition.
(e) With respect to the Standard Welfare Plans and other Plans
sponsored by Standard and its affiliates (collectively, the Standard
Plans), where the consideration was in the form of Holding Company
Stock, Northwestern Trust and Advisory Company (Northwestern Trust),
the independent Plan fiduciary appointed to represent the interests of
each of the Standard Plans,
(1) Exercised its authority and responsibility to vote on behalf of
the Standard Plans at the special meeting of Eligible Members on the
proposal to approve the Demutualization Plan;
(2) Monitored the Holding Company Stock received by a Standard
Plan; and
(3) Provided instructions with respect to the voting, the continued
holding and the disposition of Holding Company Stock held by all of the
Standard Plans.
(f) After each Eligible Member was allocated at least 52 shares of
Holding Company Stock, additional consideration was allocated to
Eligible Members who owned participating policies based on actuarial
formulas that took into account each participating policy's
contribution to the surplus of Standard which formulas have been
approved by the Director.
(g) All Eligible Members that were Plans participated in the
transactions on the same basis within their class groupings as other
Eligible Members that were not Plans.
(h) No Eligible Member paid any brokerage commissions or fees in
[[Page 33371]]
connection with the receipt of Holding Company Stock, nor has (or will)
such Eligible Member pay any brokerage commissions or fees in
connection with the implementation of the commission-free sales and
purchase program (the Program).
(i) All of Standard's policyholder obligations will remain in force
and will not be affected by the Plan of Demutualization.
Section II. Definitions
For purposes of this proposed exemption:
(a) The term ``Standard'' means The Standard Insurance Company and
any affiliate of Standard as defined in paragraph (b) of this Section
III.
(b) An ``affiliate'' of Standard includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Standard; (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual.) and
(2) Any officer, director or partner in such person.
(c) The term ``Eligible Member'' means a policyholder who is
eligible to vote and to receive consideration under Standard's
Demutualization Plan. Such Eligible Member must have been a
policyholder of Standard on December 17, 1997, the date the Plan of
Demutualization was adopted by the Board of Directors of Standard.
(d) The term ``policy credit'' means an increase in the
accumulation account value \27\ (to which no surrender or similar
charges are applied) in the general account or an increase in a
dividend accumulation on a policy.
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\27\ In general, a policy's accumulation account value is
expressed in dollar terms and reflects contributions and interest
credited under the policy, less expenses and withdrawals.
Accumulation values may be applied for the purchase of annuity
benefits, or depending on the provisions of the contract, withdrawn
by the policyholder in a lump sum or installments. Under Standard's
Plan of Demutualization, where a policy eligible for distributions
under such Plan has an accumulation value, the policy's accumulation
value will be increased by an amount equal to the distribution the
policyholder is entitled to under the Plan.
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Effective Date: If granted, this proposed exemption will be
effective as of April 21, 1999.
Summary of Facts and Representations
1. Standard was formerly a mutual life insurance company chartered
under the laws of the State of Oregon. It was originally chartered in
1906 as a stock company and was subsequently ``mutualized'' in 1929
under Oregon law. Standard is authorized to transact life, health and
annuity business in all 50 states (reinsurance only in New York), the
District of Columbia and the U.S. Territory of Guam. As of December 31,
1998, Standard had admitted assets (on a statutory basis) in excess of
$4.9 billion and generated $890.9 million in annualized premium and
annuity consideration.
Standard's home office is located at 1100 S.W. Sixth Avenue,
Portland, Oregon. As of December 31, 1998, Standard was rated A
(Excellent) by A.M. Best, A+ (Good) by Standard and Poor's, AA (Very
High Claims Paying Ability) by Duff & Phelps and A2 (Good) by Moody's.
As a mutual life insurance company, Standard had no stockholders.
Instead, its policyholders were members of the company and were
entitled to vote to elect its directors and would be entitled to share
in its assets upon its liquidation.
Standard provides a variety of fiduciary and other services,
including plan administration, investment management and related
services, to Plans policyholders that are covered under the applicable
provisions of the Act and/or the Code. As a result, Standard may be
considered a party in interest or a disqualified person with respect to
such Plans under section 3(14)(A) and (B) of the Act as well as the
related ``derivative'' provisions of section 3(14) of the Act.
Standard has actively marketed its products to Plans. As of
December 31, 1997, Standard had approximately 30,800 outstanding
policies and contracts issued in connection with Plan policyholders
that were pension or welfare plans subject to the Act. Of these
policies, approximately 5,200 contracts were issued to defined benefit
or defined contribution pension plans (including section 401(k) plans)
and over 25,600 contracts were issued to welfare plans to provide group
life, short-term and long-term disability, accidental death and
dismemberment, and group health and dental coverage.
2. Standard Management, Inc. (Standard Management) is a holding
company that is organized under Oregon law and formerly wholly owned by
Standard. On April 21, 1999, the effective date of the demutualization,
Standard Management became a wholly owned subsidiary of StanCorp
Financial Group, Inc. (i.e., the Holding Company), which also became
the parent of Standard. The Holding Company is also organized under
Oregon law.
3. Standard has also created two limited liability companies under
Oregon law. They are Standard Mortgage Investors, LLC (Standard
Mortgage), which manages Standard's mortgage loan portfolio and markets
its expertise to other investors and Standard Real Estate Investors,
LLC (Standard Real Estate Investors), which is engaged in the business
of real estate management, primarily with respect to real estate owned
by Standard. Currently, the assets of Standard Mortgage and Standard
Real Estate Investors are owned completely by Standard through Standard
Management.
In addition to these companies, Standard has formed Stan-West
Equities, Inc. (Stan-West), a licensed broker-dealer, 400 Health Club,
Inc. (400 Health Club), a corporate shell that does not conduct
business of any kind, and Standard Assigned Benefits, Inc. (Standard
Assigned Benefits), an entity which was formerly in the business of
funding structured litigation settlements but which is not transacting
business at the present time. Through its sister, Standard Management,
Standard owns 100 percent of the assets of these entities.
4. Standard and its affiliates also sponsor a number of retirement
and welfare plans for their agents and employees that participated in
the demutualization transaction described herein. The affected Standard
Plans, their total number of participants and assets are shown as
follows as of December 31, 1997, which is the most recent date this
information is available:
------------------------------------------------------------------------
Number of Total
Standard plans participants assets as
as of 12/97 of 12/97
------------------------------------------------------------------------
Group Life, Supplemental Life and AD&D 2,837 <SUP>1</SUP> $431,985
Employees and Agents........................
Group Long Term and Short Term Disability- 1,771 <SUP>1</SUP> 802,820
Employees...................................
Defined Benefit Plan-Employees............... 1,419 64,754,363
Defined Benefit Plan-Agents.................. 85 13,442,533
Defined Contribution Plan-Employees.......... 1,405 55,397,674
Defined Contribution Plan-Agents............. 119 16,200,232
------------------------------------------------------------------------
<SUP>1</SUP> Expressed as an annualized premium.
5. In 1997, Standard's Board of Directors authorized its management
to develop a plan of demutualization
[[Page 33372]]
whereby Standard would be converted from a mutual life insurance
company to a stock life insurance company. In response, Standard began
developing the Plan of Demutualization which was formally adopted by
the Board of Directors on September 28, 1998. The principal purposes
for the demutualization were to (a) enhance Standard's strategic and
financial flexibility by creating a corporate structure that would
provide opportunities for obtaining additional capital from sources
that are unavailable to Standard in its current form as a mutual
insurer; (b) allow Standard to use stock options or other equity-based
compensation arrangements to attract and retain talented employees; (c)
facilitate acquisitions, which Standard's management viewed as an
important element of future growth; and (d) provide Eligible Members
with an opportunity to convert their illiquid interests as members of
Standard into shares of Stock of the Holding Company or Cash or Policy
Credits. The demutualization would not, in any way, change premiums or
reduce policy benefits, values, guarantees or other policy obligations
of Standard to its policyholders. Policy dividends would continue to be
paid as declared, although they may vary from year to year. In effect,
insurance policies would remain in force and policyholders would be
entitled to receive the benefits under their policies and contracts to
which they would have been entitled if the Demutualization Plan had not
been adopted.
6. Therefore, Standard has requested an individual exemption from
the Department that would apply, effective April 21, 1999, to the
receipt of Holding Company Stock, Cash or Policy Credits by Eligible
Members that were Plans in exchange for their existing membership
interests in Standard because it believes the transaction could be
viewed as a prohibited sale or exchange of property between a plan and
a party in interest in violation of section 406(a)(1)(A) and (D) of the
Act. Standard also has requested exemptive relief, effective April 21,
1999, with respect to distributions of Holding Company Stock to the
Standard Welfare Plans, because it believes the receipt of Holding
Company Stock by these Standard Plans violated section 406(a)(1)(E) and
(a)(2) of the Act and section 407(a)(2) of the Act, in addition to
section 406(a)(1)(A) and (D) of the Act.\28\ Standard represents that
although the Holding Company Stock would constitute ``qualifying
employer securities'' within the meaning of section 407(d)(5) of the
Act, such stock would represent 100 percent of the assets of the
Standard Welfare Plans, in violation of section 407(a)(2) of the Act.
Standard also asserts that the statutory exemptive relief contained in
section 408(e) of the Act would not apply to the acquisition and
holding of Holding Company Stock by the Standard Welfare Plans.\29\
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\28\ Section 406(a)(1)(E) of the Act prohibits the acquisition
by a Plan of any employer security that violates section 407(a) of
the Act. Section 406(a)(2) of the Act states that no fiduciary who
has authority or discretion to control the assets of a plan shall
permit the plan to hold any employer security if he [or she] knows
that holding such security would violate section 407(a) of the Act.
Section 407(a)(1)(A) of the Act states that, except otherwise
provided, a plan may not hold any employer security which is not a
qualifying employer security. Section 407(a)(2) of the Act prohibits
the acquisition by a plan of any qualifying employer security if
immediately after such acquisition, the aggregate fair market value
of such securities exceeds 10 percent of the fair market value of
the plan's assets.
\29\ Northwestern Trust, which was retained by Standard as the
independent fiduciary for all of the Standard Plans, subsequently
determined (see Representation 11) that the only Standard Plan
affected by the ``excess holding problem'' was the Standard Group
Life Plan. Although Northwestern Trust expressed no opinion on the
Standard Disability Plan, Standard believes that Northwestern Trust
may have concluded that the Holding Company Stock received in
connection with the demutualization was not a ``plan asset'' and was
thus allocable to Standard. Nevertheless, to remove any doubt,
Standard has requested that the exemption apply to both of the
Standard Welfare Plans. However, the Department is not expressing an
opinion herein on whether the Standard Disability Plan is entitled
to any of the consideration received as a result of the
demutualization.
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Standard further notes that the holding of Holding Company Stock by
the Standard Welfare Plans would not violate section 407(f) of the Act
because neither Plan would own more than 25 percent of the outstanding
shares of Holding Company Stock, and at least 50 percent of the
outstanding shares would be owned by persons who were independent of
the issuer.
Standard represents that statutory exemptive relief from section
408(e) of the Act would apply to distributions of Holding Company Stock
to its defined benefit plans (i.e., the Defined Benefit Retirement
Plan-Employees and the Defined Benefit Retirement Plan-Agents)
(together, the Standard Defined Benefit Plans) because the fair market
value of the Stock would not exceed 10 percent of the assets of these
Plans. Therefore, Standard has not requested that the exemption apply
to the Standard Defined Benefit Plans.
Similarly, Standard represents that section 408(e) would be
applicable to distributions of Holding Company Stock to its two defined
contribution plans (i.e., the Defined Contribution Plan-Employees and
the Defined Contribution Plan-Agents) (together, the Standard Defined
Contribution Plans).\30\ Therefore, Standard has not requested that the
exemption apply to the Standard Defined Contribution Plans.
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\30\ The Department expresses no opinion herein on whether the
Holding Company Stock constitutes qualifying employer securities and
whether such distributions satisfied the terms and conditions of
section 408(e) of the Act.
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7. Standard's Plan of Demutualization was approved by the Director
in January 1999. Subsequently, the following steps were taken to
implement the Demutualization Plan:
(a) Demutualization under Oregon Law. Standard converted from a
mutual life insurance company to a stock life insurance company on
April 21, 1999 in accordance with the requirements of Sections 732.600
to 732.630 of the Oregon Revised Statutes as well as under the
provisions of its Plan of Demutualization. Each policyholder's
membership interest in Standard was terminated. As compensation for
their membership interests, Eligible Members received Holding Company
Stock, Cash or Policy Credits as compensation for the termination of
their interests.
As a result of the demutualization, Standard became a stock company
and a wholly owned subsidiary of the Holding Company. Standard also
distributed its real estate management and mortgage subsidiaries (i.e.,
Standard Mortgage and Standard Real Estate Investors) and certain other
non-insurance subsidiaries (i.e., Stan-West Equities, 400 Health Club
and Standard Assigned Benefits) to the Holding Company. As a result,
these companies became direct or indirect subsidiaries of the Holding
Company.
(b) The Initial Public Offering (the IPO). The Holding Company sold
15,209,400 shares of Holding Company Stock in an underwritten IPO in
conjunction with the demutualization. The Holding Company also arranged
for the listing of Holding Company Stock on the NYSE.
(c) Contribution to the Capital of Standard. Following the
transactions described above, the Holding Company contributed $267.9
million raised in the IPO (after the payment of transaction expenses)
to Standard to pay Cash consideration to certain Eligible Members and
to fund Policy Credits for other Eligible Members as required under the
Plan of Demutalization.
8. Standard represents that Sections 732.600 to 732.630 (Section
732) of the Oregon Revised Statutes establish an approval process for
the demutualization of a life insurance company organized under Oregon
law.
[[Page 33373]]
Specifically, Section 732 requires that a plan of demutualization be
approved by both the Director and a vote of the policyholders. The
Director may hold a hearing for the purpose of receiving comments on
whether a plan should be approved and on any other matter relating to
the demutualization. After the hearing, the Director will approve the
demutualization plan if he or she finds all of the following: \31\
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\31\ The Director held a public hearing regarding Standard's
demutualization on January 27, 1999 and approved the Demutualization
Plan by order issued on February 12, 1999.
(a) The applicable provisions of ORS 732.600 to 732.630, and
other applicable provisions of the law, have been fully met.
(b) The plan protects the rights of policyholders.
(c) The plan will be fair and equitable to the members, and the
plan will not prejudice the interests of the members.
(d) The allocation of consideration among the Eligible Members
is fair and equitable.
(e) The converted stock insurer will have capital or surplus, or
any combination thereof, that is required of a domestic stock
insurer on initial authorization to transact like kinds of
insurance, and otherwise will be able to satisfy the requirements of
this state for transacting its insurance business.
(f) The plan will not substantially reduce the security of the
policyholders and the service to be rendered to the policyholders.
(g) If a stock holding or mutual holding company is organized,
the financial condition of the stock holding company, the mutual
holding company or any subsidiary thereof will not jeopardize the
financial stability of the converted stock insurer.
(h) The financial condition of the converting mutual insurer
will not be jeopardized by the conversion or reorganization, and the
conversion or reorganization will not jeopardize the financial
stability of the stock holding company, the mutual holding company
or any subsidiary thereof.
(i) The competence, experience and integrity of those persons
who will control the operation of the converted stock insurer are
not contrary to the interests of policyholders of the converted
stock insurer and of the public in allowing the plan to proceed.
(j) Implementation of the plan will protect the interests of the
insurance-buying public.
(k) The activity is not subject to other material and reasonable
objections.
(l) All modifications required by the Director have been made.
Section 732 authorizes the Director to employ staff personnel and
to engage outside consultants to assist the Commissioner in determining
whether a demutualization plan meets the requirements of Section 732.
(In the case of the Standard demutualization, the Director retained
Ernst & Young to provide actuarial services, Sidley & Austin to provide
legal services and Merrill Lynch & Co. to provide investment banking
services.) The decision by the Director to approve a demutualization
plan under Section 732 is subject to judicial review in the Oregon
courts.
9. In addition to being approved by the Director, Standard
represents that its Demutualization Plan had to be approved by its
policyholders. In this regard, Section 732 requires that the
policyholders be provided with notice of a meeting convened for the
purpose of voting on whether to approve the demutualization plan.\32\
Moreover, the demutalization plan must be approved by a vote of not
less than a majority of the votes of the insurer's policyholders voting
thereon in person, by proxy or by mail.
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\32\ Under Oregon law, the notice of the policyholder meeting
must be mailed within 45 days of the Director's order and at least
30 days prior to the meeting. Eligible Members must receive two
notices. The first notice pertains to the public hearing and
includes a summary of the plan of demutualization and provides
information regarding the right of the Eligible Member to comment,
either in person or in writing, on the plan. The second notice
relates to the meeting to vote on the plan of demutualization and
includes a full copy of the plan, a detailed explanation of the plan
and its consequences, and an explanation of the voting procedure.
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With respect to Standard, approximately 114,000 Eligible Members
were eligible to vote on the Demutualization Plan which occurred at a
special meeting on March 19, 1999. Each Eligible Member was entitled to
one vote. Of the Eligible Members, 35,569 or 32.4 percent voted and
32,598 or 91.7 percent of the votes cast were in favor of the
demutualization.
10. Standard's Demutualization Plan provided for Eligible Members
to receive Holding Company Stock, Cash or Policy Credits as
consideration for the termination of their membership interests in the
mutual company. (Combinations of different forms of consideration were
not permitted.) For purposes of the demutualization, an Eligible Member
is any owner of one or more policies of insurance, if the policy was in
force as of December 17, 1998, the record date for the plan of
conversion. This was the date that Standard's Board of Directors
adopted the Demutualization Plan.
Solely for purposes of calculating the amount of consideration,
each Eligible Member was allocated (but not necessarily issued) a
minimum of 52 shares of Holding Company Stock as soon as reasonably
practicable after April 21, 1999, the effective date of the
demutualization. Any remaining Holding Company Stock was allocated
substantially on the basis of the contributions to surplus made by each
Eligible Member's in-force policies.\33\ In this regard, under Section
732, the Director was required to make a finding that the allocation
methodology was fair and equitable.
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\33\ As noted above, Standard's IPO resulted in the sale of
15,290,400 shares of Holding Company Stock. An additional 18,310,836
shares were also allocated by Standard to Eligible Members.
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Certain Eligible Members received Cash or Policy Credits in lieu of
Holding Company Stock, which Cash or Policy Credits had a value equal
to the Holding Company Stock the policyholders would otherwise have
received, based on the price per share of the Holding Company Stock in
the IPO. Specifically, an Eligible Member received Cash in lieu of
allocable Holding Company Stock (a) if the owner of the policy was
known to Standard to be subject to a bankruptcy proceeding, or (b)
where the Eligible Member's address for mailing purposes, as shown on
the records of Standard, was located outside the United States of
America or was shown on Standard's records to be an address at which
mail to such Eligible Member is undeliverable, or (c) where an Eligible
Member, who had been allocated 99 shares or less of Holding Company
Stock, made an affirmative election, on a form provided to such
Eligible Member by Standard, to receive Cash instead of Holding Company
Stock.
An Eligible Member received Policy Credits in lieu of Holding
Company Stock with respect any policy that was (a) an individual
retirement annuity contract within the meaning of section 408 of the
Code, (b) a tax sheltered annuity contract within the meaning of
section 403(b) of the Code, (c) an individual annuity contract that had
been issued pursuant to a plan qualified under section 401(a) of the
Code directly to the plan participant, or (d) an individual life
insurance policy that had been issued pursuant to a plan qualified
under section 401(a) of the Code directly to the plan participant.
The decision to receive Holding Company Stock, Cash or Policy
Credits by a Plan was made by one or more fiduciaries of such Plan
which was independent of Standard and its affiliates. In addition,
neither Standard nor any of its affiliates exercised discretion or
provided ``investment advice,'' within the meaning of 29 CFR 2510.3-
21(c), with respect to each such acquisition.\34\ Further, no Eligible
[[Page 33374]]
Member will pay any brokerage commissions or fees in connection with
the receipt of stock.
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\34\ Consistent with section 732.600 to 732.630 of Oregon
Insurance Law, the Demutualization Plan generally provides that the
policyholder eligible to participate in the distribution of stock,
cash or policy credits resulting from the Demutualization Plan is
the ``Owner'' of the policy and that ``The Owner of a Policy shall
be shown on the Company's records.'' Standard further represents
that an insurance or annuity policy that provides benefits under an
employee benefit plan, typically designates the employer that
sponsors the plan, or a trustee acting on behalf of the plan, as the
owner of the policy. In regard to insurance or annuity policies that
designate the employer or trustee as owner of the policy, Standard
represents that it was required under the foregoing provisions of
Oregon Law and the Demutualization Plan to make distributions
resulting from such Plan to the employer or trustee as owner of the
policy, except as provided below.
In general, it is the Department's view that, if an insurance
policy (including an annuity contract) is purchased with assets of
an employee benefit plan, including participant contributions, and
if there exist any participants covered under the plan (as defined
at 29 CFR 2510.3-3) at the time when Standard incurred the
obligation to distribute Holding Company Stock, Cash or policy
credits, then such consideration would constitute an asset of such
plan. Under these circumstances, the appropriate plan fiduciaries
must take all necessary steps to safeguard the assets of the plan in
order to avoid engaging in a violation of the fiduciary
responsibility provisions of the Act.
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11. Standard's Demutualization Plan provided for the Holding
Company to establish a commission-free sales and purchase program. The
Program commenced on February 24, 2000 and it will continue until May
31, 2000. The Program may be extended if the Board of Directors of the
Holding Company determines that the extension is appropriate and in the
best interest of the Holding Company and its shareholders.
Under the Program, each Eligible Member who received 99 or fewer
shares of Holding Company Stock has been given the opportunity to sell,
at prevailing market prices, all shares of such stock. Moreover, an
Eligible Member who received 99 or fewer shares of Holding Company
Stock is permitted to purchase, at prevailing market prices, additional
shares of Holding Company Stock required to round-up the total number
of shares to 100. Under either the sales or purchase components of the
Program, the Eligible Member is not required to pay any brokerage
commissions or similar fees. Also, Standard and its affiliates have not
provided (and will not provide) ``investment advice,'' as defined in 29
CFR 2510.3-21(c).
12. Northwestern Trust was appointed by Standard to serve as the
independent fiduciary and, in so doing, to represent the interests of
the Standard Plans that are identified in Representation 4.
Northwestern Trust is a privately-owned trust company chartered by the
State of Washington and regulated by the State of Washington Department
of Financial Institutions. As of May 31, 1999, Northwestern Trust had
assets under administration exceeding $3.5 billion. A majority of those
assets consisted of retirement plan assets. Northwestern Trust's
professional staff manages ERISA programs and its ERISA clients are
located in 15 states across the United States. Northwestern Trust
provides fiduciary services to a variety of pension and welfare plans
and it is experienced in connection with the acquisition, retention and
disposition of employer securities. In addition, Northwestern Trust is
extensively involved with non-qualified deferred compensation
arrangements. To assist Northwestern Trust in carrying out its
independent fiduciary duties, it retained Dorsey & Whitney LLP as
independent legal counsel.
Northwestern Trust represents that it is completely unrelated to
Standard and its affiliates. In this regard, Northwestern Trust states
that both it and Standard have no common officers or directors nor does
it have an ownership interest in Standard or vice versa.
Northwestern Trust also represents that although it had no voting
or dispositive power over shares of Holding Company Stock other than
pursuant to its Independent Fiduciary Agreement with Standard, it acted
as a directed trustee or custodian to various retirement or welfare
plans that were not sponsored by Standard or its affiliates. On a de
minimus basis, Northwestern Trust explains that it made investments on
behalf of these plans in contracts issued by Standard. However,
Northwestern Trust states that it received no revenues from these
investments other than a trustee or custodial fee from the investing
plan.
As the independent fiduciary for the Standard Plans, Northwestern
Trust explains that it understood and acknowledged the duties,
responsibilities and liabilities in acting as a fiduciary for such
Plans. In this respect, Northwestern Trust states that in accordance
with the terms of its Independent Fiduciary Agreement, it (a) exercised
its authority and responsibility to vote on behalf of the Standard
Plans at the special meeting of Eligible Members on the proposal to
approve the Demutualization Plan; (b) monitored, on behalf of the
Standard Plans, the holding of the Holding Company Stock; and (c)
provided instructions with respect to the voting, the continued holding
and the disposition of Holding Company Stock held by all of the
Standard Plans. Finally, Northwestern Trust asserts that it would take
all actions that were necessary and appropriate to safeguard the
interests of the Standard Plans.
Northwestern Trust notes that the Standard Plans were entitled to
receive consideration in the form of Holding Company Stock because each
of these Plans was allocated more than 99 shares. Thus, Northwestern
Trust states that it was not required to make an ``election'' with
respect to the form of consideration that was to be received by the
Standard Plans.\35\ Northwestern Trust also states that it advised
Standard that the only Standard Plan for which a distribution of
Holding Company Stock would exceed the 10 percent limitation imposed by
section 407(a)(2) of the Act was Standard's Group Life Plan which had
no other assets.
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\35\ Indeed, the Independent Fiduciary Agreement requires that
Northwestern Trust make an election available under the
Demutualization Plan with respect to the form of consideration that
is to be received by each of the Standard Plans.
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Northwestern Trust represents that the transactions were prudent
and in the best interests of the Standard Plans and their participants
and beneficiaries because the consummation of the transactions was
conditioned upon approval of Standard's Eligible Members, an
overwhelming majority of whom approved the Demutualization Plan on
March 19, 1999, as well as other conditions set forth in the
Demutualization Plan. In addition, Northwestern Trust states that its
determination that the transactions were appropriate for the Standard
Plans was based upon its review of all of the facts and circumstances
surrounding the transactions, including documentation and records
prepared in connection with the transactions. Based upon this
information, Northwestern Trust determined that approval of the
Demutualization Plan would be in the best interests of all of the
Standard Plans and their participants and beneficiaries. Accordingly,
Northwestern Trust explains that it voted in favor of the
Demutualization Plan and directed the appropriate fiduciaries of the
Standard Plans to receive and hold title to the Holding Company Stock
when issued.
13. In connection with the disposition of Holding Company Stock
that was held by the Standard Plans, Northwestern Trust directed that
such shares be repurchased by the Holding Company as follows:
(a) The Standard Defined Contribution Plans. The Standard Defined
Contribution Plan-Employees and the Standard Defined Contribution Plan-
Agents received a total of 44,610 shares of Holding Company Stock as a
result of the demutualization. The
[[Page 33375]]
Holding Company Stock held by these Standard Plans was repurchased by
the Holding Company for cash in four equal weekly installments
occurring on November 4, 1999, November 10, 1999, November 18, 1999 and
November 24, 1999 at the closing market prices on those dates. In this
regard, on November 4, 1999, the Standard Defined Contribution Plans
sold 11,152 shares of Holding Company Stock to the Holding Company for
a closing price of $24.625 per share. On November 10, 1999, the
Standard Defined Contribution Plans sold another 11,152 shares of
Holding Company Stock to the Holding Company for a closing price of
$23.625 per share. On November 18, 1999, the Standard Defined
Contribution Plans sold 11,153 shares of Holding Company Stock to the
Holding Company at a closing price of $25.50 per share. Finally, on
November 24, 1999, the Standard Defined Contribution Plans sold 11,153
shares of Holding Company Stock to the Holding Company at the closing
price of $28.188 per share.
(b) The Standard Defined Benefit Plans. The Standard Defined
Benefit Plan-Employees and the Standard Defined Benefit-Agents received
26,127 shares and 4,389 shares, respectively, as a result of the
demutualization. These shares were repurchased by the Holding Company
on November 4, 1999 at the closing market price per share of $24.625.
(c) The Standard Group Life Plan. In Standard's demutualization,
the Standard Group Life Plan received 29,562 shares of Holding Company
Stock.\36\ On November 4, 1999, 23 |
