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Secretary of Labor Thomas E. Perez
EBSA (Formerly PWBA) Federal Register Notice Proposed Exemptions; Merganser Capital Management LP (Merganser), et al. [06/04/2001]

EBSA (Formerly PWBA) Federal Register Notice

EBSA (Formerly PWBA) Federal Register Notice Proposed Exemptions; Merganser Capital Management LP (Merganser), et al. [06/04/2001]

[PDF Version]

Volume 66, Number 107, Page 30012-30021


DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10951, et al.]

 
Proposed Exemptions; Merganser Capital Management LP (Merganser), 
et al.

AGENCY: Pension and Welfare Benefits Administration, Labor

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).
    Written Comments and Hearing Requests: All interested persons are 
invited to submit written comments or request for a hearing on the 
pending exemptions, unless otherwise stated in the Notice of Proposed 
Exemption, within 45 days from the date of publication of this Federal 
Register Notice. Comments and requests for a hearing should state: (1) 
the name, address, and telephone number of the person making the 
comment or request, and (2) the nature of the person's interest in the 
exemption and the manner in which the person would be adversely 
affected by the exemption. A request for a hearing must also state the 
issues to be addressed and include a general description of the 
evidence to be presented at the hearing.

ADDRESSES: All written comments and request for a hearing (at least 
three copies) should be sent to the Pension and Welfare Benefits 
Administration, Office of Exemption Determinations, Room N-5649, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. __, stated in each Notice of Proposed 
Exemption. The applications for exemption and the comments received 
will be available for public inspection in the Public Documents Room of 
the Pension and Welfare Benefits Administration, U.S. Department of 
Labor, Room N-5638, 200 Constitution Avenue, NW., Washington, DC 20210.
    Notice to Interested Persons: Notice of the proposed exemptions 
will be provided to all interested persons in the manner agreed upon by 
the applicant and the Department within 15 days of the date of 
publication in the Federal Register. Such notice shall include a copy 
of the notice of proposed exemption as published in the Federal 
Register and shall inform interested persons of their right to comment 
and to request a hearing (where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Merganser Capital Management LP (Merganser) Located in Cambridge, 
Massachusetts

[Application No. D-10951]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act and section 4975(c)(2) of 
the Code and in accordance with the procedures set forth in 29 CFR part 
2570, Subpart B (55 FR 32836, August 10, 1990).

Section I. Transaction

    If the exemption is granted, Merganser shall not be precluded from 
functioning as a ``qualified professional asset manager'' pursuant to 
Prohibited Transaction Exemption 84-14 (49 FR 9494, Mar. 13, 1984) (PTE 
84-14) for the period between April 6, 2000 and December 31, 2006, 
solely because of its failure to satisfy the shareholders' or partners' 
equity requirement under section V(a)(4) of PTE 84-14, provided that 
the conditions set forth in section II are met.

Section II. Conditions

    (a) Merganser shall obtain an irrevocable Letter of Credit, which 
shall be reduced only by ERISA Claims paid on behalf of ERISA Clients.
    (b) The amount available under the Letter of Credit shall be at 
least $750,000 as of the first day of each fiscal year during which the 
Letter of Credit is maintained.
    (c) Merganser shall cause the Letter of Credit to be issued to an 
Agent to be held for the benefit of all ERISA Clients.
    (d) Merganser shall notify current and future ERISA Clients in 
writing of: (i) Their status as beneficiaries of the Letter of Credit; 
(ii) their right to make a draw against the Letter of Credit by 
presenting the Agent with the documentation described in (g) below; and 
(iii) the U.S. address of the Agent at which an ERISA Client may 
present such documentation. Merganser shall promptly notify all ERISA 
Clients of any changes in the information as to how to contact the 
Agent.
    (e) Merganser shall provide current and future ERISA Clients with a 
copy of the proposed and final exemption, if granted, as published in 
the Federal Register.
    (f) Merganser shall provide the Agent with a complete list of all 
ERISA Clients, which shall be updated each time Merganser obtains a new 
ERISA Client.
    (g) The Letter of Credit shall be payable on demand solely to any 
ERISA Client (or its agent) if the ERISA Client provides the Agent 
with:
    (i)(A) a certified copy of the final judgment against Merganser 
based on an ERISA Claim of such client, entered by a court of competent 
jurisdiction with all rights of appeal having expired or having been 
exhausted, or (B) a true copy of a settlement agreement between the 
ERISA Client and Merganser providing for damages to the ERISA Client 
with respect to an ERISA Claim;
    (ii) in the case of a final court judgment, a certified true copy 
of a Sheriff's or Marshall's levy and execution on the judgment, 
returned unsatisfied, or such other documentation, certified by an 
officer of the court in which the judgment was entered, stating that 
the judgment remains unsatisfied following attempts

[[Page 30013]]

to collect the judgment in accordance with local court rules; and
    (iii) a certificate of an authorized representative of the ERISA 
Client stating the amount of the judgment or settlement which remains 
unsatisfied.
    (h)(i) The Letter of Credit shall be maintained until the earlier 
of December 31, 2006 or Merganser's satisfaction of the partners' 
equity requirement under section V(a)(4) of PTE 84-14.
    (ii) Notwithstanding subparagraph (i), in the event that one or 
more ERISA Clients has a Pending ERISA Claim on December 31, 2006, 
Merganser shall either (A) cause the Letter of Credit to be maintained 
until the earlier of December 31, 2008 or a final judgment or 
settlement disposing of all such Pending ERISA Claims, or (B) cause a 
bond to be purchased which fully insures all such Pending ERISA Claims 
in the total amount equal to the amount of such Pending ERISA claims 
but not to exceed $750,000.

Section III. Definitions

    (a) ``Agent'' shall mean a commercial bank, trust company or other 
financial institution subject to federal or state banking regulation 
that is independent of Merganser.
    (b) ``Claim'' shall mean a civil proceeding for monetary relief 
which is commenced by the filing or service of a civil complaint or 
similar pleading, or a request for monetary relief which could have 
been the subject of such a complaint or pleading but for a settlement 
agreement.
    (c) ``ERISA Claim'' shall mean a Claim filed against Merganser or 
with respect to which a settlement is reached with Merganser prior to 
December 31, 2006, by reason of Merganser's alleged breach or violation 
of a duty described in sections 404 or 406 of the Act.
    (d) ``ERISA Client'' shall mean any employee benefit plan covered 
by Title I of ERISA to which Merganser provides or provided investment 
management services on or before December 31, 2006.
    (e) ``Letter of Credit'' shall mean a standby letter of credit in 
the amount of $750,000 issued by a commercial bank, trust company or 
other financial institution subject to federal or state banking 
regulation that is independent of Merganser.
    (f) ``Pending ERISA Claim'' shall mean an ERISA Claim that: (i) has 
been filed in court and is not the subject of a final judgment or 
settlement; or (ii) has been the subject of a final judgment or 
settlement which remains unsatisfied.
    (g) A person will be ``independent'' of another person only if:
    (i) for purposes of this exemption, such person is not an affiliate 
of that other person; and
    (ii) the other person, or an affiliate thereof, is not a fiduciary 
that has investment management authority or renders investment advice 
with respect to assets of such person.
    (h) An ``affiliate'' of a person means:
    (i) any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the person. (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);
    (ii) any officer, director, employee or relative (as defined in 
section 3(15) of the Act) of any such other person or any partner in 
any such person; and
    (iii) any corporation or partnership of which such person is an 
officer, director or employee, or in which such person is a partner.

Summary of Facts and Representations

    1. Based in Cambridge, Massachusetts, Merganser Capital Management 
LP (the Partnership) is a registered investment adviser with more than 
$2.4 billion in assets under its management, including $850 million in 
ERISA plan assets. The Partnership's predecessor, Merganser Capital 
Management Corporation (the Corporation), was founded in 1984 as a 
wholly-owned subsidiary of the Polaroid Corporation. In 1987, Polaroid 
sold the subsidiary to its founders, Edward R. Bedrosian and Edward 
Safran. They were equal partners, each owning fifty percent of the 
stock of the Corporation.
    2. On April 6, 2000, Mr. Safran sold his shares back to the 
Corporation for $10 million. The Corporation's purchase of the stock 
was financed by a $2.5 million contribution from Mr. Bedrosian, a $6 
million unsecured loan from a commercial bank, and a secured, 
subordinated loan from Mr. Safran in the amount of $1.5 million. 
Following the buyout, Mr. Bedrosian owned 100% of the Corporation. Five 
employees of the Corporation participated in a phantom stock ownership 
plan. The Corporation then transferred substantially all of its assets 
and liabilities to the Partnership, a new limited partnership formed to 
serve as Merganser's operating entity.
    3. The general partner of the new Partnership is the Corporation. 
The Partnership has a single limited partner, a limited liability 
company owned by the same Merganser employees who had participated in 
the Corporation's phantom stock ownership plan. The general partner has 
an eighty percent interest and the limited partner has a twenty percent 
interest in the Partnership.
    4. The Applicant represents that as a result of the buyout of Mr. 
Safran, as of December 31, 2000 (the last day of its fiscal year), the 
Partnership has partners' equity of negative $6.5 million, determined 
in accordance with ``generally accepted accounting principles'' (GAAP). 
Because the buyout was an ``internal'' transaction, GAAP requires that 
the assets of the Corporation (and the Partnership) be reflected at 
``book'' rather than market value. As a result, goodwill, a significant 
asset to a firm such as this one, cannot be recognized on the 
Partnership's balance sheet. Because goodwill cannot be included as an 
asset, the Partnership will have negative equity until most of its 
current debt is repaid.
    The Applicant further represents that, had the stock of the 
Corporation been sold to outsiders in an external transaction, the 
Corporation (and thus the Partnership) could have recognized the full 
market value of its assets. Following an external transaction, the 
Corporation (and the Partnership) would have had equity sufficient to 
meet the requirements of PTE 84-14, even if it had financed the 
transaction. Had Mr. Bedrosian personally borrowed the funds to buyout 
Mr. Safran using the Partnership to guarantee the loan, the Partnership 
would have had sufficient partners' equity. Although the partners' 
equity is affected by the structure of the buyout, the Partnership's 
earning potential is not.
    The Partnership's current EBITDA (i.e., earnings before interest, 
taxes, depreciation, and amortization) is over $2 million per year. It 
is expected that, as a result of debt repayment and earnings, the 
Partnership will satisfy the $750,000 equity requirement on a GAAP 
basis within four or five years.
    5. To qualify as a qualified professional asset manager (QPAM) 
under PTE 84-14, an investment adviser must have partners' equity in 
excess of $750,000. As a result of its reorganization, as of April 6, 
2000, the Partnership will no longer qualify as a QPAM under PTE 84-14 
because it will not have $750,000 in partners' equity.
    6. The Partnership seeks an individual exemption permitting it to 
substitute an irrevocable standby letter of credit for the partners' 
equity requirement under PTE 84-14. Specifically, the Partnership will 
cause First Union National Bank (First Union) to issue an irrevocable 
standby letter of

[[Page 30014]]

credit for the benefit of employee benefit plans to which Merganser 
provides or provided investment management services on or before 
December 31, 2006 (ERISA Clients). The Applicant represents that, if 
the exemption is granted, it will serve as a QPAM, as defined in PTE 
84-14, for all the ERISA Clients with respect to which it provides 
investment management services.
    7. The letter of credit will initially be issued in the amount of 
$750,000, the amount of the partners' equity requirement under PTE 84-
14. As a condition of continuing relief, the Partnership will ensure 
that the amount available to ERISA Clients under the letter of credit 
as of the first day of each of the Partnership's fiscal years for which 
relief is needed is at least $750,000. Thus, in the event that there is 
a payment under the letter of credit during one of the Partnership's 
fiscal years, thereby reducing the remaining amount available under the 
letter of credit, the Partnership will ensure that the letter of credit 
is increased back to $750,000 no later than the first day of the 
following fiscal year.
    8. The letter of credit shall be payable on demand solely to any 
ERISA Client (or its agent) if the ERISA Client provides:
    (1) (A) a certified copy of the final judgment against Merganser 
based on an ERISA Claim of such client, entered by a court of competent 
jurisdiction with all rights of appeal having expired or having been 
exhausted, or
    (B) a true copy of a settlement agreement between the ERISA Client 
and Merganser providing for damages to the ERISA Client with respect to 
an ERISA Claim;
    (2) in the case of a final court judgment, a certified true copy of 
a Sheriff's or Marshall's levy and execution on the judgment, returned 
unsatisfied, or such other documentation, certified by an officer of 
the court in which the judgment was entered, stating that the judgment 
remains unsatisfied following attempts to collect the judgment in 
accordance with local court rules; and
    (3) a certificate of an authorized representative of the ERISA 
Client stating the amount of the judgment or settlement which remains 
unsatisfied.
    9. The letter of credit will be maintained by the Partnership for 
the period of the exemption, unless the Partnership satisfies the 
partners' equity requirement of PTE 84-14 at an earlier date. 
Additionally, in the event that one or more ERISA Clients has a pending 
ERISA claim against Merganser outstanding on December 31, 2006, 
Merganser will either (i) cause the letter of credit to be maintained 
until the earlier of December 31, 2008 or a final judgment or 
settlement disposing of all such pending ERISA claims, or (ii) cause a 
bond to be purchased which fully insures all such pending ERISA claims 
in the total amount equal to the amount of such pending ERISA claims 
but not to exceed $750,000.
    If Merganser causes a bond to be purchased under subparagraph (ii) 
above, the bond would be payable under terms consistent with the letter 
of credit. Accordingly, the bond would cover the pending ERISA claim(s) 
and would be payable in the event of a final judgment with rights to 
appeal expired or exhausted, or in the event of a settlement. The 
Applicant represents that it has inquired and been told by a bond 
company that obtaining a bond for a claim that already has been filed 
is commercially feasible, although it could require substantial 
collateral.
    10. During the life of the letter of credit, Merganser's ERISA 
Clients will likely change; new clients will be added and existing 
clients may end their relationships with Merganser. Because the letter 
of credit is intended to provide protection to a changing group of 
ERISA Clients, it will be necessary to issue the letter to an ``agent'' 
who can hold it on behalf of the multiple ERISA Clients. The agent 
(Agent) will be a person or entity affiliated with First Union and 
independent of the Partnership. The Agent will be required to demand 
payment from First Union on behalf of any ERISA Client under exactly 
the same circumstances under which First Union is obligated to pay 
under the letter of credit (i.e., an unsatisfied claim or judgment for 
ERISA Claims).
    11. Neither First Union nor the Agent has any discretion in 
determining whether, respectively, to pay under the letter of credit or 
to demand payment under the letter of credit. If an ERISA Client meets 
the conditions described in the letter of credit, the duty to pay or 
demand payment is automatic. So long as the letter of credit is in 
effect, the Agent will demand and First Union will pay any ERISA Client 
who obtains a settlement or judgment of ERISA claims, irrespective of 
when the alleged violations occurred.
    12. The Agent will maintain an up-to-date list of all of 
Merganser's ERISA Clients, each of which shall be entitled to instruct 
the Agent to demand payment under the letter of credit consistent with 
the conditions described above. This list will be made an exhibit to 
the agreement between the Agent and the Partnership. Each current ERISA 
Client will be provided with written notice of its rights with respect 
to the letter of credit at the same time as it is provided with a copy 
of the proposed exemption for purposes of its right to comment pursuant 
to the Department's regulations at 29 CFR 2570.43. New ERISA Clients 
will be provided with written notice of their rights with respect to 
the letter of credit at the same time as they are provided with a copy 
of the proposed and final exemption, if granted, as published in the 
Federal Register. ERISA Clients will be provided with the U.S. address 
of the Agent, and will be promptly notified of any changes in that 
address. First Union's obligation to pay under the letter of credit 
will be fully secured by marketable collateral with value of at least 
$750,000.
    13. In summary, it is represented that the proposed transactions 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act because:
    (a) The requested exemption is administratively feasible because 
the Partnership's compliance with the proposed conditions can be 
readily determined. In addition, the exemption would not require 
continued monitoring or other involvement on behalf of the Department.
    (b) The requested exemption is in the interest of the Partnership's 
ERISA Clients and their participants and beneficiaries because it 
permits the Partnership to render continuing services to the ERISA 
Clients and permits those ERISA Clients to continue to invest without 
regard to the ``party in interest'' status of other parties to the 
transactions, while providing security for any ERISA Claims arising out 
of these investments.
    (c) The requested exemption is protective of the rights of the 
Partnership's ERISA Clients and their participants and beneficiaries 
because it requires the maintenance of a letter of credit exclusively 
for the Partnership's ERISA Clients.
    For Further Information Contact: Karen Lloyd of the Department, 
telephone (202) 219-8194. (This is not a toll-free number).

ATGI 401(k) Plan (the Plan) Located in Houston, Texas

[Application No. D-10970]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is 
granted, the restrictions of

[[Page 30015]]

sections 406(a), 406(b)(1) and (b)(2) and 407(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 (E) of the Code, shall not 
apply effective November 30, 2000 to: (1) the acquisition of Stock 
Rights (the Stock Rights) by the Plan in connection with a Stock Rights 
offering by Alpha Technologies Group, Inc. (ATGI); (2) the holding of 
the Stock Rights by the Plan during the subscription period of the 
offering; and (3) the disposition or exercise of the Stock Rights by 
the Plan; provided that the following conditions are met:
    (a) The Stock Rights were acquired pursuant to Plan provisions for 
individually-directed investment of such accounts;
    (b) The Plan's receipt of the Stock Rights occurred in connection 
with a Stock Rights offering made available to all shareholders of 
common stock of ATGI;
    (c) All decisions regarding the holding and disposition of the 
Stock Rights by the Plan were made, in accordance with the Plan 
provisions for individually-directed investment of participant 
accounts, by the individual Plan participants whose accounts in the 
Plan received Stock Rights in connection with the offering;
    (d) The Plan's acquisition of the Stock Rights resulted from an 
independent act of ATGI as a corporate entity, and all holders of the 
Stock Rights, including the Plan, were treated in the same manner with 
respect to the acquisition; and
    (e) The price received by the Plan for the Stock Rights is no less 
than the fair market value of the Stock Rights on the date of the 
offering.
    Effective Date: This exemption is effective as of November 30, 
2000.

Summary of Facts and Representations

    1. ATGI, the sponsor of the Plan, is a Delaware corporation engaged 
primarily in the manufacturing of thermal management products, 
principally heat sinks. ATGI's thermal management business is conducted 
through several wholly owned subsidiaries: Wakefield Engineering, Inc., 
which includes the Wakefield-Fall River and Wakefield-Temecula 
Divisions; Specialty Extrusion Corporation; Lockhart Industries, Inc; 
and National Northeast Corporation (NNE).
    2. The Plan is a defined contribution profit-sharing plan. The 
initial effective date of the Plan was November 1, 1977. The Plan is a 
qualified plan under Code section 401(a). As of February 19, 2001, the 
Plan has approximately 730 participants. According to CIGNA Retirement 
& Investment Services (CIGNA), the Plan's recordkeeper, approximately 
200 of these participants had shares of ATGI stock, a NASDAQ publically 
traded stock, allocated to their Plan accounts as of the Record Date. 
In total, 188,983.82 shares of ATGI stock were allocated to Plan 
participants' accounts on the Record Date for a total ATGI stock 
balance of $1,994,971.06. These holdings of employer stock represented 
approximately 19.95% of the Plan's total assets as of the Record Date.
    3. Steve E. Chupik, ATGI's Vice-President of Administration, serves 
as Plan Trustee. The Plan provides for participant-directed investment 
of contributions made to the Plan. Investment in employer stock is a 
permitted investment option under the terms of the Plan. The Plan 
Trustee has authority to vote all shares of employer stock owned by 
participants through the Plan. In addition to ATGI stock, Plan 
participants may choose among the following investment options: (1) the 
Guaranteed Long-Term Fund, (2) the Guaranteed Short-Term Securities 
Fund, (3) the Large Company Stock Index Fund, (4) the Fidelity Advisor 
Growth Opportunities Account, (5) the Janus Account, (6) the PBHG 
Growth Account, and (7) the American Century Vista Account.
    Each participant's Plan account is also subdivided into various 
source accounts. Source accounts denote from which sources monies held 
within a participant's Plan account were received. There are six source 
account designations: (1) Employee Post-Tax, (2) Rollover, (3) Prior 
Company Matching, (4) Company Discretionary, (5) Company Matching, and 
(6) Employee Pre-Tax.
    4. ATGI's decision to engage in the Stock Rights offering was made 
in ATGI's capacity as issuer of its securities, not in its capacity as 
a Plan fiduciary. The decision was prompted by a business need to raise 
capital for the expansion of ATGI's thermal management business. The 
offering was conducted as a mechanism for partially financing the 
purchase of the stock of NNE, a leading manufacturer of aluminum 
extrusions and heat sinks.
    ATGI first began exploring the possibility of engaging in a Stock 
Rights offering to assist in financing the purchase of NNE in September 
2000. Based upon this initial consideration, ATGI filed an S-2 
Registration Statement containing a preliminary prospectus with the 
Securities and Exchange Commission (the SEC) on October 6, 2000. ATGI 
made the Stock Rights offering contingent upon the completion of the 
purchase of NNE. On November 21, 2000, ATGI's Board of Directors (the 
Board) resolved to meet the requirements of the lender through a Stock 
Rights offering, and it settled upon a subscription price for the 
offering. A revised S-2A Registration Statement including a final 
prospectus were then filed with the SEC on November 30, 2000.
    The acquisition of NNE was completed on January 9, 2001, and the 
proceeds of the Stock Rights offering were contributed to the 
approximately $50 million purchase price of NNE.
    5. The Basic Subscription Privilege: ATGI offered all of its 
shareholders as of the Record Date the opportunity to purchase 
additional shares of ATGI's common stock at a fixed price and in 
proportion to the shareholders' existing interests on the Record Date. 
Through the Stock Rights offering, shareholders received one stock 
right for each 25 shares of stock they owned on the Record Date. 
Shareholders became entitled to receive their Stock Rights on or about 
November 30, 2000 upon the effectiveness of ATGI's S-2A Registration 
Statement. No fractional Stock Rights were distributed. Rather, the 
number of Stock Rights received by a shareholder was rounded up to the 
nearest whole number if the fraction was greater than \1/2\ and rounded 
down to the nearest whole number if the fraction was less than \1/2\.
    Each stock right allowed the shareholder to purchase one share of 
ATGI common stock at the fixed subscription price of $7.25 per share. 
The Board set this subscription price after considering several 
factors, including the historical and current market price of the 
common stock, ATGI's current business prospects, recent and anticipated 
operating results, ATGI's need for capital, the alternatives available 
for raising capital, the amount of proceeds desired, the pricing of 
similar transactions, the liquidity of the common stock, and the need 
to offer shares at a price that would be attractive to investors 
relative to the current trading price of ATGI's common stock.
    Shareholders choosing to use the Stock Rights granted to them to 
purchase additional shares of ATGI stock were required to exercise 
their rights by 5 p.m., EST, on the Expiration Date. A shareholder 
elected to exercise his or her Stock Rights by properly completing the 
rights exercise agreement provided to the shareholder along with the 
prospectus and delivering this rights exercise agreement to the 
subscription agent, the American Stock Transfer and Trust Company (the 
Subscription Agent), by 5 p.m., EST, on

[[Page 30016]]

the Expiration Date. A shareholder choosing to exercise rights also had 
to deliver the purchase price of the stock purchased pursuant to the 
exercise of rights to the Subscription Agent by 5 p.m., EST, on the 
Expiration Date. Shareholders were allowed to exercise as few or as 
many of their basic Stock Rights as they wished. The Stock Rights were 
nontransferable, and an exercise of Stock Rights was irrevocable. All 
unexercised rights expired at 5 p.m., EST, on the Expiration Date and 
were forfeited.
    6. ATGI limited the shares of common stock it issued under the 
Stock Rights offering to 270,946 shares. However, ATGI expected that 
not all of these shares would be purchased by shareholders pursuant to 
the exercise of their basic subscription rights. Rather, ATGI expected 
that some shareholders would not exercise any or all of the Stock 
Rights granted to them under the basic subscription privilege. To 
compensate for these under-subscribing shareholders, ATGI provided 
shareholders who elected to exercise all of their Stock Rights pursuant 
to the basic subscription privilege with the opportunity to purchase 
those shares that were not purchased by the under-subscribing 
shareholders (the Over-Subscription Privilege). Shareholders were 
required to exercise their over-subscription rights at the same time 
and in the same manner as they elected to exercise their basic 
subscription rights.
    ATGI also expected that the number of over-subscription requests 
might exceed the number of shares available. In this event, ATGI 
decided to allocate the available shares to over-subscribing 
shareholders in proportion to the number of shares purchased by these 
shareholders through the basic subscription privilege.
    6. The Expiration Date of the Stock Rights Offering: the expiration 
date and time of the Stock Rights offering were initially set for 5 
p.m., EST, January 5, 2001. However, ATGI reserved the right to extend 
the offering up to 10 days. On January 5, 2001, ATGI announced that it 
was exercising this right to extend the offering. The new expiration 
date and time were extended to 5 p.m., EST, January 8, 2001.
    7. Pursuant to applicable securities laws, ATGI could not exclude 
the Plan from the Stock Rights offering. Thus, as the holder of record 
of the 188,983.82 shares of ATGI stock allocated to Plan participants' 
accounts by CIGNA as of the Record Date, the Plan Trustee received 
7,556 Stock Rights through the Stock Rights offering. The Plan was 
treated in the same manner as all other holders of this class of 
securities.
    To avoid engaging in a prohibited transaction, the Plan Trustee 
considered refusing to accept the Stock Rights offered from ATGI. 
However, since participation in the Stock Rights offering was expected 
to allow Plan participants whose Plan accounts held a minimum level of 
ATGI stock on the Record Date (Invested Plan Participants) to purchase 
shares of ATGI's common stock at a discount from market price, the Plan 
Trustee concluded that refusing to accept the Stock Rights might 
constitute a breach of his fiduciary duty to Plan participants. A 
refusal of the Stock Rights would have denied Invested Plan 
Participants the opportunity to purchase additional shares of ATGI 
stock at the discounted price offered to all other ATGI shareholders.
    8. The Plan provides for individually-directed investment of the 
assets in each participant's account. Therefore, the Stock Rights 
received by the Plan Trustee were allocated to individual Invested Plan 
Participants' accounts based upon the participants' respective holdings 
of ATGI stock on the Record Date. All decisions regarding the exercise 
of the Stock Rights were made by the Invested Plan Participants. The 
Plan Trustee undertook measures to ensure that Invested Plan 
Participants were provided with adequate information regarding the 
Stock Rights offering so that these participants could make informed 
decisions regarding the exercise of their Stock Rights.
    9. Following the Board's resolution on November 21, 2000 setting 
the subscription price of the Stock Rights offering, a finalized 
prospectus was filed with the SEC on November 30, 2000 as part of 
ATGI's S-2A Registration Statement. On December 4, 2000, the Plan 
received copies of this completed prospectus from the printer for 
distribution to Invested Plan Participants. Completed prospectuses and 
the accompanying materials described below were sent via Federal 
Express on December 6, 2000 to the human resource departments at ATGI's 
locations. On December 7, 2000, the prospectuses were distributed to 
the approximately 125 Invested Plan Participants employed at these 
locations. Approximately 70 Invested Plan Participants worked at remote 
locations or were not current employees of ATGI. These participants 
were mailed prospectuses and accompanying materials via first-class 
mail on December 6, 2000. In comparison, copies of the prospectus were 
not mailed to other ATGI shareholders until December 8, 2000.
    10. A memorandum from the Plan Trustee accompanied the prospectus. 
The memorandum introduced the Stock Rights offering and informed 
Invested Plan Participants of the additional information they would be 
receiving at a later date.
    11. The Plan Trustee provided Invested Plan Participants with a 
letter containing an explanation of the Stock Rights offering and 
outlining the procedure they should follow to exercise their Stock 
Rights. The letter also reminded Invested Plan Participants of the 
risks involved in investing in ATGI stock. Invested Plan Participants 
who were current employees of ATGI received the letter and the 
accompanying materials described below via interoffice mail on December 
8, 2000. Invested Plan Participants who worked at remote locations or 
who were not current employees of ATGI were mailed the letter and 
accompanying materials via U.S. priority mail on December 7, 2000.
    12. A Direction Form accompanied the above letter provided to 
Invested Plan Participants on December 7 and December 8, 2000. The 
Direction Form served as the mechanism through which Invested Plan 
Participants directed the Plan Trustee to exercise or to forfeit the 
Stock Rights allocated to them. The Direction Form also required 
Invested Plan Participants electing to exercise some or all of their 
rights to designate which of their Plan investments were to be 
liquidated to fund the exercise of the rights. A self-addressed 
envelope was included with the Direction Form to assist Invested Plan 
Participants in returning the Direction Form to the Plan Trustee.
    In addition to the Direction Form, Invested Plan Participants 
received a Source Designation Form enabling them to designate from 
which Plan accounts, such as the employee pre-tax account or the 
company matching account, they wished the purchase price of any stock 
purchased pursuant to the exercise of rights to be withdrawn. Invested 
Plan Participants who had already indicated through a return of their 
Direction Forms that they would not be participating in the Stock 
Rights offering were not sent a Source Designation Form. Approximately 
110 of the Invested Plan Participants who were current employees of 
ATGI received the Source Designation Form via facsimile on December 20, 
2000. These Invested Plan Participants were asked to return this form 
to the Plan Trustee by December 22, 2000 by either a return facsimile 
or an email. Approximately 48 of the Invested Plan Participants who 
were employed at remote locations or

[[Page 30017]]

who no longer worked at ATGI were sent a Source Designation Form by 
U.S. priority mail on December 20, 2000. These Invested Plan 
Participants were asked to respond via email, facsimile, or telephone 
by December 26, 2000. ATGI's Human Resources Manager (the Human 
Resources Manager), personally contacted by telephone the Invested Plan 
Participants who could not be reached by facsimile. The Human Resources 
Manager also contacted the Invested Plan Participants who indicated 
through a return of their Direction Forms that they wished to 
participate in the Stock Rights offering but whose Source Designation 
Forms were not received by the deadline. Through these efforts, source 
designations were obtained from all but two of the Invested Plan 
Participants exercising rights. The Human Resources Manager also 
attempted to contact these two Invested Plan Participants by telephone; 
however, there was no response from either.
    13. In addition to the Direction Form and the Source Designation 
Forms, a table depicting ATGI's daily stock activity, including stock 
closing prices, for the period from November 1, 2000 to December 6, 
2000 accompanied the letter from the Plan Trustee provided to Invested 
Plan Participants on December 7 and December 8, 2000.
    14. On December 7, 2000, the Plan Trustee provided each Invested 
Plan Participant with an individualized statement of his or her Plan 
accounts reflecting that participant's investment fund allocations and 
the value of that participant's various Plan accounts as of the Record 
Date.
    15. Representatives of ATGI and the Plan made themselves available 
to answer participants' questions regarding the Stock Rights offering. 
The Human Resources Manager conducted telephone conferences with 
approximately 30 to 35 Plan participants and several ATGI human 
resource representatives. The Plan Trustee visited several of ATGI's 
larger locations where he answered questions presented to him during 
his visits with employees on the shop floor. The Plan Trustee also 
occupied a vacant office at these locations, allowing employees to stop 
in with questions without an appointment.
    16. An Invested Plan Participant exercised the Stock Rights by 
properly completing and submitting the Direction Form to the Plan 
Trustee. An Invested Plan Participant was required to include the 
following information on the Direction Form; (i) how many Stock Rights, 
if any, the participant wished to exercise; (ii) assuming the 
participant elected to exercise all of the Stock Rights allocated to 
him or her pursuant to the basic subscription privilege, whether and 
how many additional shares of stock the participant wished to purchase 
pursuant to the Over-Subscription Privilege; and (iii) which Plan 
investments the participant wished to liquidate to cover the purchase 
price of any shares of stock purchased pursuant to the exercise of 
rights.
    If an Invested Plan Participant elected to exercise rights but 
failed to indicate from which investments the purchase price should be 
withdrawn, he or she was deemed to have elected that the purchase price 
be withdrawn pro rata from all of his or her investments, i.e., a 
failure to specify constituted a pro rata election.
    The deadline for receipt of properly completed Direction Forms by 
the Plan Trustee was Friday, December 22, 2000. The rights of Invested 
Plan Participants whose Direction Forms were not received by this date 
were forfeited. The December 22 deadline was selected upon consultation 
with CIGNA and Merrill Lynch, the Plan's broker for ATGI stock 
transactions. The December 22 deadline for receipt of the Direction 
Forms by the Plan Trustee from Invested Plan Participants was selected 
as the latest date allowing the Plan Trustee to review and compile the 
Direction Forms for submission of the data to CIGNA by December 27, 
2000.
    In addition to completing and returning the Direction Form, 
Invested Plan Participants choosing to exercise rights were also 
required to complete and return a Source Designation Form. On the 
Source Designation Form, Invested Plan Participants designated from 
which Plan accounts they wished the purchase price of the shares of 
stock purchased under the Stock Rights offering to be withdrawn. 
Invested Plan Participants were warned that if they failed to make this 
designation, funds would be withdrawn from Plan accounts in the 
following order; (i) Employee Post-tax; (ii) Rollover; (iii) Prior 
Company Matching; (iv) Company Discretionary; (v) Company Matching; and 
(vi) Employee Pre-Tax.
    Invested Plan Participants who lacked sufficient funds in their 
Plan accounts to cover the purchase price of the requested shares of 
stock could exercise their rights pursuant to the basic or the Over-
Subscription Privileges only to the extent of the funds available in 
their Plan accounts.
    17. ATGI completed the Stock Rights offering at 5 p.m., EST, on 
Monday, January 8, 2001. The Stock Rights offering raised almost $2 
million towards the acquisition of NNE. All 270,946 shares of ATGI 
common stock offered under the Stock Rights offering were purchased. 
Invested Plan Participants purchased 2,427 shares pursuant to the basic 
subscription privilege and 5,405 shares pursuant to the Over-
Subscription Privilege. Since the Stock Rights offering was over-
subscribed, the shares available for purchase under the over-
subscription privilege were allocated to over-subscribing shareholders 
in proportion to the number of shares purchased by these shareholders 
pursuant to their basic subscription rights.
    ATGI's closing stock price on the Expiration Date was listed on 
NASDAQ as $7.813.
    18. The applicant states that the proposed transaction is in the 
best interests of the Plan and its participants and beneficiaries 
because the acquisition of the Stock Rights from ATGI benefitted the 
Plan and its participants by providing Invested Plan Participants with 
a mechanism through which they could increase the net worth of their 
Plan accounts. Through the exercise of the Stock Rights, the Invested 
Plan Participants acquired stock worth $7.813 per share as of the close 
of business on the Expiration Date while only paying $7.25 per share, a 
net gain of $.56 per share.
    19. In summary, the applicant represents that the proposed 
transaction meets the statutory criteria of section 408(a) of the Act 
because:
    (a) The Stock Rights were acquired pursuant to Plan provisions for 
individually-directed investment of such accounts;
    (b) The Plan's receipt of the Stock Rights occurred in connection 
with a Stock Rights offering conducted by ATGI;
    (c) All decisions regarding the holding and disposition of the 
Stock Rights by the Plan were made, in accordance with the Plan 
provisions for individually-directed investment of participant 
accounts, by the individual Plan participants whose accounts in the 
Plan received Stock Rights in connection with the offering;
    (d) All holders of the Stock Rights, including the Plan, were 
treated in the same manner with respect to the acquisition of the Stock 
Rights; and
    (e) Through the exercise of the Stock Rights, the Invested Plan 
Participants acquired stock worth $7.813 per share as of the close of 
business on the Expiration Date while only paying $7.25 per share, a 
net gain of $.56 per share.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given to all interested persons in the manner agreed upon by 
the applicant and

[[Page 30018]]

Department within 15 days of the date of publication in the Federal 
Register. Comments and requests for a hearing are due forty-five (45) 
days after publication of the notice in the Federal Register.
    For Further Information Contact: Khalif Ford of the Department, 
telephone (202) 219-8883. (This is not a toll-free number).

The Joliet Medical Group, Ltd. Employees Retirement Plan & Trust 
(the Plan) Located in Joliet, Illinois

[Application D-10990]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act and section 4975(c)(2) of the 
Code and in accordance with the procedures set forth in 29 CFR Part 
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption 
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) 
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 (E) of the 
Code, will not apply effective November 1, 1999 to the past and 
continued leasing of a medical clinic (the Property) located at 2100 
Glenwood Ave., Joliet, Illinois, from the Plan to Joliet Medical Group, 
Ltd. (the Employer), provided that the following conditions have been 
and will be met:
    (a) The independent fiduciary has determined that the transaction 
is feasible, in the interest of, and protective of the Plan;
    (b) The fair market value of the Property has not exceeded and will 
not exceed twenty percent (20%) of the value of the total assets of the 
Plan;
    (c) The independent fiduciary has negotiated, reviewed, and 
approved the terms of the lease of the Property with the Employer;
    (d) The terms and conditions of the lease of the Property with the 
Employer have been and will continue to be no less favorable to the 
Plan than those obtainable by the Plan under similar circumstances when 
negotiated at arm's length with unrelated third parties;
    (e) An independent qualified appraiser has determined the fair 
market rental value of the Property;
    (f) The independent fiduciary has monitored and will continue to 
monitor compliance with the terms of the lease of the Property to the 
Employer throughout the duration of such lease and is responsible for 
legally enforcing the payment of the rent and the proper performance of 
all other obligations of the Employer under the terms of the lease on 
the Property; and
    (g) The Plan has not incurred and will not incur any fees, costs, 
commissions, or other charges or expenses as a result of its 
participation in the proposed transaction, other than the fee payable 
to the independent fiduciary.
    Effective Date: This exemption is effective as of November 1, 1999.

Preamble

    On February 15, 2001 (66 FR 10526), the Department published a 
notice of proposed exemption (the Prior Notice) from the prohibited 
transaction restrictions of the Employee Retirement Income Security Act 
of 1974 and from certain taxes imposed by the Internal Revenue Code of 
1986. The Prior Notice for which retroactive relief had been requested, 
would have provided conditional relief for the past and continued 
leasing of the Property, from the Plan to the Employer.
    On April 3, 2001 (66 FR 17737), the Department published a 
withdrawal of the Prior Notice. The notice of proposed exemption herein 
provides the most recent information submitted by the applicant and the 
independent fiduciary.

Summary of Facts and Representations

    1. The Plan is a profit sharing plan which was created effective 
January 1, 1975. As of August 29, 2000, the Plan had net assets valued 
at approximately $20,075,282 and 165 participants.
    2. The Employer is a medical corporation licensed to practice 
medicine in the State of Illinois, whose principal place of business is 
Joliet, Illinois. The Employer's principal place of business is the 
Property. The Employer is engaged in the general practice of medicine.
    3. The Property consists of a two story medical building located at 
2100 Glenwood Avenue, Joliet Illinois. The Property contains 
approximately 10,583 square feet on each floor for a total square 
footage (above ground) of approximately 21,166 square feet. In 
addition, there is a full basement which is finished and contains an 
additional approximately 10,583 square feet. The fair market value of 
the Property represents 15.94% of the total assets in the Plan.
    The Plan initially leased the Property to the Employer for an 
initial term of 18 years, which ended November 1, 1999. In response to 
an exemption application filed by the Employer, the Department granted 
an exemption covering the initial lease (the Initial Lease): Prohibited 
Transaction Exemption 81-96 (PTE 81-96), 46 FR 53816 (October 30, 
1981). It is represented that since the inception of the Initial Lease, 
the Employer has always paid its rent on time and otherwise complied 
with all of the terms and conditions of the Initial Lease and PTE 81-
96. Furthermore, the independent fiduciary has continued to monitor and 
oversee compliance with the conditions of the exemption after the 
expiration of the lease because the parties determined to continue the 
arrangement after November 1, 1999.
    4. Joseph E. Batis, (Mr. Batis), an accredited appraiser with 
Edward J. Batis & Associates, Inc., located in Joliet, Illinois, 
appraised the Property on October 24, 2000. Mr. Batis states that he is 
a full time qualified, independent appraiser, as demonstrated by his 
status as a State Certified General Real Estate Appraiser licensed by 
the State of Illinois. In addition, Mr. Batis represents that both he 
and his firm are independent of the Employer.
    In his appraisal, Mr. Batis relied primarily on the ``Appraisal 
Process''. Included within the steps of this process are three 
approaches to a value estimate: the Cost Approach, the Direct Sales 
Comparison Approach and the Income Approach. According to Mr. Batis, 
these methods best represent the actions of buyers and sellers in the 
market place. After Mr. Batis independently applies each approach to 
value, the three resultant value estimates are reconciled into an 
overall estimate of value. In the reconciliation process, the appraiser 
analyzes each approach with respect to its applicability to the 
property being appraised. Also considered in the reconciliation process 
is the strength and weakness of each approach with regards to 
supporting market data. After inspecting the Property and analyzing all 
relevant data, Mr. Batis determined that a fee simple interest in the 
Property had a fair market value of approximately $3,200,000. On 
February 27, 2001, Mr. Batis updated the appraisal and determined the 
fair market monthly rental value of the Property to be $32,000 and the 
annual fair market rental value to be $384,000.
    5. An independent party, the First Midwest Trust Company (the Bank) 
has served and continues to serve as the independent fiduciary. The 
Bank represents that since the inception of the Initial Lease, the 
Employer has complied with all of the terms and conditions of the 
Initial Lease and PTE 81-96. The Bank certifies that the transaction is 
appropriate and in the best interests of the Plan and that the terms 
and conditions of the proposed transactions are at least equal to what 
the Plan would receive from an unrelated party in similar transaction. 
In addition, the Bank will monitor the transaction and will have the

[[Page 30019]]

responsibility for exercising the Plan's rights in the proposed 
transaction. On March 28, 2001 the Bank represented that the annual 
fair market rental value of the Property should reflect 12% of the fair 
market value of the Property (3,200,000  x  .12 = $384,000).
    6. The Employer will enter into a five year, ``triple net'' lease 
with the Plan leasing the Property to the Employer for a ``floating'' 
monthly rental of 1% of the current appraised value of the subject 
realty ($3,200,000  x  1%= $32,000). A new appraisal by an independent, 
qualified appraiser would be performed every other year to update the 
rent. The minimum guaranteed monthly rental value (regardless of any 
possible decrease in the appraisal) is $32,000. The terms of the lease 
provide for a primary term of five years with an option to renew and 
extend for two additional successive terms of five years each subject 
to the approval of the independent fiduciary. In the event of a 
default, the Employer is required to reimburse the Plan on demand for 
all costs reasonably incurred by the Plan in connection therewith, 
including attorney's fees, court costs and related costs plus a 
reasonable rate of return on the amount of accrued but unpaid rent due 
the Plan, as determined by an appropriate third party source.
    7. Since the Initial Lease, the Employer has continued to pay rent 
to the Plan in a timely manner without default or rental delinquencies. 
However, the Employer is aware of the fact that a prohibited 
transaction occurred in violation of the Act subsequent to the 
expiration of the lease under PTE 81-96 (November 1, 1999). Therefore, 
the Employer has requested exemptive relief with respect to the past 
and continued leasing of the Property by the Plan to the Employer. If 
granted, the proposed exemption will be retroactive to November 1, 
1999.
    8. In summary, the applicant represents that the proposed 
transaction meets the statutory criteria of section 408(a) of the Act 
because:
    (a) The independent fiduciary has determined that the transaction 
is feasible, in the interest of, and protective of the Plan;
    (b) The fair market value of the Property has not exceeded and will 
not exceed twenty percent (20%) of the value of the total assets of the 
Plan;
    (c) The independent fiduciary has negotiated, reviewed, and 
approved the terms of the lease with the Employer on the Property;
    (d) The terms and conditions of the lease with the Employer on the 
Property have been and will continue to be no less favorable to the 
Plan than those obtainable by the Plan under similar circumstances when 
negotiated at arm's length with unrelated third parties;
    (e) An independent qualified appraiser has determined the fair 
market rental value of the Property;
    (f) The independent fiduciary has monitored and will continue to 
monitor compliance with the terms of the lease of the Property to the 
Employer throughout the duration of such lease and is responsible for 
legally enforcing the payment of the rent and the proper performance of 
all other obligations of the Employer under the terms of the lease; and
    (g) The Plan has not incurred and will not incur any fees, costs, 
commissions, or other charges or expenses as a result of its 
participation in the proposed transactions, other than the fee payable 
to the independent fiduciary.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given to all interested persons in the manner agreed upon by 
the applicant and Department within 15 days of the date of publication 
in the Federal Register. Comments and requests for a hearing are due 
forty-five (45) days after publication of the notice in the Federal 
Register.
    For Further Information Contact: Khalif Ford of the Department, 
telephone (202) 219-8883 (this is not a toll-free number).

ACE Business Travel Accident Plan (the Plan) Located in 
Philadelphia, Pennsylvania

[Application No. L-10955]

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) and (b) of the Act shall not apply to the 
reinsurance of risks and the receipt of premiums therefrom by ACE 
American Insurance Company (ACE USA) from the insurance contracts sold 
by Life Insurance Company of North America (CIGNA) or any successor 
company to CIGNA which is unrelated to ACE INA Holdings, Inc. (ACE 
INA), to provide accidental death and dismemberment benefits to 
participants in the Plan, provided the following conditions are met:
    (a) ACE USA--
    (1) Is a party in interest with respect to the Plan by reason of a 
stock or partnership affiliation with ACE INA 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, and
    (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, Pennsylvania) by the Insurance 
Commissioner of the Commonwealth of Pennsylvania within 5 years prior 
to the end of the year preceding the year in which the reinsurance 
transaction occurred.
    (b) The Plan pays no more than adequate consideration for the 
insurance contracts;
    (c) No commissions are paid with respect to the direct sale of such 
contracts or the reinsurance thereof;
    (d) 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 ACE USA will be indemnity insurance only, 
i.e., the insurer will not be relieved of liability to the Plan should 
ACE USA be unable or unwilling to cover any liability arising from the 
reinsurance arrangement; and
    (e) For each taxable year of ACE USA, the gross premiums and 
annuity considerations received in that taxable year by ACE USA for 
life and health insurance or annuity contracts for all employee benefit 
plans (and their employers) with respect to which ACE USA is a party in 
interest by reason of a relationship to such employer described in 
section 3(14)(E) or (G) of the Act does not exceed 50% of the gross 
premiums and annuity considerations received for all lines of insurance 
(whether direct insurance or reinsurance) in that taxable year by ACE 
USA. For purposes of this condition (e):
    (1) the term ``gross premiums and annuity considerations received'' 
means as to the numerator the total of premiums and annuity 
considerations received, both for the subject reinsurance transactions 
as well as for any direct sale or other reinsurance of life insurance, 
health insurance or annuity contracts to such plans (and their 
employers) by ACE USA. This total is to be reduced (in both the 
numerator and the denominator of the fraction) by

[[Page 30020]]

experience refunds paid or credited in that taxable year by ACE USA; 
and
    (2) all premium and annuity considerations written by ACE USA for 
plans which it alone maintains are to be excluded from both the 
numerator and the denominator of the fraction.

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.
    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. ACE INA is a publicly traded insurance holding company 
incorporated under the laws of the Commonwealth of Pennsylvania. ACE 
INA provides a full range of insurance related services through its 
subsidiaries, including ACE USA.
    2. ACE USA is a corporation organized under the laws of the 
Commonwealth of Pennsylvania, with its principal administrative offices 
in Philadelphia, Pennsylvania. ACE USA is a wholly-owned subsidiary of 
ACE INA, and is currently licensed to do business in all states and the 
District of Columbia. ACE USA is principally engaged in the business of 
underwriting insurance including property and casualty, accident and 
health, commercial automobile, aviation, crime, credit, crop/hail, 
fidelity, general liability, inland marine, ocean marine, surety and 
worker's compensation insurance. The applicant represents that $416 
million in premiums was underwritten by ACE USA in 1999.
    3. ACE INA and most of its subsidiaries provide their eligible 
employees with certain welfare benefits through the Plan. The Plan is a 
fully insured ``employee welfare benefit plan'' within the meaning of 
section 3(1) of the Act that provides accidental death and 
dismemberment benefits to approximately 4,800 eligible employees and 
beneficiaries. Eligible employees include all full time and part time 
salaried employees working at least 24 hours per week. Eligible 
employees and beneficiaries receive accidental death or dismemberment 
coverage in the event that the employee dies or is severely injured as 
a result of an accident while traveling on company business. Coverage 
under the Plan equals five times salary, rounded to the highest $1,000, 
up to a maximum of $2,500,000. All premiums are paid by ACE INA and/or 
its subsidiaries.
    4. The benefits provided under the Plan are currently underwritten 
by CIGNA, an unaffiliated insurance carrier. ACE INA, as a fiduciary of 
the Plan, has entered into a policy with CIGNA for 100% of this 
coverage. ACE INA proposes to use its subsidiary, ACE USA, to reinsure 
50% of the risk through a reinsurance contract between ACE USA and 
CIGNA in which CIGNA would pay 50% of the premiums to ACE USA. From the 
participants' perspective, the participants have a binding contract 
with CIGNA, which is legally responsible for the risk associated under 
the Plan. CIGNA is liable to provide the promised coverage regardless 
of the proposed reinsurance arrangement. The applicant has also 
requested that the proposed exemption apply to any successor company to 
CIGNA that is also unrelated to ACE INA should ACE INA, as a fiduciary 
of the Plan, decide to insure this coverage with another carrier under 
the same kind of arrangement.
    5. The applicant represents that the proposed transaction will not 
in any way affect the cost to the insureds of the accidental death and 
dismemberment insurance benefits, and the Plan will pay no more than 
adequate consideration for the insurance. Also, Plan participants are 
afforded insurance protection from CIGNA at competitive rates arrived 
at through arm's-length negotiations. CIGNA is rated ``A+'' by Best's, 
whose insurance ratings are widely used in financial and regulatory 
circles. CIGNA has assets in excess of $3.8 billion and reserves set 
aside for group accident and health policies of approximately $2.2 
billion. CIGNA will continue to have the ultimate responsibility in the 
event of loss to pay insurance benefits to the employee or the 
employee's beneficiary.\1\ The applicant represents that ACE USA is a 
sound, viable company which does a substantial amount of business 
outside of its affiliated group of companies. ACE USA is substantially 
dependent upon insurance customers that are unrelated to itself and its 
affiliates for premium revenue.
---------------------------------------------------------------------------

    \1\ The applicant represents that any successor to CIGNA would 
be a legal reserve life insurance company with assets and reserves 
similar to CIGNA, and thus be of such a size as to afford similar 
protection and responsibility.
---------------------------------------------------------------------------

    6. The applicant represents that the proposed reinsurance 
transaction will meet all of the conditions of PTE 79-41 covering 
direct insurance transactions:
    (a) ACE USA 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 ACE INA, which maintains the Plan.
    (b) ACE USA is licensed to do business in all states and the 
District of Columbia.
    (c) ACE USA has undergone an examination by an independent 
certified public accountant for the last completed taxable year 
immediately prior to the taxable year of the proposed reinsurance 
transaction.
    (d) ACE USA has received a Certificate of Authority from its 
domiciliary state, Pennsylvania, which has neither been revoked nor 
suspended.
    (e) The Plan will pay no more than adequate consideration for the 
insurance. The proposed transaction will not in any way affect the cost 
to the insureds of the accidental death and dismemberment benefits.
    (f) No commissions have been paid or will be paid with respect to 
the acquisition of direct insurance or the reinsurance agreements 
between CIGNA (or any successor) and ACE INA and ACE USA.
    (g) For each taxable year of ACE USA, the ``gross premiums and 
annuity considerations received'' in that taxable year for group life 
and health insurance (both direct insurance and reinsurance) for all 
employee benefit plans (and their employers) with respect to which ACE 
USA is a party in interest by reason of

[[Page 30021]]

a relationship to such employer described in section 3(14)(E) or (G) of 
the Act will not exceed 50% of the ``gross premiums and annuity 
considerations received'' by ACE USA from all lines of insurance in 
that taxable year. ACE USA has received no premiums for the Plan 
insurance in the past. ACE USA wrote $416 million in premiums in 1999. 
At least 80% of ACE USA's premiums for 1999 were derived from insurance 
(or reinsurance thereon) sold to entities other than ACE INA and its 
affiliated group. In addition, ACE USA is substantially dependent upon 
insurance customers that are unrelated to CIGNA and its affiliates for 
premium income.
    7. 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 CIGNA, an ``A+'' rated group insurer, at competitive 
market rates arrived at through arm's-length negotiations; (b) ACE USA 
is a sound, viable insurance company which does a substantial amount of 
public business outside its affiliated group of companies; and (c) each 
of the protections provided to the Plan and its participants and 
beneficiaries by PTE 79-41 will be met under the proposed reinsurance 
transaction.
    For Further Information Contact: Gary H. Lefkowitz of the 
Department, telephone (202) 219-8881. (This is not a toll-free number.)

General Informaiton

    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 30th day of May, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 01-13905 Filed 6-1-01; 8:45 am]
BILLING CODE 4510-29-P