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Proposed Exemptions; Kwik-Copy Corporation Employees Welfare Benefit Plan and Trust (the Plan) [08/17/2000]
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Volume 65, Number 160, Page 50223-50245
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. L-10667, et al.]
Proposed Exemptions; Kwik-Copy Corporation Employees Welfare
Benefit Plan and Trust (the Plan)
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
[[Page 50224]]
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.
Kwik-Copy Corporation Employees Welfare Benefit Plan and Trust (the
Plan), Located in Cypress Creek, TX
[Application No. L-10667]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406(a), 406(b)(1) and (b)(2) of the Act shall not apply to
the cash sale by the Plan of certain recreational facilities (the
Recreational Facilities) to the International Center for
Entrepreneurial Development, Inc. (ICED), the parent of Kwik-Copy
Corporation (Kwik-Copy),\1\ the Plan sponsor, and a party in interest
with respect to the Plan.\2\
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\1\ Unless otherwise noted, Kwik-Copy and ICED are together
referred to as the Applicants.
\2\ Because the Plan is a voluntary employees' beneficiary
association trust (VEBA), it is not qualified under section 401 of
the Code. Therefore, there is no jurisdiction under Title II of the
Act pursuant to section 4975 of the Code. However, the Department is
assuming, for purposes of this proposal, that there is jurisdiction
under Title I of the Act pursuant to section 3(1) of the Act.
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This proposed exemption is subject to the following requirements:
(a) The proposed sale is a one-time transaction for cash.
(b) The fair market value of the Recreational Facilities has been
determined by qualified, independent appraisers who propose to update
their valuation of the Recreational Facilities on the date of the sale.
(c) On the date of the sale, the Plan receives an amount which is
equal to the greater of the fair market value of the Recreational
Facilities or the Plan's total acquisition costs.
(d) The Plan pays no fees or commissions in connection with the
proposed sale.
Summary of Facts and Representations
1. The Plan was established by Kwik-Copy on February 25, 1983 to
provide welfare benefits, such as health benefits and life insurance,
to employee-participants of Kwik-Copy. The Plan constitutes a VEBA in
which benefits are funded only when they are incurred. In this regard,
employer contributions are immediately ``passed through'' to the Plan
to pay current welfare benefits and there is no build-up of the trust
corpus. As a VEBA, the Plan is exempt from taxation under section
501(c)(9) of the Code \3\ and, as noted previously, it is not qualified
under section 401(a) of the Code.\4\
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\3\ Section 501(c)(9) of the Code provides an exemption from
federal taxation for a VEBA which provides for the payment of life,
sick, accident, or other benefits to the members of such VEBA or
their dependents or their designated beneficiaries, if no part of
the net earnings of such association inures (other than through such
payments) to the benefit of any private shareholder or individual.
\4\ Section 401(a) of the Code sets forth the qualification
requirements for pension, profit sharing and stock bonus plans and
prescribes special rules thereunder.
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As of January 31, 2000, the Plan had 120 participants and net
assets available for benefits of approximately $313,431. The persons
who have investment discretion over the Plan's assets are F. C.
Hadfield, Chairman of the Board of ICED, and Stephen B. Hammerstein,
President of ICED. Both Messrs. Hadfield and Hammerstein also serve as
the Plan trustees (the Trustees).
2. Kwik-Copy, the Plan sponsor, is the franchiser of printing
centers in various parts of the world. It conducts business under the
principal trademarks ``Kwik Copy Printing'' and ``Kall Kwik Printing.''
Kwik-Copy assists individuals in acquiring and operating these printing
centers. Kwik-Copy maintains its principal place of business at One
Kwik-Copy Way, Cypress, Texas.
3. ICED also maintains its principal place of business at One Kwik-
Copy Way, Cypress, Texas. Kwik-Copy is a wholly owned subsidiary of
ICED. ICED is engaged in the business of franchising printing centers
and other businesses.
4. On April 26, 1984, the Plan entered into a written agreement
(the License) with Kwik-Copy which entitled the Plan to use a portion
of a tract of land that is adjacent to the Kwik-Copy's offices for
recreational purposes.\5\ The entire tract of land is legally described
as ``106.0936 acres of land out of the O.T. Taylor Survey, Abstract
759, and the Alexander Burnett Survey, Abstract 109, Harris County,
Texas.'' The land is located along the west line of Telge Road at
Cypress Creek in Northwest Harris County, Cypress Creek, Texas, and is
owned in its entirety by Kwik-Copy. The portion of the vacant land that
was allocated to the Plan for purposes of the License consisted of
0.4226 acres or 18,585 square feet.
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\5\ In a letter dated October 17, 1983 to the Internal Revenue
Service regarding the Plan's tax-qualified status, one of the former
Trustees, Mr. Joe A. Lambert, confirmed that Kwik-Copy would own the
underlying land since property values in the Houston area had
appreciated substantially and a sale of the underlying land to the
Plan would have ultimately increased the cost of the Recreational
Facilities that are described herein and reduced the amount of cash
needed to provide other benefits to Plan participants.
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The initial term of the License was 10 years, which commenced on
May 1, 1984 and ended on April 30, 1994. On May 1, 1994, the License
was extended by the parties for an additional 10 year term, which will
end on April 30, 2004. The current License term may also be extended
again by the parties unless the Plan gives Kwik-Copy three months
advance notice of its intention to terminate the License arrangement.
Since its execution, the License has required the Plan to pay Kwik-
Copy $1.00 in annual consideration each January 1. However, no such
payments have ever been made by the Plan.
The License requires Kwik-Copy to keep the underlying property in
good order, make all repairs and take such other actions as may be
necessary or appropriate for the maintenance of such property. In
addition, Kwik-Copy is required to keep the property insured and it has
named both itself and the Plan as the insureds under such policy.
4. Between 1984 and 1989, the Trustees had the Recreational
Facilities constructed on the parcel of land that was subject to the
License. The Recreational Facilities consist of a cafeteria, swimming
pool and tennis courts, and they constitute the sole assets of the
Plan. The Recreational Facilities were constructed in order to provide
recreational benefits to participants pursuant to applicable provisions
under the Plan.\6\ In this regard, section 8.16(a) of the Plan document
expressly states that--
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\6\ The Department notes that section 404(a)(1) of the Act
requires, among other things, that a fiduciary of a plan act
prudently, and solely in the interest of the plan's participants and
beneficiaries, and for the exclusive purpose of providing benefits
to participants and beneficiaries. However, in this proposed
exemption, the Department expresses no opinion on whether the Plan's
investment in the Recreational Facilities has satisfied the
requirements of section 404(a)(1) of the Act or has otherwise
violated certain fiduciary responsibility provisions of Part 4 of
Title I of the Act.
Participants shall be entitled to the use of a recreation and
vacation facility to be acquired or constructed by the Trustees
within the State of Texas with Trust assets. Said facility, which
shall be owned by the Trustees and subject to the Trustees' control
and disposition, shall provide Participants with healthy activities
of a nature tending to encourage relaxation and thus assist in
combating fatigue by the Participants, thereby protecting against
contingencies interrupting or impairing Participants' earning power.
It is intended that said facility provide recreational benefits such
as tennis
[[Page 50225]]
courts, swimming pool(s), a fishing pond, billiard and ping-pong
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tables, etc.
5. The Trustees caused the Recreational Facilities to be
constructed on behalf of the Plan based upon cash contributions that
the Plan received from Kwik-Copy and for which Kwik-Copy took
corresponding tax deductions. In this regard, Kwik-Copy contributed
$505,434 to the Plan for the construction of the cafeteria building,
$63,128 for the construction of the swimming pool and $22,714 for the
construction of the tennis courts, thereby bringing the aggregate
contribution to the Plan for the construction of the Recreational
Facilities to $591,276. This total contribution for the Recreational
Facilities was in addition to amounts that were contributed by Kwik-
Copy to the Plan for medical and life insurance benefits.
The Plan has incurred no out-of-pocket expenses in connection with
its ownership of the Recreational Facilities nor has it received any
additional income. All maintenance expenses that are associated with
the Recreational Facilities have been paid by Kwik-Copy.
According to the Applicants, under Texas law, the Plan's title to
the Recreational Facilities has not merged into the underlying real
property owned by Kwik-Copy. Therefore, the Recreational Facilities
have not become fixtures.\7\ Also, the Applicants represent that under
applicable Treasury Regulations,\8\ the Recreational Facilities cannot
revert to Kwik-Copy on the Plan's termination because the assets must
be expended to provide benefits to Plan participants.
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\7\ The Applicants explain that Texas case law and not Texas
statutory law governs whether property affixed to a parcel of land
by a licensee remains the property of the licensee or becomes the
property of the landowner upon the termination of the license. The
Applicants represent that the general rule in Texas is that property
affixed to the land of another under a license from the owner
remains the personal property of the licensee, unless the licensee
has intended otherwise. To illustrate this principle, the Applicants
cite Wright v. McDonnell, 30 SW 907 (Tex. 1895), which involved
buildings affixed to land.
In addition, the Applicants note that the line of Texas cases
pertaining to the issue of whether personalty has merged into the
dominant estate have all involved a dispute between a landowner and
a licensee as to the ownership of certain property at the end of the
license. The Applicants indicate that, in the present case, there is
no such dispute or claim to that effect because Kwik-Copy has agreed
that it does not, and will not, own the affixed assets at the end of
the License. Thus, the Applicants conclude that the intent of the
parties is that the Recreational Facilities are personalty owned by
the Plan.
\8\ The last sentence of Treasury Regulations Section
1.501(c)(9)-4(d) generally provides that if, upon termination of a
VEBA, the VEBA's assets are distributed to its contributing
employer, a prohibited inurement will exist and the VEBA will fail
to qualify under section 501(c)(9) of the Code.
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6. During 1998, efforts were underway to sell either ICED or Kwik-
Copy to unrelated parties. Although there was no purchaser, the
Applicants believe that this transaction could resurface at any time.
Therefore, in the interim, the Applicants propose to have ICED purchase
the Recreational Facilities from the Plan and hereby request an
administrative exemption from the Department for such transaction. The
Applicants represent that the sale proceeds will be used to satisfy
future health claims of the participants until such amounts have been
exhausted. Then, the Applicants contemplate terminating the Plan in
order to facilitate the sale of Kwik-Copy's entire business premises,
including the Recreational Facilities, to an unrelated party.
7. The Recreational Facilities were initially appraised by Gary
Brown, M.A.I., President of Gary Brown & Associates, Inc. of Houston,
Texas. Mr. Brown is an independent fee appraiser who has been actively
involved, among other things, in real property valuation, lease
negotiations and rendering expert witness testimony. Mr. Brown is
unrelated to Kwik-Copy, ICED and their principals.
In an appraisal report dated February 15, 1998, Mr. Brown placed
the fair market value of the Recreational Facilities in an ``as is''
condition at $280,000 as of February 3, 1998. In valuing the
Recreational Facilities, Mr. Brown utilized the Cost Approach to
valuation due to the ``special use'' nature of the Recreational
Facilities, the fact that the Recreational Facilities are not
replaceable through purchase or lease, and the lack of sales of
comparable properties by which to assess fair market value. Mr. Brown
also determined that the ``highest and best use'' of the Recreational
Facilities was their ``value in use'' and that an individual component
sale would result in a ``liquidation value'' for such properties.
In an addendum to the appraisal report dated August 11, 1998, Mr.
Brown again concluded that the fair market value of the Recreational
Facilities was $280,000. He noted that the Recreational Facilities were
an integral part of Kwik-Copy's world headquarters and that these
structures could not stand alone as a separate economic unit.
Therefore, Mr. Brown emphasized that the ``highest and best use'' of
the Recreational Facilities was in conjunction with the other
improvements comprising Kwik-Copy's property.
In a full, updated appraisal report dated November 24, 1999, Mr.
Brown and his colleague, Mr. Michael E. Gentry, Associate Appraiser,
also a qualified, independent appraiser with Gary Brown & Associates,
Inc., indicated that they had personally inspected the Recreational
Facilities, conducted required investigations, gathered necessary data
and analyzed the information in order to determine the appropriate fair
market value. Messrs. Brown and Gentry noted that due to the specific
use and design of the Recreational Facilities, it would take
approximately 18 months to market the subject improvements to a limited
number of potential purchasers. Therefore, on the basis of these
findings, Messrs. Brown and Gentry placed the fair market value of the
Recreational Facilities at $300,000 as of November 24, 1999, again
using the Cost Approach to valuation.
8. The Applicants contemplate that the proposed sales price for the
Recreational Facilities will be equal to the greater of the
independently appraised value of such improvements as of the date of
the sale or their total acquisition cost. The consideration will be
paid by ICED in cash. In addition, Messrs. Brown and Gentry will be
required to update their valuation of the Recreational Facilities on
the day the sale is consummated. Further, the Plan will not be required
to pay any real estate fees or commissions in connection with such
transaction.
Thus, based upon the foregoing, because the $591,276 total cost for
the Recreational Facilities is in excess of their $300,000 current fair
market value, the Applicants state that ICED will pay the Plan the
greater amount for such property.
9. In summary, the Applicants represent that the proposed
transaction will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The proposed sale will be a one-time transaction for cash.
(b) The fair market value of the Recreational Facilities has been
determined by qualified, independent appraisers who will update their
valuation of the Recreational Facilities on the date of the sale.
(c) On the date of sale, the Plan will receive an amount which is
equal to the greater of the fair market value of the Recreational
Facilities or the Plan's total acquisition costs.
(d) The Plan will pay no fees or commissions in connection with the
proposed sale.
[[Page 50226]]
Notice to Interested Persons
Notice of the proposed exemption will be provided to interested
persons within 30 days after the publication of the proposed exemption
in the Federal Register. Notice will be given to active employees of
Kwik-Copy by hand delivery and by first class mail to each participant
who is not actively working for Kwik-Copy. The 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 with respect to the
proposed exemption. Comments with respect to the proposed exemption are
due within 60 days of 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.)
DuPont Capital Management Corporation, Located in Wilmington, DE
[Exemption Application Nos.: D-10744 through D-10746]
Proposed Exemption
The Department of Labor 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 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\9\
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\9\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to the corresponding provisions of the Code.
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I. Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and the sanctions resulting from the
application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (D), shall not apply to a transaction between a
party in interest with respect to certain plans (the Former DuPont
Related Plans), as defined in Section II(e), below, and an investment
fund in which such plans have an interest (Investment Fund), as defined
in Section II(k), below, provided that DuPont Capital Management
Corporation (DCMC)has discretionary authority or control with respect
to the plan assets involved in the transaction and the following
conditions are satisfied:
(a) DCMC is an investment adviser registered under the Investment
Advisers Act of 1940 that has, as of the last day of its most recent
fiscal year, total assets, including in-house plan assets (In-house
Plan Assets), as defined in Section II(g), below, under its management
and control in excess of $100 million and either:
(1) shareholders' or partners equity, as defined in Section II(j),
below, in excess of $750,000; or
(2) payment of all its liabilities, including any liabilities that
may arise by reason of a breach or violation of a duty described in
sections 404 or 406 of the Act, is unconditionally guaranteed by--a
person with a relationship to DCMC, as defined in Section II(a)(1),
below, if DCMC and such affiliate have, as of the last day of their
most recent fiscal year, shareholders' equity, in the aggregate, in
excess of $750,000;
(b) At the time of the transaction, as defined in Section II(m),
below, the party in interest or its affiliate, as defined in Section
II(a), below, does not have, and during the immediately preceding one
(1) year has not exercised, the authority to--
(1) Appoint or terminate DCMC as a manager of any of the Former
DuPont Related Plans' assets, or
(2) Negotiate the terms of the management agreement with DCMC
(including renewals or modifications thereof) on behalf of the Former
DuPont Related Plans;
(c) The transaction is not described in--
(1) Prohibited Transaction Class Exemption 81-6 (PTCE 81-6) \10\
(relating to securities lending arrangements);
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\10\ 46 FR 7527, January 23, 1981.
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(2) Prohibited Transaction Class Exemption 83-1 (PTCE 83-1) \11\
(relating to acquisitions by plans of interests in mortgage pools), or
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\11\ 48 FR 895, January 7, 1983.
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(3) Prohibited Transaction Class Exemption 82-87 (PTCE 82-87) \12\
(relating to certain mortgage financing arrangements);
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\12\ 47 FR 21331, May 18, 1982.
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(d) The terms of the transaction are negotiated on behalf of the
Investment Fund by, or under the authority and general direction of,
DCMC, and either DCMC, or (so long as DCMC retains full fiduciary
responsibility with respect to the transaction) a property manager
acting in accordance with written guidelines established and
administered by DCMC, makes the decision on behalf of the Investment
Fund to enter into the transaction;
(e) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of DCMC, the terms of the transaction are at least as favorable
to the Investment Fund as the terms generally available in arm's length
transactions between unrelated parties;
(f) Neither DCMC nor any affiliate thereof, as defined in Section
II(b), below, nor any owner, direct or indirect, of a 5 percent (5%) or
more interest in DCMC is a person who, within the ten (10) years
immediately preceding the transaction, has been either convicted or
released from imprisonment, whichever is later, as a result of:
(1) any felony involving abuse or misuse of such person's employee
benefit plan position or employment, or position or employment with a
labor organization;
(2) any felony arising out of the conduct of the business of a
broker, dealer, investment adviser, bank, insurance company, or
fiduciary;
(3) income tax evasion;
(4) any felony involving the larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds or securities;
conspiracy or attempt to commit any such crimes or a crime in which any
of the foregoing crimes is an element; or
(5) any other crimes described in section 411 of the Act.
For purposes of this Section I(f), a person shall be deemed to have
been ``convicted'' from the date of the judgment of the trial court,
regardless of whether the judgment remains under appeal;
(g) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(h) The party in interest dealing with the Investment Fund:
(1) Is a party in interest with respect to the Former DuPont
Related Plans (including a fiduciary) solely by reason of providing
services to the Former DuPont Related Plans, or solely by reason of a
relationship to a service provider described in section
3(14)(F),(G),(H), or (I) of the Act;
(2) Does not have discretionary authority or control with respect
to the investment of plan assets involved in the transaction and does
not render investment advice (within the meaning of 29 CFR Sec. 2510.3-
21(c)) with respect to those assets; and
(3) Is neither DCMC nor a person related to DCMC, as defined in
Section II(i), below;
(i) DCMC adopts written policies and procedures that are designed
to assure
[[Page 50227]]
compliance with the conditions of the exemption;
(j) An independent auditor, who has appropriate technical training
or experience and proficiency with the fiduciary responsibility
provisions of the Act and who so represents in writing, conducts an
exemption audit, as defined in Section II(f), below, on an annual
basis. Following completion of the exemption audit, the auditor shall
issue a written report to the Former DuPont Related Plans presenting
its specific findings regarding the level of compliance with the
policies and procedures adopted by DCMC in accordance with Section
I(i), above, of this exemption; and
(k)(1) DCMC or an affiliate maintains or causes to be maintained
within the United States, for a period of six (6) years from the date
of each transaction, the records necessary to enable the persons
described in Section I(k)(2), below, to determine whether the
conditions of this exemption have been met, except that (a) a
prohibited transaction will not be considered to have occurred if, due
to circumstances beyond the control of DCMC and/or its affiliates, the
records are lost or destroyed prior to the end of the six (6) year
period, and (b) no party in interest or disqualified person other than
DCMC 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 Section I(k)(2), below, of
this exemption.
(2) Except as provided in Section I(k)(3), below, of this
exemption, and notwithstanding any provisions of subsections (a)(2) and
(b) of section 504 of the Act, the records referred to in Section
I(k)(1), above, of this exemption are unconditionally available for
examination at their customary location during normal business hours
by:
(A) any duly authorized employee or representative of the
Department or of the Internal Revenue Service;
(B) any fiduciary of any of the Former DuPont Related Plans
investing in the Investment Fund or any duly authorized representative
of such fiduciary;
(C) any contributing employer to any of the Former DuPont Related
Plans investing in the Investment Fund or any duly authorized employee
representative of such employer;
(D) any participant or beneficiary of any of the Former DuPont
Related Plans investing in the Investment Fund, or any duly authorized
representative of such participant or beneficiary; and,
(E) any employee organization whose members are covered by such
Former DuPont Related Plans;
(3) None of the persons described in Section I(k)(2)(B) through
(E), above, of this exemption shall be authorized to examine trade
secrets of DCMC or its affiliates or commercial or financial
information which is privileged or confidential.
II. Definitions
(a) For purposes of Section I (a) and (b), above, of this
exemption, an ``affiliate'' of a person means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, 5 percent (5%)
or more partner, or employee (but only if the employer of such employee
is the plan sponsor), and
(3) Any director of the person or any employee of the person who is
a highly compensated employee, as defined in section 4975(e)(2)(H) of
the Code, or who has direct or indirect authority, responsibility, or
control regarding the custody, management, or disposition of plan
assets. A named fiduciary, within the meaning of section 402(a)(2) of
the Act, of a Plan, and an employer any of whose employees are covered
by the plan, will be considered affiliates with respect to each other
for purposes of Section I(b), if such employer or an affiliate of such
employer has the authority, alone or shared with others, to appoint or
terminate the named fiduciary or otherwise negotiate the terms of the
named fiduciary's employment agreement.
(b) For purposes of Section I(f), above, of this exemption, an
``affiliate'' of a person means--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
(5%) or more partner or owner, and
(4) Any employee or officer of the person who--
(A) Is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent (10%) or more
of the yearly wages of such person), or
(B) Has direct or indirect authority, responsibility or control
regarding the custody, management, or disposition of plan assets.
(c) For purposes of Section II(e) and (g), below, of this exemption
an ``affiliate'' of DCMC includes a member of either:
(1) a controlled group of corporations, as defined in section
414(b) of the Code, of which DCMC is a member, or
(2) a group of trades or businesses under common control, as
defined in section 414(c) of the Code, of which DCMC is a member;
provided that ``50 percent'' shall be substituted for ``80 percent''
wherever ``80 percent'' appears in section 414(b) or 414(c) of the
rules thereunder.
(d) The term, ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) ``Former DuPont Related Plans'' mean:
(1) CONSOL Inc. Employee Retirement Plan (the CONSOL Plan);
(2) the Pension Plan for Consolidation Coal Company Local 5400
Union Employees (the CONSOL Union Plan);
(3) the Investment Plan for Salaried Employees of CONSOL, Inc. (the
CONSOL DC Plan);
(4) the Thrift Plan for Employees of Conoco, Inc. (the Conoco DC
Plan);
(5) any plan the assets of which include or have included assets
that were managed by DCMC, as an in-house asset manager (INHAM),
pursuant to Prohibited Transaction Class Exemption 96-23 (PTCE 96-23)
\13\ but as to which PTCE 96-23 is no longer available because such
assets are no longer held under a plan maintained by an affiliate of
DCMC (as defined in Section II(c), above, of this exemption); and
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\13\ 61 FR 15975 (April 10, 1996).
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(6) any plan (the Add-On Plan) that is sponsored or becomes
sponsored by an entity that was, but has ceased to be, an affiliate of
DCMC (as defined in Section II(c), above, of this exemption); provided
that: (A) The assets of the Add-On Plan are invested in a commingled
fund (the Commingled Fund) with the assets of a plan or plans,
described in Section II(e)(1)-(5), above; and (B) the assets of the
Add-On Plan in the Commingled Fund do not comprise more than 25 percent
(25%) of the value of the aggregate assets of such Fund, as measured on
the day immediately following the commingling of their assets.
(f) ``Exemption audit'' of any of the Former DuPont Related Plans
must consist of the following:
(1) A review of the written policies and procedures adopted by
DCMC,
[[Page 50228]]
pursuant to Section I(i), above, of this exemption for consistency with
each of the objective requirements of this exemption, as described in
Section II(f)(5), below;
(2) A test of a representative sample of the subject transactions
in order to make findings regarding whether DCMC is in compliance with:
(A) the written policies and procedures adopted by DCMC, pursuant
to Section I(i), above, of this exemption; and
(B) the objective requirements of this exemption;
(3) A determination as to whether DCMC has satisfied the
requirements of Section I(a), above, of this exemption;
(4) Issuance of a written report describing the steps performed by
the auditor during the course of its review and the auditor's findings;
and
(5) For purposes of Section II(f) of this exemption, the written
policies and procedures must describe the following objective
requirements of the exemption and the steps adopted by DCMC to assure
compliance with each of these requirements:
(A) the requirements of Section I(a), above, of this exemption
regarding registration under the Investment Advisers Act of 1940, total
assets under management, and shareholders' or partners' equity;
(B) the requirements of Part I and Section I(d) of this exemption,
regarding the discretionary authority or control of DCMC with respect
to the asset of the Former DuPont Related Plans involved in the
transaction, in negotiating the terms of the transaction, and with
regard to the decision on behalf of the Former DuPont Related Plans to
enter into the transaction;
(C) the transaction is not entered into with any person who is
excluded from relief under Section I(h)(1), above, of this exemption,
Section I(h)(2) to the extent such person has discretionary authority
or control over the plan assets involved in the transaction, or Section
I(h)(3); and
(D) the transaction is not described in any of the class exemptions
listed in Section I(c), above, of this exemption.
(g) ``In-house Plan Assets'' means the assets of any plan
maintained by an affiliate of DCMC, as defined in Section II(c), above,
of this exemption and with respect to which DCMC exercises
discretionary authority or control.
(h) The term, ``party in interest,'' means a person described in
section 3(14) of the Act and includes a ``disqualified person,'' as
defined in section 4975(e)(2) of the Code.
(i) DCMC is ``related'' to a party in interest for purposes of
Section I(h)(3) of this exemption, if the party in interest (or a
person controlling, or controlled by, the party in interest) owns a 5
percent (5%) or more interest in DCMC, or if DCMC (or a person
controlling, or controlled by DCMC) owns a 5 percent (5%) or more
interest in the party in interest.
For purposes of this definition:
(1) The term, ``interest,'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership; or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(j) For purposes of Section I(a) of this exemption, the term,
``shareholders' '' or ``partners'' equity,'' means the equity shown in
the most recent balance sheet prepared within the two (2) years
immediately preceding a transaction undertaken pursuant to this
exemption, in accordance with generally accepted accounting principles.
(k) ``Investment Fund'' includes a single customer and pooled
separate account maintained by an insurance company, individual trust
and common collective or group trusts maintained by a bank, and any
other account or fund to the extent that the disposition of its assets
(whether or not in the custody of DCMC) is subject to the discretionary
authority of DCMC.
(l) The term, ``relative,'' means a relative as that term is
defined in section 3(15) of the Act, or a brother, sister, or a spouse
of a brother or sister.
(m) The ``time'' as of which any transaction occurs is the date
upon which the transaction is entered into. In addition, in the case of
a transaction that is continuing, the transaction shall be deemed to
occur until it is terminated. If any transaction is entered into on or
after the date when the grant of this exemption is published in the
Federal Register or a renewal that requires the consent of DCMC occurs
on or after such publication date and the requirements of this
exemption are satisfied at the time the transaction is entered into or
renewed, respectively, the requirements will continue to be satisfied
thereafter with respect to the transaction. Nothing in this subsection
shall be construed as exempting a transaction entered into by an
Investment Fund which becomes a transaction described in section 406 of
the Act or section 4975 of the Code while the transaction is
continuing, unless the conditions of this exemption were met either at
the time the transaction was entered into or at the time the
transaction would have become prohibited but for this exemption. In
determining compliance with the conditions of the exemption at the time
that the transaction was entered into for purposes of the preceding
sentence, Section I(h) of this exemption will be deemed satisfied if
the transaction was entered into between a plan and a person who was
not then a party in interest.
Temporary Nature of Exemption
The Department has determined that the relief provided by this
proposed exemption is temporary in nature. The exemption, if granted,
will be effective upon the date the final exemption is published in the
Federal Register and will expire on the day which is six (6) years from
the date of such publication. Accordingly, the relief provided by this
proposed exemption will not be available upon the expiration of such
six-year period for any new or additional transactions, as described
herein, after such date, but would continue to apply beyond the
expiration of such six-year period for continuing transactions entered
into within the six-year period. Should the applicant wish to extend,
beyond the expiration of such six-year period, the relief provided by
this proposed exemption to new or additional transactions, the
applicant may submit another application for exemption.
Summary of Facts and Representations
1. DCMC, a wholly owned subsidiary of DuPont, is organized as a
Delaware corporation with its principal office in Wilmington, Delaware.
DCMC is an investment adviser registered under the Investment Advisers
Act of 1940. As of December 31, 1998, DCMC had total assets under its
management with an aggregate market value of approximately $20.7
billion. It is represented that DCMC either has shareholders' equity in
excess of $750,000 or payment of all it liabilities, including any
liabilities that may arise by reason of a breach or violation of a duty
described in sections 404 or 406 of the Act, is unconditionally
guaranteed by an affiliate of DCMC, as defined in Section II(a)(1) of
this proposed exemption, if DCMC and such
[[Page 50229]]
affiliate have, as of the last day of their most recent fiscal year,
shareholders' equity, in the aggregate, in excess of $750,000.
DCMC provides investment management services to employee benefit
plans, including plans sponsored by DuPont and its subsidiaries and
affiliates (the DuPont Group), with respect to a spectrum of
investments consisting primarily of domestic and international
equities, fixed-income securities, and various alternative investments
(including real estate, venture capital and commodity futures). DCMC
primarily utilizes value-based investment strategies with the objective
of achieving maximum return consistent with levels of risk suitable to
each plan. In this regard, DCMC uses the services of investment
professionals employed by DuPont Pension Fund Investment (DPFI), a
division of DuPont.
2. In July of 1997, DCMC replaced DPFI as investment manager for
the assets of the DuPont Pension Trust Fund (the Trust). In this
regard, DCMC represents that it qualified as an INHAM, as defined in
section IV(a) of PTCE 96-23, and relied on the relief provided by that
class exemption in connection with its management of the assets of the
Trust.\14\ As of December 31, 1997, the value of the assets held by the
Trust was approximately $17.7 billion.
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\14\ The Department expresses no opinion in this proposed
exemption as to whether DCMC has met, or will continue to meet, the
conditions necessary for relief under PTCE 96-23 for transactions
with parties in interest with respect to the Trust, or whether DCMC
qualifies or has qualified as an INHAM with regard to the management
of the assets in the Trust.
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3. It is represented that CONSOL, Inc. (CONSOL) was a member of the
DuPont Group prior to November 5, 1998. At that time, the Trust held
the assets of the CONSOL Plan and the CONSOL Union Plan both of which
are sponsored by CONSOL. As of December 31, 1997, approximately $184
million of the assets held by the Trust related to the CONSOL Plan and
approximately $759,000 related to the CONSOL Union Plan. On November 5,
1998, DuPont divested substantially all of its holdings in CONSOL. As
of March 3, 1999, the CONSOL Plan and the CONSOL Union Plan had
approximately 6,703 and 44 participants and beneficiaries,
respectively. Based on the success of DCMC's investment strategy and
the long term experience with DCMC's investment professionals, as of
June 1, 1999, CONSOL determined that it was in the best interest of the
CONSOL Plan and the CONSOL Union Plan for DCMC to continue to manage
the assets of such plans.\15\
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\15\ The Vice President for Human Resources of CONSOL represents
that since 1988 the long term investment performance of DCMC and its
predecessor, as manager of plan assets that were part of the Trust,
compares favorably with other alternatives. In addition, the
Director of Investment Services of DCMC represents that investment
return on the Trust has exceeded the performance benchmark for seven
of the eight years during the period since 1992.
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As a result of the divestiture of CONSOL, the relief provided to
DCMC, as an INHAM, pursuant to PTCE 96-23, ceased to be available with
respect to DCMC's management of the assets of the CONSOL Plan and
CONSOL Union Plan, because under section IV(a)of PTCE 96-23, after the
divestiture DCMC was no longer an affiliate of the employer maintaining
such plans. The applicant represents that during the period since June
1, 1999, DCMC has, in managing assets of the CONSOL Plan and the CONSOL
Union Plan, investigated whether counterparties to proposed
transactions involving the assets of such plans were parties in
interest with respect to such plans. Further, DCMC has not authorized
any such transactions with counterparties that were found to be parties
in interest, unless a statutory or administrative exemption (other than
PTCE 84-14 or PTCE 96-23) was available.
It is represented that prior to 1999, Conoco, Inc. (Conoco), a
wholly-owned subsidiary of DuPont was a member of the DuPont Group.
Accordingly, at that time the Trust held the assets of a non-
contributory defined benefit plan (the DuPont Pension Plan) which
covered substantially all of the employees of DuPont and its
subsidiaries, including Conoco. Approximately 21,763 participants and
beneficiaries of the DuPont Pension Plan were attributed to employees
of Conoco and their beneficiaries. In September 1999, DuPont divested
substantially all of its holdings in Conoco. On July 1, 2000, assets
having a value of approximately $820,000,000 were transferred from the
DuPont Pension Plan to a separate trust for the Retirement Plan of
Conoco Inc. (The Conoco Plan), a qualified defined benefit pension plan
covering substantially all of the employees of Conoco Inc. As a result
of DuPont's divestiture of Conoco, the relief provided to DCMC, as an
INHAM, pursuant to PTCE 96-23, ceased to be available with respect to
DCMC's management of the assets of the Conoco Plan, because under PTCE
96-23, as of September 1999, DCMC no longer is an affiliate of the
employer maintaining such plan. It is represented that during the
period since July 1, 2000, all steps necessary to avoid violations of
the Act have been taken by the Conoco Plan.
In addition to managing pension assets held in the Trust, DPFI,
prior to 1997, also managed a portion of the assets of two defined
contribution plans, the CONSOL DC Plan and the Conoco DC Plan.
Subsequently, DCMC assumed the management of the assets of the CONSOL
DC Plan and the Conoco DC Plan. It is represented that the assets of
these plans have been managed by the same investment personnel both
before and after the substitution of DCMC for DPFI. The investment
management activities in the case of each of these plans involved the
management of assets held in a fixed income fund that was one of the
investment options available to participants in these plans. It is
further represented that in managing the assets of the CONSOL DC Plan
and the Conoco DC Plan, DCMC and DPFI have taken all steps necessary to
avoid violations of the Act.
With respect to the CONSOL DC Plan, the substitution of DCMC for
DPFI did not occur until CONSOL had ceased to be an affiliate of
Dupont. With respect to the Conoco DC Plan, DCMC began managing the
assets of the plan at a time when Conoco was still an affiliate of
DuPont. However, it is represented that the INHAM audits required,
pursuant to PTCE 96-23, did not cover the Conoco DC Plan. Accordingly,
DCMC never managed the assets of either the CONSOL DC Plan or the
Conoco DC Plan, as an INHAM, pursuant to PTCE 96-23.
Because the CONSOL DC Plan and the Conoco DC Plan were never
managed by DCMC as an INHAM, these two plans do not fit within the
definition of Former DuPont Related Plans, as set forth in Section
II(e)(5) of this proposed exemption, nor does either plan fit within
the definition of an Add On Plan, as set forth in this proposed
exemption under Section II(e)(6). Therefore, the applicant has
requested that the CONSOL DC Plan and the Conoco DC Plan be
specifically included under the definition of Former DuPont Related
Plans by listing each plan separately by name. The applicant believes
that to the extent DCMC is appointed as an investment manager of the
assets of the CONSOL DC Plan and the Conoco DC Plan, DCMC should have
the same degree of flexibility in managing these assets as it will have
with respect to the assets of the pension plans sponsored by CONSOL and
Conoco which are also under the management of DCMC.
4. DCMC seeks an exemption which would provide appropriate relief
for any prospective transactions with certain
[[Page 50230]]
parties in interest (as described in Section I(h), above) in order to
manage, after the divestiture of CONSOL, the assets of the CONSOL Plan,
the CONSOL Union Plan, the CONSOL DC Plan, and after the divestiture of
Conoco, to manage the assets of the Conoco Plan and the Conoco DC Plan,
subject to the conditions discussed herein. Further, DCMC requests
relief which would permit it to manage the assets of other Former
DuPont Related Plans. In this regard, the Former DuPont Related Plans
covered by this exemption include, in addition to those plans
specifically mentioned above: (1) Any plan, the assets of which have
been managed by DCMC, as an INHAM, but as to which PTCE 96-23 is no
longer available because such plan is no longer maintained by an
affiliate of DCMC; and (2) any Add-On Plan that is sponsored or becomes
sponsored by an entity that was, but has ceased to be, an affiliate of
DCMC; provided certain conditions, as set forth in this proposed
exemption are satisfied.
Given the large number of service providers with which the Former
DuPont Related Plans engage, the breadth of the definition of ``party
in interest'' under 3(14) of the Act, and the wide array of investment
and related services offered by DCMC, it is represented that it would
not be uncommon for DCMC, as investment manager, to propose
transactions that involve parties in interest to one or more of the
Former DuPont Related Plans. In this regard, the transactions for which
DCMC seeks an exemption include, but are not limited to, sale and
exchange transactions, leasing and other real estate transactions,
foreign currency trading transactions, and transactions involving the
furnishing of goods, services, and facilities. It is anticipated that
relief will most likely be necessary where DCMC has discretion over
investments in real estate, mortgages, foreign currency, futures,
commodities and over-the-counter options, as there is no other class
exemption which would permit DCMC, as investment manager, to purchase
property from, sell or lease property to, or borrow money from most
parties in interest to the Former DuPont Related Plans.
Without the requested relief, DCMC would be unable to offer the
full range of investment opportunities that were available to the
Former DuPont Related Plans prior to divestiture, which could
substantially reduce DCMC's overall effectiveness and adversely affect
the Former DuPont Related Plans' investment returns. In the absence of
the exemption, it would be necessary to examine each transaction to
determine whether it might involve a party in interest.\16\ Such
examinations could prove burdensome for DCMC because of the myriad of
persons that may be parties in interest as service providers to large
plans, such as the Former DuPont Related Plans. Moreover, it is
represented that certain transactions which would be beneficial to the
Former DuPont Related Plans might involve parties in interest and be
prohibited, thereby depriving such plans of a potentially favorable
investment opportunity.
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\16\ As noted above, DCMC has investigated since June 1, 1999,
whether the counterparties to proposed transactions involving the
assets of the CONSOL Plan and the CONSOL Union Plan were parties in
interest with respect to such plans. Further, with respect to the
Conoco Plan (since July 1, 2000), the CONSOL DC Plan, and the Conoco
DC Plan, DCMC and DPFI have taken all steps necessary to avoid
violations of the Act.
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5. The proposed exemption will be modeled after Prohibited
Transaction Class Exemption 84-14 (PTCE 84-14),\17\ which, in general,
permits various parties in interest with respect to an employee benefit
plan to engage in a transaction involving plan assets, if the
transaction is authorized by a qualified professional asset manager
(QPAM) and if certain other conditions are met. Specifically, DCMC
seeks an individual exemption for transactions that are described,
pursuant to Part I of PTCE 84-14.\18\ In this regard, Part I of PTCE
84-14 provides relief from the restrictions of section 406(a)(1)(A)-(D)
of the Act and 4975(c)(1)(A)-(D) of the Code for transactions between a
party in interest with respect to an employee benefit plan and an
investment fund in which the plan has an interest and which is managed
by a QPAM, provided certain conditions are satisfied. One such
condition (the Diverse Clientele Test), as set forth in Part I(e) of
PTCE 84-14, requires that:
\17\ 49 FR 9494 (March 13, 1984), as amended, 50 FR 41430
(October 10, 1985).
\18\ DCMC is not requesting an administrative exemption for the
transactions described in Part II, Part III, and Part IV of PTCE 84-
14.
The transaction is not entered into with a party in interest
with respect to any plan whose assets managed by QPAM, when combined
with the assets of other plans established or maintained by the same
employer (or affiliate thereof * * *) or by the same employee
organization, and managed by the QPAM, represent more than 20
percent of the total client assets managed by the QPAM at the time
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of the transaction.
DCMC represents that, as of December 31, 1998, it met the
definition of a QPAM, as set forth in Part V(a) of PTCE 84-14. With
respect to the capitalization requirement, DuPont has agreed to
unconditionally guarantee the payment of DCMC's liabilities, including
any liabilities that may arise by reason of a breach or violation of a
duty described in sections 404 or 406 of the Act, for any year that
DCMC's shareholders' equity as of the last day of its preceding fiscal
year falls below $750,000. Further, DCMC represents that it is an
investment adviser registered under the Investment Advisers Act of
1940. In order to be a QPAM, a registered investment adviser must,
among other requirements, have as of the last day of its most recent
fiscal year total client assets under its management and control in
excess of $50 million. The proposed exemption would include ``In-house
Plan Assets,'' as defined in Section II(g), in the calculation of total
assets under DCMC's management for purposes of meeting the assets under
management test required herein (see Section I(a), above). DCMC
represents that it currently manages assets, including In-house Plan
Assets with a value in excess of $100 million.
In the absence of an individual exemption, DCMC is uncertain
whether it would be deemed to satisfy the Diverse Clientele Test, as
required for a QPAM to obtain relief for party in interest
transactions, pursuant to PTCE 84-14 (see Part I(e) of PTCE 84-14).
DCMC is concerned that the assets for which it serves as an INHAM are
not ``client assets'' for purposes of serving as a QPAM for plan assets
of Former DuPont Related Plans. In this regard, although DCMC manages
the assets of the CONSOL Plan and CONSOL Union Plan which in the
aggregate comprise substantially less than 20 percent (20%) of the
total assets under its management, the remaining assets which DCMC
manages consist entirely of plan assets for which DCMC acts as an
INHAM. As a result, DCMC believes that the relief provided by PTCE 84-
14 may not be available for the transactions which are the subject of
this exemption.\19\
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\19\ The Department expresses no opinion as to whether DCMC
would qualify as a QPAM for purposes of PTCE 84-14 and Part I(e)
following DuPont's divestiture of CONSOL and Conoco or with respect
to any of the Former DuPont Related Plans or other unaffiliated
plan.
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6. It is represented that the conditions of the proposed exemption
provide safeguards for the protection of the rights of participants and
beneficiaries of the Former DuPont Related Plans. In this regard, the
proposed exemption incorporates all but one of the conditions found in
PTCE 84-14. Specifically, except for the Diverse Clientele Test, DCMC
represents that it will comply with the remaining conditions, as set
forth in Part I of PTCE 84-14. Moreover, DCMC, although it
[[Page 50231]]
will no longer be an INHAM with respect to the assets of the Former
DuPont Related Plans, will remain subject to the procedural
requirements of the INHAM class exemption, as set forth in PTCE 96-23.
DuPont will be required to maintain written policies and procedures
designed to ensure compliance with the objective requirements of the
exemption and to retain an independent auditor experienced and
proficient with the fiduciary provisions of the Act to conduct an
exemption audit. It is the responsibility of the independent auditor to
evaluate DuPont's compliance with such policies and procedures and to
report annually its findings to each of the Former DuPont Related
Plans.
7. Furthermore, the proposed exemption contains several additional
conditions which are designed to ensure the presence of adequate
safeguards. First, the transactions which are the subject of this
proposed exemption cannot be part of an agreement, arrangement, or
understanding designed to benefit a party in interest. Second, neither
DCMC nor a person related to DCMC may engage in transactions with the
Investment Fund. Further, a party in interest (including a fiduciary)
which deals with the Investment Fund, may only be a party in interest
by reason of providing services to the Former DuPont Related Plans, or
by having a relationship to a service provider, and such party in
interest may not have discretionary authority or control with respect
to the investment of plan assets involved in the transaction nor render
investment advice with respect to those assets.
8. DCMC represents that the requested exemption is administratively
feasible because it would not impose any administrative burdens on
either DCMC or the Department which are not already imposed by PTCE 84-
14 or PTCE 96-23. Further, DCMC will maintain and make available
certain records necessary to enable the Department, the Internal
Revenue Service, and other interested parties to determine whether the
conditions of the exemption, if granted, have been met.
9. The applicant represents that the proposed exemption is in the
interest of the Former DuPont Related Plans and their participants and
beneficiaries, because it will allow DCMC, on behalf of the Former
DuPont Related Plans, to negotiate transactions with parties in
interest where the transactions are beneficial to such plans. Absent
the exemption, the Former DuPont Related Plans would be precluded from
engaging in such transactions, even though such transactions may offer
favorable investment or diversification opportunities.
The applicant states that denial of the exemption could deprive
DCMC of its ability to provide a full range of investment opportunities
to the Former DuPont Related Plans without undue administrative costs.
Further, denial of the exemption would place DCMC in a undue
competitive disadvantage in seeking to manage the assets of the Former
DuPont Related Plans.\20\
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\20\ While it is represented that DCMC receives no fees from the
DuPont Pension Plan, other than reimbursement of certain expenses
(to the extent permitted by the Act), no special restrictions would
apply to its receipt of fees for managing assets of the Former
DuPont Related Plans, once their sponsors no longer have any
ownership affiliation with the DCMC, provided that the provision of
such services and the receipt of fees related thereto meet the
conditions necessary for relief under section 408(b)(2) and the
regulations thereunder.
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10. In summary, the applicant represents that the transactions
satisfy the statutory criteria for an exemption under section 408(a) of
the Act and section 4975(c)(2) of the Code because, among other things:
(a) DCMC is an investment adviser registered under the Investment
Advisers Act of 1940 that has under its management and control total
assets, including In-house Plan Assets (as defined in Section II(g)),
in excess of $100 million, and either has shareholders' equity, in
excess of $750,000 or a unconditional guarantee of payment of
liabilities in that amount from an affiliate;
(b) At the time of the transaction and during the year preceding,
the party in interest or its affiliate dealing with the Investment Fund
does not have and has not exercised, the authority to appoint or
terminate DCMC as a manager of any of the Former DuPont Related Plans'
assets, or to negotiate the terms on behalf of the Former DuPont
Related Plans (including renewals or modifications) of the management
agreement with DCMC;
(c) The transaction is not described in PTCE 81-6; PTCE 83-1; or
PTCE 82-87;
(d) The terms of the transaction are negotiated on behalf of the
Investment Fund by, or under the authority and general direction of
DCMC, and either DCMC, or a property manager acting in accordance with
written guidelines established and administered by DCMC, makes the
decision on behalf of the Investment Fund to enter into the
transaction;
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(f) At the time the transaction is entered into, renewed, or
modified that requires the consent of DCMC, the terms of the
transaction are at least as favorable to the Investment Fund as the
terms generally available in arm's length transactions between
unrelated parties;
(g) Neither DCMC nor any affiliate, nor any owner, direct or
indirect, of a 5 percent (5%) or more interest in DCMC is a person who,
within the ten (10) years immediately preceding the transaction has
been either convicted or released from imprisonment, whichever is
later, as a result of any felony, as set forth in Section I(f) of this
proposed exemption;
(h) The party in interest with respect to the Former DuPont Related
Plans that deals with the Investment Fund is a party in interest
(including a fiduciary) solely by reason of being a service provider to
the Former DuPont Related Plans, or having a relationship to a service
provider, and such party in interest does not have discretionary
authority or control with respect to the investment of plan assets
involved in the transaction and does not render investment advice with
respect to those assets;
(i) Neither DCMC nor a person related to DCMC engages in the
transactions which are the subject of this proposed exemption;
(j) DCMC adopts written policies and procedures that are designed
to assure compliance with the conditions of the proposed exemption;
(k) An independent auditor, who has appropriate technical training
or experience and proficiency with the fiduciary responsibility
provisions of the Act and who so represents in writing, conducts an
exemption audit on an annual basis and issues a written report to the
Former DuPont Related Plans presenting its specific findings regarding
the level of compliance with the policies and procedures adopted by
DCMC; and
(l) DCMC or an affiliate maintains or causes to be maintained
within the United States, for a period of six (6) years from the date
of each transaction, the records necessary to enable the Department,
the IRS, and other persons to determine whether the conditions of this
exemption have been met.
Notice to Interested Persons
The applicant will furnish a copy of the Notice of Proposed
Exemption (the Notice) along with the supplemental statement, described
at 29 CFR Sec. 2570.43(b)(2), to the investment committee or trustees
of each of the Former DuPont Related Plans to inform them of the
pendency of the exemption, by hand delivery or first class mailing,
within fifteen (15) days of the
[[Page 50232]]
publication of the Notice in the Federal Register. Comments and
requests for a hearing are due on or before 45 days from the date of
publication of the Notice in the Federal Register. A copy of the final
exemption, if granted, will also be provided to the CONSOL Plan, the
CONSOL Union Plan, the CONSOL DC Plan, the Conoco Plan and the Conoco
DC Plan. Further, DCMC will furnish a copy of the final exemption to
any of the other Former DuPont Related Plans at the time the exemption
becomes applicable to the management of the assets of such plan.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (this is not a toll-free number).
General Motors Investment Management Corporation Located in New
York, NY
[Exemption Application Nos.: D-10782 through D-10785]
Proposed Exemption
The Department of Labor 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 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\21\
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\21\ For purposes of this exemption, references to specific
provisions of Title I of the Act unless otherwise specified, refer
to the corresponding provisions of the Code.
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I. Transactions
If the exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and the sanctions resulting from the
application of section 4975 of the Code by reason of section
4975(c)(1)(A) through (D), shall not apply, as of May 28, 1999, to a
transaction between a party in interest with respect to certain plans
(the Transition Plans), as defined in Section II(e), below, and an
investment fund in which such plans have an interest (the Investment
Fund), as defined in Section II(k), below, provided that General Motors
Investment Management Corporation or its successor (collectively,
GMIMCO) has discretionary authority or control with respect to the plan
assets involved in the transaction and the following conditions are
satisfied:
(a) GMIMCO or its successor is an investment adviser registered
under the Investment Advisers Act of 1940 that has, as of the last day
of its most recent fiscal year, total assets, including in-house plan
assets (the In-house Plan Assets), as defined in Section II(g), below,
under its management and control in excess of $100 million and
shareholders' or partners' equity, as defined in Section II(j), below,
in excess of $750,000;
(b) At the time of the transaction, as defined in Section II(m),
below, the party in interest or its affiliate, as defined in Section
II(a), below, does not have, and during the immediately preceding one
(1) year has not exercised, the authority to--
(1) Appoint or terminate GMIMCO as a manager of any of the
Transition Plans' assets, or
(2) Negotiate the terms of the management agreement with GMIMCO
(including renewals or modifications thereof) on behalf of the
Transition Plans;
(c) The transaction is not described in--
(1) Prohibited Transaction Class Exemption 81-6 (PTCE 81-6) \22\
(relating to securities lending arrangements);
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\22\ 46 FR 7527, January 23, 1981.
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(2) Prohibited Transaction Class Exemption 83-1 (PTCE 83-1) \23\
(relating to acquisitions by plans of interests in mortgage pools), or
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\23\ 48 FR 895, January 7, 1983.
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(3) Prohibited Transaction Class Exemption 82-87 (PTCE 82-87) \24\
(relating to certain mortgage financing arrangements);
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\24\ 47 FR 21331, May 18, 1982.
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(d) The terms of the transaction are negotiated on behalf of the
Investment Fund by or under the authority and general direction of
GMIMCO, and either GMIMCO, or (so long as GMIMCO retains full fiduciary
responsibility with respect to the transaction) a property manager
acting in accordance with written guidelines established and
administered by GMIMCO, makes the decision on behalf of the Investment
Fund to enter into the transaction;
(e) At the time the transaction is entered into, and at the time of
any subsequent renewal or modification thereof that requires the
consent of GMIMCO, the terms of the transaction are at least as
favorable to the Investment Fund as the terms generally available in
arm's length transactions between unrelated parties;
(f) Neither GMIMCO nor any affiliate thereof, as defined in Section
II(b), below, nor any owner, direct or indirect, of a 5 percent (5%) or
more interest in GMIMCO is a person who, within the ten (10) years
immediately preceding the transaction, has been either convicted or
released from imprisonment, whichever is later, as a result of:
(1) any felony involving abuse or misuse of such person's employee
benefit plan position or employment, or position or employment with a
labor organization;
(2) any felony arising out of the conduct of the business of a
broker, dealer, investment adviser, bank, insurance company, or
fiduciary;
(3) income tax evasion;
(4) any felony involving the larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds or securities;
conspiracy or attempt to commit any such crimes or a crime in which any
of the foregoing crimes is an element; or
(5) any other crimes described in section 411 of the Act.
For purposes of this Section I(f), a person shall be deemed to have
been ``convicted'' from the date of the judgment of the trial court,
regardless of whether the judgment remains under appeal;
(g) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(h) The party in interest dealing with the Investment Fund:
(1) Is a party in interest with respect to the Transition Plans
(including a fiduciary) solely by reason of providing services to the
Transition Plans, or solely by reason of a relationship to a service
provider described in section 3(14)(F),(G),(H), or (I) of the Act;
(2) Does not have discretionary authority or control with respect
to the investment of plan assets involved in the transaction and does
not render investment advice (within the meaning of 29 CFR Sec. 2510.3-
21(c)) with respect to those assets; and
(3) Is neither GMIMCO nor a person related to GMIMCO, as defined in
Section II(i), below;
(i) GMIMCO adopts written policies and procedures that are designed
to assure compliance with the conditions of the exemption;
(j) An independent auditor, who has appropriate technical training
or experience and proficiency with the fiduciary responsibility
provisions of the Act and who so represents in writing, conducts an
exemption audit, as defined in Section II(f), below, on an annual
basis. Following completion of the exemption audit, the auditor shall
issue a written report to the Transition Plans presenting its specific
findings regarding the level of compliance with the policies and
procedures adopted by GMIMCO in accordance with Section I(i), above, of
this exemption; and
[[Page 50233]]
(k)(1) GMIMCO or an affiliate maintains or causes to be maintained
within the United States, for a period of six (6) years from the date
of each transaction, the records necessary to enable the persons
described in Section I(k)(2) to determine whether the conditions of
this exemption have been met, except that (a) a prohibited transaction
will not be considered to have occurred if, due to circumstances beyond
the control of GMIMCO and/or its affiliates, the records are lost or
destroyed prior to the end of the six (6) year period, and (b) no party
in interest or disqualified person other than GMIMCO 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 Section I(k)(2), below, of this proposed
exemption.
(2) Except as provided in Section I(k)(3), below, and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in Section I(k)(1), above, of
this exemption are unconditionally available for examination at their
customary location during normal business hours by:
(A) any duly authorized employee or representative of the
Department or of the Internal Revenue Service;
(B) any fiduciary of any of the Transition Plans investing in the
Investment Fund or any duly authorized representative of such
fiduciary;
(C) any contributing employer to any of the Transition Plans
investing in the Investment Fund or any duly authorized employee
representative of such employer;
(D) any participant or beneficiary of any of the Transition Plans
investing in the Investment Fund, or any duly authorized representative
of such participant or beneficiary; and,
(E) any employee organization whose members are covered by such
Transition Plans;
(3) None of the persons described in Section I(k)(2)(B) through
(E), above, of this exemption shall be authorized to examine trade
secrets of GMIMCO or its affiliates or commercial or financial
information which is privileged or confidential.
II. Definitions
(a) For purposes of Section I(b) of this exemption, an
``affiliate'' of a person means--
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, 5 percent (5%)
or more partner, or employee (but only if the employer of such employee
is the plan sponsor), and
(3) Any director of the person or any employee of the person who is
highly compensated employee, as defined in section 4975(e)(2)(H) of the
Code, or who has direct or indirect authority, responsibility, or
control regarding the custody, management, or disposition of plan
assets. A named fiduciary (within the meaning of section 402(a)(2) of
the Act) of a plan, and an employer any of whose employees are covered
by the plan, will also be considered affiliates with respect to each
other for purposes of Section I(b) if such employer or an affiliate of
such employer has the authority, alone or shared with others, to
appoint or terminate the named fiduciary or otherwise negotiate the
terms of the named fiduciary's employment agreement.
(b) For purposes of Section I(f), above, of this exemption, an
``affiliate'' of a person means--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust, or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
(5%) or more partner or owner, and
(4) Any employee or officer of the person who --
(A) Is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent (10%) or more
of the yearly wages of such person), or
(B) Has direct or indirect authority, responsibility or control
regarding the custody, management, or disposition of plan assets.
(c) For purposes of Section II(e) and (g), below, of this exemption
an ``affiliate'' of GMIMCO includes a member of either:
(1) a controlled group of corporations, as defined in section
414(b) of the Code, of which GMIMCO is a member, or
(2) a group of trades or businesses under common control, as
defined in section 414(c) of the Code, of which GMIMCO is a member;
provided that ``50 percent'' shall be substituted for ``80 percent''
wherever ``80 percent'' appears in section 414(b) or 414(c) of the
rules thereunder.
(d) The term, ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) ``Transition Plans'' mean:
(1) the Delphi Retirement Program for Salaried Employees; Delphi
Hourly-Rate Employees Pension Plan; Delphi Automotive Systems
Corporation Personal Savings Plan, Delphi Automotive Systems
Corporation Income Security Plan, Delphi Automotive Systems Corporation
Savings-Stock Purchase Program, Packard-Hughes Interconnect Non-
Bargaining Retirement Plan, Packard-Hughes Interconnect Bargaining
Retirement Plan, Packard-Hughes Interconnect Foley-Alabama Facility
Retirement Plan, and ASEC Manufacturing Retirement Program
(collectively, the Delphi Plans);
(2) any plan the assets of which include or have included assets
that were managed by GMIMCO, as an in-house asset manager (INHAM),
pursuant to Prohibited Transaction Class Exemption 96-23 (PTCE 96-23);
\25\ but as to which PTCE 96-23 is no longer available because such
assets are no longer held under a plan maintained by an affiliate of
GMIMCO (as defined in Section II(c), above, of this exemption); and
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\25\ 61 FR 15975 (April 10, 1996)
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(3) any plan (an Add-On Plan) that is sponsored or becomes
sponsored by an entity that was, but has ceased to be, an affiliate of
GMIMCO,(as defined in Section II(c), above, of this exemption);
provided that: (A) the assets of the Add-On Plan are invested in a
commingled fund (the Commingled Fund) with the assets of a plan or
plans, described in Section II(e)(1) or Section II(e)(2), above; and
(B) the assets of the Add-On Plan in the Commingled Fund do not
comprise more than 25 percent (25%) of the value of the aggregate
assets of such fund, as measured on the day immediately following the
commingling of their assets.
(f) ``Exemption audit'' of any of the Transition Plans must consist
of the following:
(1) A review of the written policies and procedures adopted by
GMIMCO, pursuant to Section I(i) of this exemption, for consistency
with each of the objective requirements of this exemption, as described
in Section II(f)(5), below;
(2) A test of a representative sample of the subject transactions
in order to make findings regarding whether GMIMCO is in compliance
with:
[[Page 50234]]
(A) the written policies and procedures adopted by GMIMCO, pursuant
to Section I(i), above, of this exemption; and
(B) the objective requirements of this exemption;
(3) A determination as to whether GMIMCO has satisfied the
requirements of Section I(a), above, of this exemption;
(4) Issuance of a written report describing the steps performed by
the auditor during the course of its review and the auditor's findings;
and
(5) For purposes of Section II(f) of this exemption, the written
policies and procedures must describe the following objective
requirements of the exemption and the steps adopted by GMIMCO to assure
compliance with each of these requirements:
(A) the requirements of Section I(a), above, of this exemption
regarding registration under the Investment Advisers Act of 1940, total
assets under management, and shareholders' or partners' equity;
(B) the requirements of Part I and Section I(d) of this exemption,
regarding the discretionary authority or control of GMIMCO with respect
to the assets of the Transition Plans involved in the transaction, in
negotiating the terms of the transaction, and with regard to the
decision on behalf of the Transition Plans to enter into the
transaction;
(C) the transaction is not entered into with any person who is
excluded from relief under Section I(h)(1), above, of this exemption,
Section I(h)(2) to the extent such person has discretionary authority
or control over the plan assets involved in the transaction, or Section
I(h)(3); and
(D) the transaction is not described in any of the class exemptions
listed in Section I(c), above, of this exemption.
(g) ``In-house Plan Assets'' means the assets of any plan
maintained by an affiliate of GMIMCO, as defined in Section
II(c),above, of this exemption and with respect to which GMIMCO
exercises discretionary authority or control.
(h) The term, ``party in interest,'' means a person described in
section 3(14) of the Act and includes a ``disqualified person,'' as
defined in section 4975(e)(2) of the Code.
(i) GMIMCO is ``related'' to a party in interest for purposes of
Section I(h)(3) of this exemption, if the party in interest (or a
person controlling, or controlled by, the party in interest) owns a 5
percent (5%) or more interest in GMIMCO, or if GMIMCO (or a person
controlling, or controlled by GMIMCO) owns a 5 percent (5%) or more
interest in the party in interest.
For purposes of this definition:
(1) The term, ``interest,'' means with respect to ownership of an
entity--
(A) The combined voting power of all classes of stock entitled to
vote or the total value of the shares of all classes of stock of the
entity if the entity is a corporation,
(B) The capital interest or the profits interest of the entity if
the entity is a partnership; or
(C) The beneficial interest of the entity if the entity is a trust
or unincorporated enterprise; and
(2) A person is considered to own an interest held in any capacity
if the person has or shares the authority--
(A) To exercise any voting rights or to direct some other person to
exercise the voting rights relating to such interest, or
(B) To dispose or to direct the disposition of such interest.
(j) For purposes of Section I(a) of this exemption, the term,
``shareholders' or partners' equity,'' means the equity shown in the
most recent balance sheet prepared within the two (2) years immediately
preceding a transaction undertaken pursuant to this exemption, in
accordance with generally accepted accounting principles.
(k) ``Investment Fund'' includes a single customer and pooled
separate account maintained by an insurance company, individual trust
and common collective or group trusts maintained by a bank, and any
other account or fund to the extent that the disposition of its assets
(whether or not in the custody of GMIMCO) is subject to the
discretionary authority of GMIMCO.
(l) The term, ``relative,'' means a relative as that term is
defined in section 3(15) of the Act, or a brother, sister, or a spouse
of a brother or sister.
(m) The ``time'' as of which any transaction occurs is the date
upon which the transaction is entered into. In addition, in the case of
a transaction that is continuing, the transaction shall be deemed to
occur until it is terminated. If any transaction is entered into on or
after the date when the grant of this exemption is published in the
Federal Register or a renewal that requires the consent of GMIMCO
occurs on or after such publication date and the requirements of this
exemption are satisfied at the time the transaction is entered into or
renewed, respectively, the requirements will continue to be satisfied
thereafter with respect to the transaction. Nothing in this subsection
shall be construed as exempting a transaction entered into by an
Investment Fund which becomes a transaction described in section 406 of
the Act or section 4975 of the Code while the transaction is
continuing, unless the conditions of this exemption were met either at
the time the transaction was entered into or at the time the
transaction would have become prohibited but for this exemption. In
determining compliance with the conditions of the exemption at the time
that the transaction was entered into for purposes of the preceding
sentence, Section I(h) of this exemption will be deemed satisfied if
the transaction was entered into between a plan and a person who was
not then a party in interest.
Temporary Nature of Exemption
The Department has determined that the relief provided by this
proposed exemption is temporary in nature. The exemption, if granted,
will be effective May 28, 1999, and will expire on the day which is
five (5) years from the date of the publication of the final exemption
in the Federal Register. Accordingly, the relief provided by this
proposed exemption will not be available upon the expiration of such
five-year period for any new or additional transactions, as described
herein, after such date, but would continue to apply beyond the
expiration of such five-year period for continuing transactions entered
into within the five-year period. Should the applicant wish to extend,
beyond the expiration of such five-year period, the relief provided by
this proposed exemption to new or additional transactions, the
applicant may submit another application for exemption.
Summary of Facts and Representations
1. GMIMCO, a wholly-owned subsidiary of General Motors Corporation
(GM), is organized as a Delaware corporation with its principal office
in New York, New York. GMIMCO is an investment adviser registered under
the Investment Advisers Act of 1940. As of December 31, 1998, GMIMCO
had total assets under its management with an aggregate market value of
approximately $100 billion.
GMIMCO provides investment management services to employee benefit
plans and corporate clients that are not employee benefit plans.
Clients include plans sponsored by GM and its subsidiaries and
affiliates (the GM Group). Investments managed by GMIMCO include
domestic and international equities, fixed-income securities, real
estate, venture capital investments, futures, and other alternative
investments. GMIMCO has been providing these services to the GM Group
since 1992, \26\ and is generally the
[[Page 50235]]
named fiduciary for investment purposes under the Act with respect to
the pension plans sponsored by the GM Group.
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\26\ It is represented that GMIMCO has been a registered
investment advisor since 1992.
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2. GMIMCO manages the assets of the following U.S. employee benefit
plans: (a) General Motors Hourly-Rate Employees Pension Plan, (b)
General Motors Retirement Program for Salaried Employees, (c) General
Motors Savings-Stock Purchase Program for Salaried Employees in the
United States, (d) General Motors Personal Savings Plan for Hourly-Rate
Employees in the United States, (e) Saturn Individual Retirement Plan
for Represented Team Members, (f) Saturn Personal Choices Retirement
Plan for Non-Represented Team Members, (g) Saturn Individual Savings
Plan for Union Represented Employees, (h) Employees' Retirement Plan
for GMAC Mortgage Corporation, and (i) plans participating in the
General Motors Welfare Benefit Trust (collectively, the GM Plans). In
this regard, GMIMCO represents that it has qualified as an INHAM, as
defined in section IV(a) of PTCE 96-23, and has relied on the relief
provided by that class exemption in connection with its management of
the assets of the GM Plans. \27\ In addition, GMIMCO manages the assets
of corporate clients that are members of the GM Group, most
significantly Motors Insurance Corporation for which GMIMCO has over $4
billion in assets under management.
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\27\ The Department expresses no opinion in this proposed
exemption as to whether GMIMCO has met, or will continue to meet,
the conditions necessary for relief under PTCE 96-23 for
transactions with parties in interest with respect to the GM Plans,
or whether GMIMCO qualifies or has qualified as an INHAM with regard
to the management of the assets of the GM Plans in such
transactions.
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3. On or after January 1, 1999, Delphi Automotive Systems
Corporation (Delphi) and its subsidiaries sponsored the Delphi Plans
for the benefit of their employees. As of April 30, 1999, the estimated
number of participants in the Delphi Plans was 173,931 and the
approximate aggregate fair market value of the assets of the Delphi
Plans was $10,337,453,634. It is represented that Delphi was at that
time a subsidiary of GM and a member of the GM Group and that the
assets of the Delphi Plans were managed by GMIMCO, pursuant to PTCE 96-
23.
On May 28, 1999, GM totally divested all of its holdings in Delphi.
After the divestiture, Delphi requested that GMIMCO continue to act as
investment manager for the assets of the Delphi Plans. However, because
GM had divested itself of its holdings in Delphi, the relief provided
to GMIMCO, as an INHAM, pursuant to PTCE 96-23, ceased to be available
with respect to GMIMCO's management of the assets of the Delphi Plans,
because under section IV(a) of PTCE 96-23, GMIMCO would not be an
affiliate of the employer maintaining such plans. \28\
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\28\ The Department expresses no opinion on whether GMIMCO
qualifies or has qualified as an INHAM with regard to the management
of the assets of the Delphi Plans.
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4. GMIMCO seeks an exemption, effective as of May 28, 1999, to
continue, after the divestiture of Delphi, to manage the assets of the
Delphi Plans. Further, GMIMCO requests relief which would permit it to
manage the assets of other Transition Plans. In this regard, in
addition to the Delphi Plans, the Transition Plans covered by this
exemption include: (1) Any plan the assets of which have been managed
by GMIMCO, as an INHAM but as to which PTCE 96-13 is no longer
available, because such plan is no longer maintained by an affiliate of
GMIMCO; and (2) any Add-On Plan that is sponsored or becomes sponsored
by an entity that was, but has ceased to be, an affiliate of GMIMCO;
provided certain conditions, as set forth in this proposed exemption,
are satisfied.
Given the large number of service providers (particularly financial
institutions) which the Delphi Plans and most large employee benefit
plans engage, the breadth of the definition of ``party in interest''
under 3(14) of the Act, and the wide array of investment and related
services offered by GMIMCO, it would not be uncommon for GMIMCO, as
investment manager, to propose transactions that involve parties in
interest to one or more Transition Plans. In this regard, the
transactions for which GMIMCO seeks an exemption include, but are not
limited to, sale and exchange transactions, leasing and other real
estate transactions, foreign currency trading transactions, and
transactions involving the furnishing of goods, services, and
facilities. It is anticipated that relief will most likely be necessary
where GMIMCO has discretion over investments in real estate, mortgages,
foreign currency, futures, commodities, and over-the-counter options,
or other types of investments not covered by specific exemptions or
other class exemptions which would permit GMIMCO, as investment
manager, to purchase property from, sell or lease property to, or
borrow money from most parties in interest with respect to the
Transition Plans.
Without the requested relief, GMIMCO would be unable to offer the
full range of investment opportunities that were available to the
Delphi Plans prior to the divestiture, which could substantially reduce
GMIMCO's overall effectiveness and adversely affect the Delphi Plan's
investment returns. In the absence of the exemption, it would be
necessary to examine each transaction to determine whether it might
involve a party in interest. Such examinations could prove burdensome
for GMIMCO, because of the myriad of persons that may be parties in
interest as service providers to large plans, such as the Delphi Plans.
Moreover, it is represented that certain transactions which would be
beneficial to the Transition Plans might involve parties in interest
and be prohibited, thereby depriving such plans of a potentially
favorable investment opportunity.
5. GMIMCO has requested that the proposed exemption be modeled
after PTCE 84-14, which, in general, permits various parties in
interest with respect to an employee benefit plan to engage in a
transaction involving plan assets, if the transaction is authorized by
a qualified professional asset manager (QPAM) and if certain other
conditions are met. Specifically, GMIMCO seeks an individual exemption
for transactions that are described, pursuant to Part I of PTCE 84-
14.\29\ In this regard, Part I of PTCE 84-14 provides relief from the
restrictions of section 406(a)(1)(A)-(D) of the Act and 4975(c)(1)(A)-
(D) of the Code for transactions between a party in interest with
respect to an employee benefit plan and an investment fund in which the
plan has an interest and which is managed by a QPAM, provided certain
conditions are satisfied. One such condition (the Diverse Clientele
Test), as set forth in Part I(e) of PTCE 84-14, requires that:
\29\ GMIMCO is not requesting an administrative exemption for
the transactions described in Part II, Part III, and Part IV of PTCE
84-14.
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The transaction is not entered into with a party in interest
with respect to any plan whose assets managed by QPAM, when combined
with the assets of other plans established or maintained by the same
employer (or affiliate thereof * * *) or by the same employee
organization, and managed by the QPAM, represent more than 20
percent of the total client assets managed by the QPAM at the time
of the transaction.
GMIMCO represents that, as of the effective date for the requested
exemption, it met all of the requirements of the definition of a QPAM,
as set forth in Part V(a) of PTCE 84-14, other than the Diverse
Clientele Test. In this regard, GMIMCO represents that it has been
capitalized in excess of $750,000 to meet the capitalization
requirement on its own, as of the date
[[Page 50236]]
of the requested relief. Further, GMIMCO represents that it is an
investment adviser registered under the Investment Advisers Act of 1940
and that it currently manages in excess of $100 million in assets,
including In-house Plan Assets, as defined in Section II(g), above of
this proposed exemption.
However, GMIMCO is uncertain whether it would be deemed to satisfy
the Diverse Clientele Test found in Part I(e) of PTCE 84-14 with
respect to the Delphi Plans or other Transition Plans that might become
clients of GMIMCO during the period of GMIMCO's transition from a
wholly-owned in-house clientele to a full range of clients. In this
regard, GMIMCO is concerned that the assets for which it serves as an
INHAM are not ``client assets'' for purposes of Part I(e) of PTCE 84-
14. Although GMIMCO manages assets of the Delphi Plans which comprise
substantially less than 20 percent (20%) of the total assets under its
management, the remaining assets which GMIMCO manages consist entirely
of plan assets for which GMIMCO acts as an INHAM. As a result, GMIMCO
believes that it may be precluded from acting as a QPAM with respect to
the Delphi Plans and any other unaffiliated plans that might
temporarily exceed the 20% limit, if the test is based solely on assets
of unaffiliated plans and other non-GM related parties, even though
such assets might be insignificant in relation to total assets managed
by GMIMCO.\30\
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\30\ The Department expresses no opinion as to whether GMIMCO
would qualify as a QPAM for purposes of PTCE 84-14 and Part I(e)
with respect to the Delphi Plans after the divestiture of Delphi or
with respect to any Transition Plans or other unaffiliated plans.
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6. It is represented that the conditions of the proposed exemption
provide safeguards for the protection of the rights of participants and
beneficiaries of the Transition Plans. In this regard, the proposed
exemption incorporates all but one of the conditions found in PTCE 84-
14. Except for the Diverse Clientele Test, GMIMCO represents that it
will comply with the remaining conditions, as set forth in Part I of
PTCE 84-14. Moreover, GMIMCO, although it will no longer be an INHAM
with respect to the assets of the Transition Plans, will remain subject
to the procedural requirements of the INHAM class exemption, as set
forth in PTCE 96-23. In this regard, GMIMCO will be required to
maintain written policies and procedures designed to ensure compliance
with the objective requirements of the exemption and to retain an
independent auditor experienced and proficient with the fiduciary
provisions of the Act to conduct an exemption audit. It is the
responsibility of the independent auditor to evaluate GMIMCO's
compliance with such policies and procedures and to report annually its
findings to each of the Transition Plans.
7. Furthermore, the proposed exemption contains several additional
conditions which are designed to ensure the presence of adequate
safeguards. First, the transactions which are the subject of this
proposed exemption cannot be part of an agreement, arrangement, or
understanding designed to benefit a party in interest. Second, neither
GMIMCO nor a person related to GMIMCO may engage in transactions with
the Investment Fund. Further, a party in interest (including a
fiduciary) which deals with the Investment Fund, may only be a party in
interest by reason of providing services to the Transition Plans, or by
having a relationship to a service provider, and such party in interest
may not have discretionary authority or control with respect to the
investment of plan assets involved in the transaction nor render
investment advice with respect to those assets.
8. GMIMCO represents that the requested exemption is
administratively feasible because it would not impose any
administrative burdens on either GMIMCO or the Department which are not
already imposed by PTCE 84-14 or PTCE 96-23. Further, GMIMCO will
maintain and make available certain records necessary to enable the
Department, the Internal Revenue Service, and other interested parties
to determine whether the conditions of the exemption, if granted, have
been met.
9. The proposed exemption is in the interest of the Transition
Plans and participants and beneficiaries of such plans, because it will
allow GMIMCO, on behalf of the Transition Plans, to negotiate
transactions with parties in interest where the transactions are
beneficial to such plans. Absent the exemption, the Transition Plans
would be precluded from engaging in such transactions, even though such
transactions may offer favorable investment or diversification
opportunities.
The applicant represents that denial of the exemption could deprive
GMIMCO of its ability to provide a full range of investment
opportunities to the Transition Plans without undue administrative
costs. Further, denial of the exemption would place GMIMCO in a undue
competitive disadvantage in seeking to manage the assets of the
Transition Plans.\31\
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\31\ While it is represented that GMIMCO receives no fees from
the GM Plans or the Delphi Plans, other than reimbursement of
certain expenses (to the extent permitted by the Act), no special
restrictions would apply to its receipt of fees for managing assets
of the Delphi Plans in the future or any other Transition Plans that
do not have any affiliation with GMIMCO, provided that the provision
of such services and the receipt of fees related thereto meet the
conditions necessary for relief under section 408(b)(2) of the Act
and the regulations thereunder.
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10. In summary, the applicant represents that the transactions
satisfy the statutory criteria for an exemption under section 408(a) of
the Act and section 4975(c)(2) of the Code because, among other things:
(a) GMIMCO or its successor is an investment adviser registered
under the Investment Advisers Act of 1940 that has under its management
and control total assets in excess of $100 million and has
shareholders' equity, in excess of $750,000;
(b) At the time of the transaction and during the year preceding,
the party in interest or its affiliate dealing with the Investment
Fund, does not have and has not exercised, the authority to appoint or
terminate GMIMCO as a manager of any of the Transition Plans' assets,
or to negotiate the terms on behalf of the Transition Plans (including
renewals or modifications) of the management agreement with GMIMCO;
(c) The transaction is not described in PTCE 81-6; PTCE 83-1; or
PTCE 82-87;
(d) The terms of the transaction are negotiated on behalf of the
Investment Fund by, or under the authority and general direction of,
GMIMCO, and either GMIMCO, or a property manager acting in accordance
with written guidelines established and administered by GMIMCO, makes
the decision on behalf of the Investment Fund to enter into the
transaction;
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit a party in interest;
(f) At the time the transaction is entered into, renewed, or
modified that requires the consent of GMIMCO, the terms of the
transaction are at least as favorable to the Investment Fund as the
terms generally available in arm's length transactions between
unrelated parties;
(g) Neither GMIMCO nor any affiliate, nor any owner, direct or
indirect, of a 5 percent (5%) or more interest in GMIMCO is a person
who, within the ten (10) years immediately preceding the transaction
has been either convicted or released from imprisonment, whichever is
later, as a result of any felony, as set forth in Section I(f) of this
exemption;
(h) The party in interest with respect to the Transition Plans that
deals with the Investment Fund is a party in
[[Page 50237]]
interest (including a fiduciary) solely by reason of being a service
provider to the Transition Plans, or having a relationship to a service
provider and such party in interest does not have discretionary
authority or control with respect to the investment of plan assets
involved in the transaction and does not render investment advice with
respect to those assets;
(i) Neither GMIMCO nor a person related to GMIMCO engages in the
transactions which are the subject of this proposed exemption;
(j) GMIMCO adopts written policies and procedures that are designed
to assure compliance with the conditions of the proposed exemption;
(k) An independent auditor, who has appropriate technical training
or experience and proficiency with the fiduciary responsibility
provisions of the Act and who so represents in writing, conducts an
exemption audit on an annual basis and issues a written report to the
Transition Plans presenting specific findings regarding the level of
compliance with the policies and procedures adopted by GMIMCO; and
(l) GMIMCO or an affiliate maintains or causes to be maintained
within the United States, for a period of six (6) years from the date
of each transaction, the records necessary to enable the Department,
the IRS, and other persons to determine whether the conditions of this
proposed exemption have been met.
Notice to Interested Persons
GMIMCO will furnish a copy of the Notice of Proposed Exemption (the
Notice) along with the supplemental statement described at 29 CFR
Sec. 2570.43(b)(2) to the investment committee or trustees of each of
the Delphi Plans to inform them of the pendency of the exemption, by
hand delivery or first class mailing, within fifteen (15) days of the
publication of the Notice in the Federal Register. Comments and
requests for a hearing are due on or before 45 days from the date of
publication of the Notice in the Federal Register. A copy of the final
exemption, if granted, will also be provided to the Delphi Plans.
Further, GMIMCO will furnish a copy of the final exemption to any other
Transition Plans at the time the exemption becomes applicable to the
management of the assets of such plans.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (this is not a toll-free number).
Columbia Energy Group (Columbia) Located in Herndon, Virginia
[Application No. D-10802]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(a) and (b) of the Act shall not apply to the reinsurance
of risks and the receipt of premiums therefrom by Columbia Insurance
Corporation, Ltd. (CICL) in connection with an insurance contract sold
by Employers Insurance of Wausau (Wausau), or any successor insurance
company to Wausau which is unrelated to Columbia, to provide long-term
disability benefits to participants in Columbia's Long Term Disability
Plan (the Plan), provided the following conditions are met:
(a) CICL--
(1) Is a party in interest with respect to the Plan by reason of a
stock or partnership affiliation with Columbia that is described in
section 3(14)(E) or (G) of the Act;
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one State as defined in section 3(10) of the Act;
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state which has neither been revoked
nor suspended;
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its domiciliary State, Vermont) by the Insurance
Commissioner of the State of Vermont within 5 years prior to the end of
the year preceding the year in which the reinsurance transaction
occurred; and
(5) Is licensed to conduct reinsurance transactions by a State
whose law requires that an actuarial review of reserves be conducted
annually by an independent firm of actuaries and reported to the
appropriate regulatory authority;
(b) The Plan pays no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid by the Plan with respect to the direct
sale of such contracts or the reinsurance thereof;
(d) In the initial year of any contract involving CICL, there will
be an immediate and objectively determined benefit to the Plan's
participants and beneficiaries in the form of increased benefits;
(e) In subsequent years, the formula used to calculate premiums by
Wausau or any successor insurer will be similar to formulae used by
other insurers providing comparable long-term disability coverage under
similar programs. Furthermore, the premium charge calculated in
accordance with the formula will be reasonable and will be comparable
to the premium charged by the insurer and its competitors with the same
or a better rating providing the same coverage under comparable
programs;
(f) The Plan only contracts with insurers with a rating of A or
better from A. M. Best Company (Best's). The reinsurance arrangement
between the insurers and CICL will be indemnity insurance only, i.e.,
the insurer will not be relieved of liability to the Plan should CICL
be unable or unwilling to cover any liability arising from the
reinsurance arrangement;
(g) CICL retains an independent fiduciary (the Independent
Fiduciary), at Columbia's expense, to analyze the transaction and
render an opinion that the requirements of sections (a) through (f)
have been complied with. For purposes of this proposed exemption, the
Independent Fiduciary is a person who:
(1) Is not directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with Columbia or CICL (this relationship hereinafter referred to as an
``Affiliate'');
(2) Is not an officer, director, employee of, or partner in,
Columbia or CICL (or any Affiliate of either);
(3) Is not a corporation or partnership in which Columbia or CICL
has an ownership interest or is a partner;
(4) Does not have an ownership interest in Columbia or CICL, or any
of either's Affiliates;
(5) Is not a fiduciary with respect to the Plan prior to the
appointment; and
(6) Has acknowledged in writing acceptance of fiduciary
responsibility and has agreed not to participate in any decision with
respect to any transaction in which the Independent Fiduciary has an
interest that might affect its best judgment as a fiduciary.
For purposes of this definition of an ``Independent Fiduciary,'' no
organization or individual may serve as an Independent Fiduciary for
any fiscal year if the gross income received by such organization or
individual (or
[[Page 50238]]
partnership or corporation of which such individual is an officer,
director, or 10 percent or more partner or shareholder) from Columbia,
CICL, or their Affiliates (including amounts received for services as
Independent Fiduciary under any prohibited transaction exemption
granted by the Department) for that fiscal year exceeds 5 percent of
that organization or individual's annual gross income from all sources
for such fiscal year.
In addition, no organization or individual who is an Independent
Fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director, or 10 percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow funds from Columbia, CICL, or their Affiliates during the period
that such organization or individual serves as Independent Fiduciary,
and continuing for a period of six months after such organization or
individual ceases to be an Independent Fiduciary, or negotiates any
such transaction during the period that such organization or individual
serves as Independent Fiduciary.
Preamble
On August 7, 1979, the Department published a class exemption
[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44 FR 46365] which
permits insurance companies that have substantial stock or partnership
affiliations with employers establishing or maintaining employee
benefit plans to make direct sales of life insurance, health insurance
or annuity contracts which fund such plans if certain conditions are
satisfied.
In PTE 79-41, the Department stated its views that if a plan
purchases an insurance contract from a company that is unrelated to the
employer pursuant to an arrangement or understanding, written or oral,
under which it is expected that the unrelated company will subsequently
reinsure all or part of the risk related to such insurance with an
insurance company which is a party in interest with respect to the
plan, the purchase of the insurance contract would be a prohibited
transaction under the Act.
The Department further stated that as of the date of publication of
PTE 79-41, it had received several applications for exemption under
which a plan or its employer would contract with an unrelated company
for insurance, and the unrelated company would, pursuant to an
arrangement or understanding, reinsure part or all of the risk with
(and cede part or all of the premiums to) an insurance company
affiliated with the employer maintaining the plan. The Department felt
that it would not be appropriate to cover the various types of
reinsurance transactions for which it had received applications within
the scope of the class exemption, but would instead consider such
applications on the merits of each individual case.
Summary of Facts and Representations
1. Columbia was organized under the laws of the State of Delaware
on September 30, 1926, and is a registered holding company under the
Public Utility Holding Company of 1935, as amended. Its headquarters
are located in Herndon, Virginia. Columbia is one of the nation's
largest integrated natural gas systems engaged in the production of
natural gas and oil. Columbia is also engaged in related energy
businesses including the marketing of natural gas and electricity, the
generation of electricity, primarily fueled by natural gas, and the
distribution of propane. Columbia derives substantially all of its
revenues and earnings from the operating results of its 18 direct
subsidiaries.
2. CICL is a wholly-owned subsidiary of Columbia. In November,
1996, it was formed and issued a Certificate of Authority by the
Commonwealth of Bermuda permitting it to transact the business of a
Class 3 insurance company. The applicant represents that a Class 3
insurer in Bermuda is authorized to write any type of business that is
described in its business plan. Class 1 and Class 2 insurers are
restricted in the amount of unrelated business that can be written.
Besides the differences in the types of business that can be written,
Class 3 insurers have higher minimum capital and surplus, and more
stringent examination requirements, than either Class 1 or Class 2
insurers. ARS Management, Ltd. (ARS), an entity which is independent of
Columbia and CICL, has responsibility for accounting functions, records
retention and other management and administrative services for CICL. As
of December 31, 1999, total capital and surplus of CICL was $1,143,635
and earned premium was $5,996,265.
3. In 1999, CICL formed a branch (Branch) which obtained a license
in the State of Vermont. ARS, which is authorized to manage captives in
the State of Vermont, will also handle the management functions for
Branch. The applicant represents that an actuary on the staff of ARS,
the management firm for CICL, has conducted reviews of the reserves
held by CICL in the past. When CICL became a Class 3 insurer and
established Branch in Vermont, it became subject to the laws in both
jurisdictions requiring annual certification of reserves by an
independent actuarial firm. Watson, Wyatt (WW), an independent,
qualified international actuarial and benefits consulting firm has been
retained to provide actuarial services to Branch. WW's responsibilities
will include examining, on an annual basis, the reserves that will be
established by Branch in connection with the employee benefit business
reinsured by CICL through Branch to ensure that amounts required by the
State of Vermont are met. The initial reserve study has been conducted
by Christopher George, FSA, MAAA (Mr. George) of the Wellesley Hills,
Massachusetts office of WW (see rep. 12, below).
4. Columbia maintains the Plan, a long-term disability program for
approximately 10,000 of its employees. Prior to changes made in
anticipation of implementation of the subject transaction, the Plan
promised a benefit of 30 percent of salary up to the current Social
Security wage base and 60 percent of salary over that threshold.
However, combined disability income from all sources, including Social
Security, could not exceed 70 percent of earnings, and Social Security
benefits paid to family members counted towards that limitation.
5. The Plan has been historically insured with Aetna Life Insurance
Company. However, at the beginning of 1999, Columbia formulated a plan
to utilize CICL for the reinsurance of benefits and has made
substantial improvements to the Plan in anticipation of that
transaction. Specifically, the new benefit is 60 percent of salary
across the board, and the reduced percentage for earnings up to the
Social Security wage base has been eliminated. In addition, the 70
percent maximum now does not include Social Security benefits paid to
family members. Moreover, there has been a liberalization of the
definition of the term ``disability.'' The prior definition required
that an employee demonstrate that he or she could not perform ``* * *
any reasonable type of job.'' Under the new definition, an employee
qualifies for benefits in the first two years if he or she cannot
perform his or her own job, or another that pays at least 80% of the
amount the employee was earning before the disability.
6. The Plan is now insured by Wausau. Wausau was recently acquired
by Liberty Mutual Insurance Company (Liberty), an A+ rated (by Best's)
carrier located in Boston, Massachusetts. Liberty is rated by Moody's
as Aa3 (Excellent) and by Standard & Poor's as
[[Page 50239]]
AA-(Very Strong). Wausau is also rated A+ by Best's. The applicant
represents that if the Plan chooses another insurer in the future, that
insurer will carry similar ratings. It is anticipated that upon the
granting of the exemption proposed herein, Wausau will enter into a
reinsurance agreement with CICL, through Branch. Wausau will continue
to insure the Plan, with the enhanced new benefits. However, Wausau
will reinsure 100% of the risk with CICL through Branch.
The Plan will pay no more than adequate consideration for the
insurance contracts with Wausau or any successor insurer. The formula
used to calculate premiums by Wausau or any successor insurer \32\ will
be similar to formulae used by other insurers providing long-term
disability coverage under similar programs. Furthermore, the premium
charge calculated in accordance with the formula will be reasonable and
will be comparable to the premium charged by the insurer and its
competitors with the same or a better rating providing the same
coverage under comparable programs.
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\32\ The applicant states that any successor insurer would be a
legal reserve life insurance company with assets of such a size as
to afford similar protection and responsibility.
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7. In connection with this exemption request, CICL has engaged the
services of Milliman and Robertson (M&R), which is an international
firm of consultants and actuaries with expertise in all facets of
employee benefits, including insurance, as the Independent Fiduciary
for the Plan. Charles M. Waldron, FSA (Mr. Waldron), a Principal and
Consulting Actuary employed by M&R, has signed the Independent
Fiduciary representations on behalf of M&R. M&R's consultants are
frequently retained to advise corporations on the insurance
arrangements underlying their benefit programs and have considerable
expertise in the area of reinsurance and captive insurers.
8. For purposes of demonstrating independence, Mr. Waldron has
represented that:
(a) Neither he nor M&R is an Affiliate of Columbia, Wausau or CICL;
(b) He is not an officer, director, employee of, or partner in
Columbia, CICL or Wausau;
(c) M&R is not a corporation in which Columbia, CICL or any of the
other insurers involved in the proposed transaction has an ownership
interest or is a partner;
(d) neither he nor M&R has an ownership interest in Columbia, CICL,
or Wausau, or in any Affiliate of those firms;
(e) he was not a fiduciary with respect to the Plan prior to his
appointment for this transaction;
(f) he has acknowledged in writing on behalf of M&R its acceptance
of fiduciary obligations and has agreed not to participate in any
decision with respect to any transaction in which either he or M&R has
an interest that might affect their fiduciary duty;
(g) gross income received by Mr. Waldron and M&R separately and
combined from Columbia, CICL, or Wausau does not exceed 5 percent of
Mr. Waldron's or M&R's gross annual income from all sources for any
fiscal year; and
(h) neither M&R nor Mr. Waldron has acquired any property from,
sold property to, or borrowed funds from Columbia, CICL, or Wausau or
their Affiliates.
9. Mr. Waldron represents that CICL is registered in Bermuda and
has been conducting business in Bermuda since 1996 reinsuring property
and casualty risks. CICL's reserves have been reviewed by ARS, which is
a firm independent of CICL and Columbia. These reports cover the last
two reporting periods prior to the proposed transaction. In addition,
Mr. Waldron has received assurances from Columbia and CICL that all
future reserves in the Vermont branch of CICL (i.e., Branch) will be
certified by a qualified actuary approved by the State of Vermont. Mr.
Waldron has confirmed that CICL has undergone an examination by Arthur
Andersen & Co., an independent certified public accountant, for its
last completed taxable year.
10. Mr. Waldron has concluded that, as a result of the reinsurance
agreement described in representation 6, above, the Plan's risks will
be 100% covered by Wausau, a carrier rated A+ by Best's, even if CICL
were unable or unwilling to cover the Plan's liabilities it is assuming
as a result of the reinsurance agreement. Mr. Waldron represents that
he has reviewed the terms of the proposed reinsurance agreement between
Wausau and CICL, and it provides for the risk retained by CICL to
revert back to Wausau at no further cost to the Plan should CICL be
unable or unwilling to pay the benefits.
11. Mr. Waldron has represented that he reviewed the Plan benefits
before the reinsurance transaction and the benefits implemented in
anticipation of the reinsurance transaction. He has concluded that
there is an immediate benefit to the Plan participants from the
reinsurance transaction. Benefits have been increased from 30% of
monthly earnings up to the Social Security wage base plus 60% of basic
monthly earnings above the Social Security wage base, to 60% of the
basic monthly earnings without regard to the Social Security wage base.
In addition, the family benefit from Social Security will no longer be
used to offset the Plan benefits if the combined benefits exceed 70% of
basic monthly earnings.
12. The applicant makes the following representations concerning
the determination of the initial premium to the Plan under the proposed
arrangement. The Plan contacted Wausau and was quoted a rate based on
Wausau's evaluation of the risk. When CICL considered reinsuring the
Plan's risk, it asked its consultants, WW and ARS, to evaluate the risk
and the Wausau premium based on their best estimates of expected claims
and expenses, respectively. Mr. Waldron represents that M&R has
reviewed the report by Mr. George of WW (see rep. 3, above), who was
retained to develop the expected claims for the year 2000 based on the
covered participants as of December 31, 1999. In addition, M&R had a
discussion regarding that report with Mr. George to obtain more
information concerning the details of the methods he used, and M&R
relied on this report for its accuracy of data and calculation. With
respect to ARS' evaluation of expenses, M&R reviewed the types of
expenses to ensure that all types of expenses that would be expected
were provided for. M&R represents that the premium developed for the
Plan follows a methodology of adding to the expected claims, a small
provision for adverse deviation and the estimated expenses of the Plan,
including premium tax. Mr. Waldron states that this method is one of
many methods used within the industry. The expected claims were
estimated to be at the midpoint of M&R's claims model, relating to such
claims, which was based on modifications to the 1987 Group Long Term
Disability Table. The modifications were based in part on the actual
historical experience of the Plan. Expenses were developed from actual
costs incurred by the Plan, or by contractual agreements between the
parties. Expenses include administrative costs, including claims
handling expenses, fronting and placement fees, and premium taxes.
In summary, M&R represents that it has reviewed the analysis of the
Wausau rate by WW and ARS, and has concluded that the rate being
charged by Wausau is consistent with the actuarial projections. M&R
represents that the formula used to calculate the premiums is similar
to formulae used by other insurers providing long-term disability
coverage under similar plans.
[[Page 50240]]
Furthermore, it is Mr. Waldron's opinion that the premium is below the
midpoint of the range of premiums charged by other insurers providing
similar coverage under similar programs. The applicant represents that
the independent fiduciary will confirm on an annual basis that the Plan
is paying a rate comparable to that which would be charged by a
comparably-rated insurer for a program of the approximate size of the
Plan with comparable claims experience.
13. M&R will represent the interests of the Plan as the Independent
Fiduciary at all times.\33\ M&R will monitor compliance by the parties
with the terms and conditions of the proposed reinsurance transaction,
and will take whatever action is necessary and appropriate to safeguard
the interests of the Plan and of its participants and beneficiaries.
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\33\ In this regard, the applicant makes a representation
regarding a successor independent fiduciary. Specifically, if it
becomes necessary in the future to appoint a successor independent
fiduciary (the Successor) to replace M&R and Mr. Waldron, the
applicant will notify the Department sixty (60) days in advance of
the appointment of the Successor. Any Successor will have the
responsibilities, experience and independence similar to those of
M&R and Mr. Waldron.
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14. The applicant represents that the proposed reinsurance
transaction will meet the following conditions of PTE 79-41 covering
direct insurance transactions:
(a) CICL is a party in interest with respect to the Plan (within
the meaning of section 3(14)(G) of the Act) by reason of stock
affiliation with Columbia, which maintains the Plan;
(b) Branch is licensed to do conduct reinsurance transactions by
the State of Vermont. The law under which Branch is licensed requires
that all business written in a branch captive must have an annual
certification by a qualified actuary;
(c) CICL has undergone an examination by the independent certified
public accountant firm of Arthur Andersen & Co. for its last completed
taxable year;
(d) Branch has received a Certificate of Authority from its
domiciliary state, Vermont, which has neither been revoked nor
suspended;
(e) The Plan will pay no more than adequate consideration for the
insurance. In addition, in the initial year of the proposed reinsurance
transaction, there will be an immediate increase in benefits to the
Plan's participants and beneficiaries; and
(f) No commissions will be paid by the Plan with respect to the
reinsurance arrangement with CICL, through Branch, as described herein.
In addition, the Plan's interests will be represented by a
qualified, independent fiduciary (i.e., M&R or its Successor), who has
initially determined that such transaction will be in the best
interests, and protective, of the Plan and its participants and
beneficiaries. The independent fiduciary will also confirm on an annual
basis that the Plan is paying a rate comparable to that which would be
charged by a comparably-rated insurer for a program of the approximate
size of the Plan with comparable claims experience.
15. In summary, the applicant represents that the proposed
transaction will meet the criteria of section 408(a) of the Act
because: (a) Plan participants and beneficiaries are afforded insurance
protection by Wausau, a carrier rated A+ by Best's, at competitive
market rates arrived at through arm's-length negotiations; (b) CICL,
which through Branch will enter into the reinsurance transaction with
Wausau, is a sound, viable insurance company which has been in business
since 1996; (c) the protections described in representation 14, above,
provided to the Plan and its participants and beneficiaries under the
proposed reinsurance transaction are based on those required for direct
insurance by a ``captive'' insurer, under the conditions of PTE 79-41
(notwithstanding certain other requirements related to, among other
things, the amount of gross premiums or annuity considerations received
from customers who are not related to, or affiliated with the insurer);
\34\ (d) Mr. Waldron, the Plan's independent fiduciary, has reviewed
the proposed reinsurance transaction and has determined that the
transaction is appropriate for, and in the best interests of, the Plan
and that there will be an immediate benefit to the Plan participants as
a result thereof by reason of an improvement in benefits under the
terms of the Plan; and (e) M&R will monitor compliance by the parties
with the terms and conditions of the proposed reinsurance transaction,
and will take whatever action is necessary and appropriate to safeguard
the interests of the Plan and of its participants and beneficiaries.
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\34\ The proposal of this exemption should not be interpreted as
an endorsement by the Department of the transactions described
herein. The Department notes that the fiduciary responsibility
provisions of Part 4 of Title I of the Act apply to the fiduciary's
decision to engage in the reinsurance arrangement.
Specifically, section 404(a)(1) of the Act requires, among other
things, that a plan fiduciary act prudently, solely in the interest
of the plan's participants and beneficiaries, and for the exclusive
purpose of providing benefits to participants and beneficiaries when
making investment decisions on behalf of the plan. In this regard,
the Department is not providing any opinion as to whether a
particular insurance or investment product, strategy or arrangement
would be considered prudent or in the best interests of a plan, as
required by section 404 of the Act. The determination of the
prudence of a particular product or arrangement must be made by a
plan fiduciary after appropriate consideration to those facts and
circumstances that, given the scope of such fiduciary's investment
duties, the fiduciary knows or should know are relevant to the
particular product or arrangement involved, including the plan's
potential exposure to losses and the role a particular insurance or
investment product plays in that portion of the plan's investment
portfolio with respect to which the fiduciary has investment duties
and responsibilities (see 29 CFR 2550.404a-1).
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
American Mutual Holding Company (AMHC)
Located in Des Moines, IA
[Application No. D-10874]
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 in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).\35\
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\35\ For purposes of this proposed 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 to (1) the receipt of certain common stock
(Common Stock) issued by AMHC, or (2) the receipt of cash (Cash) or
policy credits (Policy Credits), by or on behalf of a policyowner of
AMHC (the Eligible Member), which is an employee benefit plan (the
Plan), other than a Plan maintained by AMHC and/or its affiliates, in
exchange for such Eligible Member's membership interest in AMHC, in
accordance with the terms of a plan of conversion (the Plan of
Conversion), implemented under Iowa law.
This proposed exemption is subject to the following conditions set
forth below in Section II.
Section II. General Conditions
(a) The Plan of Conversion is subject to approval, review and
supervision by the Iowa Commissioner of Insurance
[[Page 50241]]
(the Commissioner) and is implemented in accordance with procedural and
substantive safeguards that are imposed under Iowa law.
(b) The Commissioner reviews the terms and options that are
provided to Eligible Members of AMHC as part of such Commissioner's
review of the Plan of Conversion and the Commissioner approves the Plan
of Conversion following a determination that such Plan is fair and
equitable to Eligible Members and is not detrimental to the general
public.
(c) Each Eligible Member has an opportunity to vote to approve the
Plan of Conversion after full written disclosure is given to the
Eligible Member by AMHC.
(d) Any determination to receive Common Stock, Cash or Policy
Credits by an Eligible Member which is a Plan, pursuant to the terms of
the Plan of Conversion, is made by one or more Plan fiduciaries which
are independent of AMHC and its affiliates and neither AMHC nor any of
its affiliates exercises any discretion or provides investment advice,
within the meaning of 29 CFR 2510.3-21(c), with respect to such
decisions.
(e) After each Eligible Member entitled to receive Common Stock is
allocated at least 20 shares, additional consideration is allocated to
Eligible Members who own participating policies based on actuarial
formulas that take into account each participating policy's
contribution to the surplus and asset valuation reserve of AMHC, which
formulas have been approved by the Commissioner.
(f) All Eligible Members that are Plans participate in the
transactions on the same basis as all Eligible Members that are not
Plans.
(g) No Eligible Member pays any brokerage commissions or fees in
connection with their receipt of Common Stock or Policy Credits or in
connection with the implementation of the commission-free program (the
Program).
(h) All of AMHC's policyholder obligations remain in force and are
not affected by the Plan of Conversion.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``AMHC'' means American Mutual Holding Company and any
affiliate of AMHC as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of AMHC includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with AMHC. (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.)
(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 ``Eligible Member'' means a person who is (or,
collectively, persons who are) the owner(s) of one or more ``eligible
policies'' (the Eligible Policy or Eligible Policies) on the adoption
date of the Plan of Conversion. An ``Eligible Policy'' is defined as a
policy that has been in force for at least one year prior to the
adoption date and that remains in force on the effective date of the
Plan of Conversion. A mutual member of AMHC who owns both an Eligible
Policy and a policy that is not an Eligible Policy will be an Eligible
Member only with respect to the Eligible Policy.
(d) The term ``Policy Credit'' means either an increase in the
accumulation account value (to which no surrender or similar charge
will be applied) or an increase in a dividend accumulation on a policy
or contract issued by AmerUs Life Insurance Company (AmerUs Life).
Summary of Facts and Representations
1. AMHC is a mutual insurance holding company that was organized
under Iowa law on June 30, 1996. AMHC was formed incident to the
conversion of AmerUs Life, from a mutual insurance company to a stock
life insurance company under a plan of reorganization that was approved
by the Commissioner and AmerUs Life members. As required under Section
521A.14 of the Iowa Code (which governs the formation of mutual
insurance holding companies), and as provided in that plan of
reorganization, AmerUs Life policyowners ceased to have any membership
interests in AmerUs Life and instead became mutual members of AMHC.
2. AmerUs Life was originally organized in 1896 as a mutual
insurance company under the name ``Central Life Assurance Society of
the United States.'' In 1902, AmerUs Life was converted to a stock
company in 1902 and again reverted to a mutual company in 1919. In
1994, AmerUs Life's name was changed to American Mutual Life Insurance
Company when it merged with a previously unrelated company of that
name. On June 30, 1996, the insurer's name was finally changed to
``AmerUs Life Insurance Company.'' As of March 31, 2000, AmerUs Life
had the following financial-strength ratings: ``A'' (by A.M. Best);
``Baa1'' (by Moody's); and ``A'' (by Standard & Poor's).
3. Currently, AmerUs Life has approximately 16,000 outstanding
contracts held in connection with employee benefit plan policyowners
which are members of AMHC. None of the Plans is sponsored by AmerUs
Life or any AMHC affiliate.
In certain cases, AmerUs Life or one of its affiliates may provide
limited administrative or recordkeeping services to the Plans. These
services include the preparation of required tax forms (such as IRS
Forms 1099-R and 5948), tracking of regular contributions made to Roth
IRAs, and, in prior years, provision of prototype plan documents.
However, neither AmerUs Life nor any of its affiliates is in the
business of providing administrative, recordkeeping or fiduciary
services to Plans.
As of December 31, 1999, AmerUs Life, together with its
subsidiaries, had approximately $4.674 billion in assets, more than $4
billion of assets under management, and more than $33 billion of
individual life insurance in force.
4. The principal products of AmerUs Life include life insurance and
annuity contracts. Some of these contracts are sold to Plans that are
subject to Title I of the Act or described in section 4975(e)(1) of the
Code. The Plans generally include qualified plans and qualified annuity
plans, described in sections 401(a) and 403(a) of the Code (including
401(k) plans and Keogh plans); individual retirement arrangements
(IRAs) described in Code section 408 (including simplified employee
pensions); Roth IRAs described in Code section 408A; tax-sheltered
annuities described in Code section 403(b); and welfare plans. Because
no employee benefit plan sponsored by AMHC or its affiliates owns a
life insurance or annuity contract issued by AmerUs Life, no in-house
Plans of these entities will be involved in the demutualization and
merger transactions (collectively, the Restructuring) described herein.
5. As part of the 1996 reorganization, all of the capital stock of
AmerUs Life was issued to AMHC. Subsequently, AMHC transferred all of
that stock to its subsidiaries. At present, AmerUs Life is a wholly
owned subsidiary of AmerUs Life Holdings, Inc. (AMH), a publicly-traded
insurance holding company. AMH also owns Delta Life Corporation,
AmVestor Financial Corporation and several non-life subsidiaries. The
direct and indirect subsidiaries of AMH (other than those that are
inactive or that serve only as holding companies) are all involved in
the business of life
[[Page 50242]]
insurance or in related financial services.
AMH is approximately 58 percent owned by AmerUs Group Co. (Group),
a wholly owned subsidiary of AMHC, and approximately 42 percent owned
by public investors. Group also owns a number of non-life subsidiaries.
Subsidiaries of AmerUs Life include CLA Assurance Company, Centralife
Annuity Services, Inc. and American Vanguard Life Insurance Company.
6. An AmerUs Life policyowner's membership interest in AMHC
consists of the rights to vote, to participate in the distribution of
AMHC's surplus in the event of AMHC's voluntary dissolution or
liquidation, and to receive consideration in the event of AMHC's
demutualization. The voting rights of such members are equal, with each
member having only one vote regardless of the number of policies owned
by that member. In addition, members have the right to vote for the
election of AMHC's Board of Directors and to vote on any proposition
that the Board of Directors submits to a vote of members or that is
required to be submitted to such a vote under Iowa law. A person ceases
to be a member of AMHC when such person ceases to be an AmerUs Life
policyowner.
7. Because the mutual holding company structure no longer agrees
with the strategic business plan of AMHC and AMH, AMHC intends to
convert from a mutual company to a stock company and then merge AMH
into AMHC (i.e., the Restructuring) in accordance with the ``Plan of
Conversion of American Mutual Holding Company'' which was adopted by
the AMHC Board of Directors on December 17, 1999. The principal purpose
of the Restructuring is to enhance AMHC's financial flexibility. In
addition, the Restructuring will provide members who are eligible to
receive consideration under the Restructuring (i.e., the Eligible
Members) with an opportunity to receive shares of Common Stock issued
by AMHC, Cash or Policy Credits, in exchange for such Eligible Member's
illiquid membership interests, which will be extinguished. In this
regard, Eligible Members will realize economic value from their
membership interests that is not currently available to them as long as
AMHC remains a mutual holding company. The proposed Restructuring will
not affect the rights of AmerUs Life policyowners under their insurance
and annuity contracts. All of AmerUs Life's insurance and annuity
contracts will remain in force and all policyowners will be entitled to
receive all benefits under their contracts to which they would have
been entitled without regard to the Restructuring. In other words, the
Restructuring will not, in any way, change premiums or reduce policy
benefits, values, guarantees or other policy obligations of AmerUs Life
to its policyowners. Policy dividends will continue to be paid as
declared.
8. Accordingly, AMHC requests an administrative exemption from the
Department that would cover the receipt of Common Stock, Cash or Policy
Credits by Eligible Members that are Plans in exchange for such
Eligible Member's existing membership interests in AMHC. As noted
above, AMHC is not requesting an exemption for distributions of
consideration to ``in house'' Plans maintained by it or its affiliates
for their own employees because these Plans do not own life insurance
or annuity contracts that are issued by AmerUs Life.
9. Under Section 521.14(b)(5) of the Iowa Code, AMHC is treated as
a mutual entity and it may be converted to a stock company under
chapter 508B of the Iowa Code. Chapter 508B, which applies to AMHC's
Plan of Conversion, sets forth procedural and substantive requirements
to ensure that the Restructuring will be fair and equitable to AmerUs
Life policyowners.
Specifically, Section 508B.2 of the Iowa Code provides that a
mutual life insurance company may become a stock life insurance company
under a plan of conversion established and approved in the manner
provided by Chapter 508B. Section 508B.2 and Section 508B.3 also
provide that, in lieu of selecting a plan of conversion provided for in
Chapter 508B, a mutual company may convert to a stock company pursuant
to a plan approved by the Commissioner. (The Restructuring of AMHC will
be conducted in accordance with these latter provisions.)
Under Section 508B.3 of the Iowa Code, the Commissioner must
determine the fairness and equity of a plan of conversion with respect
to policyowners of a company undergoing demutualization. More
specifically, Section 508B.7 of the Iowa Code requires that the
Commissioner review the plan of conversion to determine whether it
complies with all provisions of law, is fair and equitable to the
mutual company and its policyowners, and whether the reorganized
company will have the amount of capital and surplus deemed by the
Commissioner to be reasonable necessary for its future solvency.
Additionally, Section 508B.7 of the Iowa Code permits the Commissioner
to order a hearing on the fairness and equity of the terms of the plan
of conversion after giving written notice of the hearing to the mutual
company, its policyowners, and other interested persons--all of whom
have a right to appear at the hearing.
Section 508B.6 of the Iowa Code requires that a plan of conversion
be approved by two-thirds of the policyowners of the mutual company who
are entitled to vote on the conversion. The statute requires notice to
be given to the policyowners and permits voting by ballot, in person,
or by proxy. The notice of meeting and election must contain a copy of
the plan of conversion or a summary of the plan of conversion. Section
508B.4 of the Iowa Code defines the class of policyowners entitled to
receive notice and to vote on the plan of conversion as generally
including policyowners whose policies or contracts are in force on the
date of adoption of the plan of conversion.
Finally, Section 508B.9 of the Iowa Code provides that, after the
plan of conversion has been approved by the Commissioner and the
policyowners, the reorganized company will be a continuation of the
mutual company and the conversion will not annul or modify any of the
mutual company's existing suits, contracts, or liabilities except as
provided in light of the plan of conversion.
All rights, franchisees and interests of the mutual company in and
to property, assets and other interests will be transferred to and vest
in the reorganized company. The reorganized company will assume all
obligations and liabilities of the mutual company.
Consistent with these requirements of chapter 508B, the Plan of
Conversion provides for AMHC to file an application with the
Commissioner under Section 508B.2 of the Iowa Code to reorganize as a
stock holding company and to merge with AMH (with AMHC as the surviving
entity). In the present case, the Commissioner will hold a public
hearing on the fairness and equity of the terms of the Plan of
Conversion and on whether AMHC will have the amount of capital and
surplus necessary for its future solvency.
The Plan of Conversion also provides for members to comment on such
Plan at the hearing and for policyowners who are entitled to vote on
the Plan to do so at a special members' meeting. Further, the Plan of
Conversion requires AMHC to provide notice to its members of both the
public hearing and the members' meeting.
10. Thus, subject to the approval of the Commissioner and the
voting members, the Plan of Conversion will include the following
actions:
<bullet> Group will liquidate into AMHC.
[[Page 50243]]
<bullet> AMHC will convert to a stock corporation.
<bullet> AMHC will provide Common Stock, Cash or Policy Credits to
Eligible Members as consideration for their membership interests.
<bullet> AMH will merge into AMHC with AMHC as the surviving
corporation and with shareholders of AMH receiving stock of AMHC in
exchange for their shares of AMH.
<bullet> AmerUs Life will become a wholly owned subsidiary of AMHC
(which will be renamed ``AmerUs Group Co.'').\36\ Shares of the
successor entity will be traded on the New York Stock Exchange. Thus,
there will be no initial public offering of AMHC stock as a result of
the Restructuring.
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\36\ AMHC is in the process of combining with Indianapolis Life
Insurance Company (ILICo), a mutual life insurance company. AMHC
expects that ILICo will be converted to a stock company under a
``sponsored demutualization'' after the Restructuring of AMHC. The
sponsored demutualization of ILICo will result in certain ILICo
policyowners receiving Common Stock, Cash or Policy Credits. It is
anticipated that a plan of conversion for the demutualization of
ILICo will be filed with the Indiana Insurance Commissioner in
August 2000 and that an exemption request will be subsequently filed
with the Department.
---------------------------------------------------------------------------
On June 22, 2000, the voting members of AMHC approved the Plan of
Conversion with approximately 100,000 policyowners voting on such Plan.
On the same day, the shareholders of AMH approved the merger of AMH
into AMHC. On June 23, 2000, the Commissioner held a public hearing on
the Plan of Conversion. The Commissioner is expected to approve the
Plan of Conversion during August 2000 and it is anticipated AMHC will
demutualize on or before September 30, 2000.
11. Under the Plan of Conversion, all Eligible Members will receive
consideration in exchange for their membership interests in AMHC.\37\
The decision to vote on the Plan of Conversion and the decision to
elect the form of consideration to be received by a Plan in connection
with the Restructuring will be made by a Plan fiduciary which is
independent of AMHC and its affiliates. In this respect, neither AMHC
nor its affiliates will exercise investment discretion or render
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c), with
respect to such decisions.
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\37\ AMHC represents that, consistent with section 508B.1.4 of
the Iowa Code, the Plan of Conversion generally provides that the
policyowner eligible to participate in the distribution of Common
Stock, Cash or Policy Credits resulting from the Plan of Conversion
generally is the owner of a policy as ``determined by [AMHC] on the
basis of AmerUs Life's records.'' AMHC 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, AMHC represents that
it is required under the foregoing provisions of the Iowa Code and
the Plan of Conversion to make distributions resulting from the Plan
of Conversion to the employer or trustee as owner of the policy.
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 AMHC incurs the obligation to
distribute Common 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.
---------------------------------------------------------------------------
The total consideration given to the Eligible Members will be equal
in value to the assets of AMHC, net of its liabilities and other
obligations. For purposes of allocating the total consideration among
Eligible Members, each Eligible Member will be allocated (but not
necessarily issued) shares of Common Stock equal to the sum of (a) a
fixed component equal to 20 shares of Common Stock; and (b) a variable
component of consideration equal to the portion, if any, of the
``aggregate variable component'' allocated to any variable component
policy owned by the Eligible Member.\38\
---------------------------------------------------------------------------
\38\ A ``variable component policy'' is a policy eligible to
participate in the divisible surplus of AmerUs Life.
---------------------------------------------------------------------------
12. The aggregate variable component will be allocated among
variable component policies by multiplying an ``equity share'' for each
variable component policy by the number of shares of Common Stock
constituting the aggregate variable component. The ``equity share'' for
a variable component policy will be equal to the ratio of the
``actuarial contribution'' for that policy to the sum of all actuarial
contributions for all variable component policies. The ``actuarial
contribution'' for a policy is the contribution that the policy has
made (and is expected to make) to AmerUs Life's statutory surplus and
asset valuation reserve, as calculated under the principles,
assumptions and methodologies set forth in the Plan of Conversion and
the actuarial contribution memorandum referred to in the Plan of
Conversion.
13. After shares of Common Stock have been allocated in the manner
described above, consideration will be paid to Eligible Members as
follows:
<bullet> First, in the case of policies and contracts held by IRAs
described in Code section 408(b) and tax-sheltered annuities described
in Code section 403(b) and in the case of individual annuity contracts
and individual life insurance policies issued directly to participants
under qualified plans described in Code section 401(a), consideration
will be paid only in Policy Credits.
<bullet> Second, in the case of other Eligible Members who hold
policies known by AMHC to be subject to a creditor lien (other than a
policy loan) or a bankruptcy proceeding or whose addresses as shown in
the records of AMHC are outside the United States or are addresses at
which mail is undeliverable, consideration will be paid only in Cash.
<bullet> Third, in the case of other Eligible Members who so elect,
by making an affirmative election, consideration generally will be paid
in Common Stock.
<bullet> Fourth, in all other cases, consideration generally will
be paid in Cash. (In other words, an Eligible Member, who is not
described in bulleted paragraph One or Two above, and who does not make
an affirmative election to receive Common Stock, as described in
bulleted paragraph Three above, will receive Cash.)
Section 6.3(d) of the Plan of Conversion provides special rules for
satisfying the Cash and Common Stock preferences of Eligible
Members.\39\ In this regard, the Plan of Conversion limits the total
amount of Cash available for payment of consideration to Eligible
Members and provides for an allocation of Cash and Common Stock among
Eligible Members (other than those described in the first two
categories) in the event that the amount of available Cash is not
adequate to meet Cash preferences. This allocation will be made as
follows:
---------------------------------------------------------------------------
\39\ The special rules are intended to apply on a uniform basis
without regard to whether the Eligible Member entitled to receive
consideration is a Plan. The reason for the special rules is that
the Plan of Conversion limits both the total number of shares of
Common Stock available for distribution in connection with the
Restructuring and the total funds available for distribution as Cash
or Policy Credits. In this regard, the total number of shares of
Common Stock available under the Plan of Conversion is 17,390,165
shares. This number is equal to the number of AMH shares currently
held by AMHC. The total funds available for distribution as Cash or
Policy Credits is the ``net cash proceeds'' of AMHC (i.e., the cash
balances of AMHC immediately prior to the effective date of the Plan
of Conversion less expenses relating to the Plan of Conversion, all
other expenses of AMHC accrued as of the effective date of the Plan
of Conversion, and the liabilities of AMHC).
---------------------------------------------------------------------------
<bullet> First, Cash will be distributed to those ``Cash
Preference'' Eligible Members who are allocated no more than the number
of shares of Common Stock constituting the fixed component of
consideration.
[[Page 50244]]
<bullet> Then, Cash will be distributed continuing to the highest
level of share allocation at which Cash preferences can be satisfied.
<bullet> If Cash preferences cannot be satisfied for ``Cash
Preference'' Eligible Members entitled to receive the same number of
shares of Common Stock, Cash will be distributed on a pro rata basis to
such Eligible Members (but with Cash paid only to the extent of whole
shares of Common Stock).
<bullet> Any consideration not paid in Cash under the first through
third bulleted paragraphs set forth above, will be paid in shares of
Common Stock.
At present, AMHC anticipates that the satisfaction of Cash
preferences with Common Stock will become applicable only with respect
to ``Cash Preference'' Eligible Members who are allocated in excess of
100 shares of Common Stock.
14. Eligible Members who do not receive Cash consideration under
the aforementioned allocation method may receive consideration in the
form of Common Stock. Therefore, it is possible that Eligible Members
who ``state a Cash preference,'' by not affirmatively electing to
receive Common Stock, may receive Common Stock as consideration for
their membership interests.
In addition, the Plan of Conversion limits the total number of
shares of Common Stock available for payment to Eligible Members and
provides for Cash and Common Stock to be allocated among Eligible
Members in a fair and equitable manner in the event the amount of
available Common Stock is not adequate to meet the Common Stock
preferences.\40\
---------------------------------------------------------------------------
\40\ Specifically, Section 6.3(d) of the Plan of Conversion
provides special rules for the limited satisfaction of Common Stock
preferences with Cash. These rules apply in the event Eligible
Members elect to receive consideration in the form of Common Stock
in such a way that the net cash proceeds of AMHC would not be fully
utilized and the shares of Common Stock issued in connection with
the Restructuring would exceed 17,390,165 shares. In this event, the
number of shares of Common Stock to be issued to the Eligible
Members who have elected to receive Common Stock (the Stock
Preference Members) will be reduced to 17,390,165 shares ``in a fair
and equitable manner'' and an amount of funds necessary to reduce
the undistributed net cash proceeds to zero will be distributed to
Stock Preference Members ``in a fair and equitable manner.'' AMHC
expects that the Common Stock preferences of all Stock Preference
Members will be satisfied with shares of Common Stock so the
foregoing rules will not apply in connection with the Restructuring.
---------------------------------------------------------------------------
15. Where consideration is to be paid in the form of Cash or Policy
Credits, the amount of Cash or Policy Credits will be determined by
multiplying the number of shares of Common Stock allocated to the
Eligible Member by the ``stock price'' of the Common Stock. Under the
Plan of Conversion, the ``stock price'' is defined as the greater of
the closing price per share of the Common Stock on the effective date
of the Plan of Conversion or the average of the closing price per share
of the Common Stock for each of the first ten trading days beginning
with the effective date of the Plan of Conversion.
16. Where consideration is to be paid in the form of Common Stock,
AMHC will issue to the Eligible Member, in book-entry form as
uncertificated shares, the shares of Common Stock allocated to the
Eligible Member for which the Eligible Member will not receive
consideration in the form of Cash or Policy Credits and will mail
notice that a designated number of shares of Common Stock have been
registered in the Eligible Member's name. Upon request of the
registered holder of such shares, AMHC will mail a stock certificate
representing such shares. No Eligible Member will pay a brokerage
commission or fee in connection with the receipt of Common Stock under
the Plan of Conversion.
17. The Plan of Conversion permits AMHC to establish a commission-
free program beginning within one year of the effective date of the
Plan of Conversion and continuing for at least three months. Pursuant
to the Program, each Eligible Member who receives not more than 99
shares of Common Stock will be entitled to sell, at prevailing market
prices all such shares received under the Restructuring without paying
brokerage commissions, mailing charges, registration fees, or other
administrative or similar expenses.
Additionally, Eligible Members receiving fewer than 99 shares of
Common Stock will be entitled to purchase, at prevailing market prices,
additional shares to round-up their holdings to 100 shares without
paying brokerage commissions, mailing charges, registration fees or
other administrative or similar expenses. However, the decision to sell
or purchase shares under the Program will be made by an independent
Plan fiduciary and neither AMHC nor its affiliates will exercise
investment discretion or render ``investment advice'' within the
meaning of 29 CFR 2510.3-21(c).
18. 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 Plan of Conversion will be implemented in accordance with
stringent procedural and substantive safeguards that are imposed under
Section 508B of the Iowa Code and will be subject to the review and
supervision of the Commissioner.
(b) The Commissioner will review the terms and options that are
provided to Eligible Members of AMHC as part of such Commissioner's
review of the Plan of Conversion and the Commissioner will approve the
Plan of Conversion following a determination that such Plan is fair and
equitable to Eligible Members (including Plans) and is not detrimental
to the general public.
(c) One or more independent Plan fiduciaries will have an
opportunity to vote to approve the terms of the Plan of Conversion (or
to comment on such Plan), and will be solely responsible for all such
decisions after receiving full and complete disclosure from AMHC.
(d) The proposed exemption will allow Eligible Members that are
Plans to receive Common Stock, Cash or Policy Credits, in exchange for
their membership interests in AMHC and neither AMHC nor any of its
affiliates will exercise investment discretion or provide ``investment
advice,'' within the meaning of 29 CFR 2510. 3-21(c), with respect to
such decisions.
(e) All Plans that are Eligible Members will participate in the
transactions and on the same basis as Eligible Members that are not
Plans.
(f) No Eligible Member will pay any brokerage commissions or fees
in connection with the receipt of Common Stock or Policy Credits or in
connection with the implementation of the Program.
(g) All of AMHC's policyholder obligations will remain in force and
will not be affected by the Plan of Conversion such that no benefits,
guarantees, or other rights and interests (apart from membership in
AMHC) will be compromised.
Notice to Interested Persons
AMHC will provide notice of the proposed exemption to Eligible
Members which are Plans within 21 days of the publication of the notice
of pendency in the Federal Register. Such notice will be provided to
interested persons by first-class mail and will include a copy of the
notice of proposed exemption, as published in the Federal Register,
including a supplemental statement, as required pursuant to 20 CFR
2570.43(b)(2) which shall inform interested persons of their right to
comment on the proposed exemption. Comments with respect to the notice
of proposed exemption are due within 51 days after the date of
publication of this pendency notice 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.)
[[Page 50245]]
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 10th day of August, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits,
Administration, U.S. Department of Labor.
[FR Doc. 00-20741 Filed 8-16-00; 8:45 am]
BILLING CODE 4510-29-P
