[Federal Register Volume 67, Number 2 (Thursday, January 3, 2002)]
[Notices]
[Pages 351-367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10886, et al.]
Proposed Exemptions; Morgan Stanley & Co. Incorporated (MS&Co)
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
requests 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 requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), 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. Interested persons are also invited to submit
comments and/or hearing requests to PWBA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``[email protected]'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. 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-1513,
[[Page 352]]
200 Constitution Avenue, N.W., 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.
Morgan Stanley & Co. Incorporated (MS&Co) Located in New York, New
York
[Exemption Application No. D-10886]
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
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975(a) and (b) of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the September
16, 1998 acquisition (the Acquisition), on behalf of the Central
States, Southeast and Southwest Areas Pension Fund (the Fund), of
certain Argentine bonds (the Bonds) from MS&Co, a party in interest
with respect to the Fund, by the Capital Asset Trust (the Trust) at the
direction of Alliance Capital Management L.P. (Alliance), an investment
manager for the Fund, provided the following conditions are satisfied:
(a) The Acquisition was a one-time transaction for cash;
(b) The Fund paid no more than the current fair market value of the
Bonds as of the date of the Acquisition;
(c) The Fund paid no commissions or expenses with respect to the
Acquisition;
(d) The Acquisition and subsequent sale of the Bonds (the Sale)
resulted in the Fund's receipt of a one-day profit totaling
$147,250.01;
(e) Upon identifying the Acquisition as a ``prohibited
transaction'', MS&Co and Alliance acted promptly to comply with the
relevant provisions of ERISA and the Code;
(f) Alliance and MS&Co took whatever actions were necessary to
ensure that the Fund was adequately protected with respect to the
Acquisition;
(g) Subsequent to the Acquisition, Alliance implemented an internal
computer system designed to prevent transactions between client plans
and named fiduciaries with respect to such plans; and
(h) The transaction was not part of an agreement, arrangement or
understanding designed to benefit a party in interest.
EFFECTIVE DATE OF EXEMPTION: The effective date of this proposed
exemption, if granted, is September 16, 1998.
Summary of Facts and Representations
1. The Fund is a jointly managed Taft-Hartley Plan established in
1955. As of September 30, 1998, the Fund had approximately 375,604
participants and beneficiaries and an approximate fair market value of
$17 billion.
2. At the time of the Acquisition, the named fiduciary for the Fund
was Morgan Stanley Dean Witter & Co. (MSDW). MSDW is a worldwide
financial services firm that provides services, either directly or
through its subsidiaries, to corporations, governments, and individual
investors. MSDW became the Fund's named fiduciary as a result of a
court order issued pursuant to a consent decree (the Consent Decree)
that, among other things, prohibited the Fund's investment managers
from engaging in transactions with ``parties in interest'' such as
MS&Co.\1\
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\1\ The Consent Decree was issued pursuant to Raymond J.
Donovan, Secretary of Labor, v. Frank Fitzsimmons, et al., Civil
Action No. 78 C 342.
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MS&Co is a wholly-owned subsidiary of MSDW having business offices
in New York and other cities worldwide. MS&Co is, among other things, a
registered broker-dealer, a member of the National Association of
Securities Dealers, and a member of most major United States and
foreign commodity exchanges.
3. Pursuant to an agreement dated May 2, 1994 (the Agreement), MSDW
(through its predecessor-in-interest, the Morgan Stanley Group, Inc.)
appointed Alliance as an investment manager with respect to a portion
of the assets in the Fund. In this regard, at the time of the
Acquisition, Alliance acted as a ``qualified professional asset
manager'' \2\ with respect to certain Fund assets invested in the
Trust, a Massachusetts trust in which the Fund was a participant.\3\
Specifically, Alliance was hired to manage a particular type of asset
class, International Fixed Income-Emerging Markets Debt. The applicant
represents that Alliance, an investment adviser registered with the
Securities and Exchange Commission, is entirely independent of MSDW and
its affiliates and does not have any management or ownership
relationship with such entities.
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\2\ As such term is defined in Section V(a) of the Department's
Prohibited Transaction Class Exemption 84-14 (49 FR 9494 (1984)).
\3\ The applicant represents that the beneficial interests of
the Trust were held by two employee benefit plans subject to ERISA
and thus the Trust itself was an entity the assets of which were
subject to ERISA. At the time of the Acquisition, the Fund owned
approximately 98.1% of the beneficial interests in the Trust, and
the Marsh & McLennan US Retirement Plan owned approximately 1.9% of
such interests.
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Relevant sections of the Agreement provided that Alliance would:
(a) invest Fund assets held in the Trust in accordance with investment
objectives specified in writing by MSDW; (b) act in accordance with the
Consent Decree and ERISA and not engage in any unexempted ``prohibited
transaction''; and (c) comply with all federal or state law
requirements that are imposed with respect to transactions involving
the assets of the Fund.
In addition, the applicant represents that MSDW delivered to
Alliance, on a regular basis, a ``prohibited transaction'' notice.
According to the applicant, such notice specifically advised that
Alliance should not, among other things, execute trades through MS&Co.
Furthermore, the applicant represents that Alliance's ``Current
Investment Guidelines'' for the Trust, dated October 31, 1997, provided
that Alliance: would not effect a prohibited transaction; and would not
deal with any MSDW entity.
4. The applicant represents that, on September 16, 1998, Alliance
learned through news reports that the
[[Page 353]]
International Monetary Fund and certain banks were preparing a package
of loans worth $4.5 billion for Argentina. The applicant states that
Alliance believed the news would have a positive effect on Argentine
fixed income securities. As a result, Alliance contacted MS&Co and
asked for an ``offering'' on the Bonds in contravention of the
safeguards described above. The applicant represents that the Bonds are
$9,500,000 Face Amount Argentina Floating Rate Bonds due March 31,
2005.
According to the applicant, as a result of inadvertent errors made
by personnel involved in the Acquisition, MS&Co agreed to fill the
order. Alliance's purchase of the Bonds was made for settlement on
September 21, 1998 for $7,566,947.91 (the Acquisition Price). Of this
amount, $7,262,750.00 consisted of principal and $304,197.91 consisted
of accrued interest.
5. At the time of the Acquisition, MS&Co was a market maker in the
Bonds. The applicant represents, however, that the Bonds were not in
MS&Co's inventory at the time of the Acquisition. In this regard, the
applicant states that a market maker will, from time to time, go into
the market to replenish a particular security which the market maker
has sold out of its inventory. Similarly, in this instance, MS&Co made
a business decision to sell the Bonds at the Acquisition Price to
Alliance even though it did not contemporaneously hold the Bonds. The
applicant states that MS&Co committed itself to the Acquisition Price
based on the belief that it could go into the market and obtain the
Bonds at a discount relative to such price.
However, in meeting its obligations with respect to the
Acquisition, MS&Co was ultimately required to purchase the Bonds at a
price higher than the Acquisition Price. In this regard, despite its
commitment to sell the Bonds to Alliance for $7,566,947.91, market
conditions were such that MS&Co was forced to acquire the Bonds in two
separate trades for a total cost of approximately $7,714,000. In so
doing, the applicant represents, MS&Co lost approximately $147,000.
6. The applicant represents that the Acquisition Price represented
the Bonds' fair market value at the time of the Acquisition. In this
regard, it is represented that in providing the Acquisition price to
Alliance, the MS&Co trader responsible for the emerging markets fixed
income desk used pricing mechanisms commonly employed in the over-the-
counter fixed income markets such that the purchase price was fair and
reasonable. Specifically, the Acquisition Price was determined in
consideration of: Bid and ask prices for the Bonds available on
interdealer computer screens; \4\ news events relating to Argentina's
receipt of potential economic relief; prior bid and ask data
historically furnished by interdealer brokers; certain volume
requirements; and other objective criteria.
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\4\ The applicant states that interdealer brokers, who are
independent of the approximately 30-40 securities dealers that
comprise the major market makers, collect and post dealer quotes
(and execute trades between dealers). Information concerning dealer
quotes is updated via computer monitors available to each of the
primary securities dealers.
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The applicant states that at the time the Acquisition occurred, the
Bonds traded in relatively high volumes and were well known and well
followed. As a result, the market for the Bonds was extremely
``transparent'' at the time of the Acquisition with only a nominal
spread between relevant bid and ask prices. In consideration of these
and other factors such as Alliance's status as a valued MS&Co client,
the MS&Co trader offered to sell the Bonds to Alliance at the
Acquisition Price.
7. Shortly after the Acquisition, Alliance decided to sell the
Bonds. In this regard, during the course of the September 16, 1998
trading day, Alliance observed significant fluctuations in the price of
the Bonds. The applicant states that when relevant bond prices rose to
the extent that Alliance believed selling the Bonds would be in the
best interest of the Fund, Alliance sold the Bonds. In this regard,
Alliance sold the Bonds to Goldman, Sachs & Co. (Goldman, Sachs) for
$7,714,197.92 (the Sale). The applicant notes that the Fund, through
the Trust, made a profit of $147,250.01 on the Acquisition and Sale.\5\
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\5\ The applicant states that although there was one other
participant in the Trust, the Trust implemented separate accounting
such that all of the profit attributable to the Acquisition and Sale
went solely to the Fund. In this regard, the Department is not
providing relief to any other participant in the Trust, nor is it
expressing any opinion as to representations made by the applicant
concerning the composition and operations of the Trust.
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8. In certifying its compliance with the Agreement to MSDW,
Alliance noted that the Acquisition may have constituted a ``prohibited
transaction''. Upon being so alerted, the applicant represents that
MS&Co filed a Form 5330 with the Internal Revenue Service on June 30,
1999, and paid an excise tax of $1,135,042.19 (15% of $7,566,947.91).
The applicant notes that the Acquisition was fully disclosed in the
Fund's audited financial statements and was corrected within the
meaning of section 4975(f)(5) of the Code.\6\
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\6\ The Department is expressing no opinion as to whether the
Acquisition was corrected in accordance with relevant provisions of
the Code.
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9. The applicant states that neither Alliance nor MS&Co intended to
engage in a ``prohibited transaction'' when consummating the
Acquisition. In this regard, various mechanisms were in place to
prevent Alliance from inadvertently violating the ``prohibited
transaction'' provisions of ERISA, all of which failed, the applicant
represents, in an unforeseeable and improbable manner.\7\ Subsequent to
the Acquisition, Alliance has devised an internal computer system in an
effort to ensure that future ``prohibited transactions'' do not
similarly occur. Such system identifies situations when a specific
trade is placed between a client plan and a party in interest who is a
named fiduciary. The system flags the trade and alerts Alliance's
compliance department.
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\7\ In addition to the safeguards discussed above, the applicant
states that Morgan Stanley Dean Witter Investment Management Inc., a
wholly owned subsidiary of MSDW, had provided materials to Alliance
at the outset of its appointment as an investment manager for the
Fund which noted the restrictions on trading with MS&Co. In
addition, prior to the Transaction, Mellon Bank, N.A., the Fund's
custodian, had created and implemented a prohibited transaction
surveillance system designed to reject attempted trades on behalf of
the Fund and the Trust with parties with whom the Fund or the Trust
were prohibited from dealing, including MSDW and its affiliates.
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10. The applicant represents that the proposed exemption is
administratively feasible in that the Bonds were sold on the same day
they were acquired. In addition, the applicant states that the
transaction was in the interests of the Fund's participants and
beneficiaries since the Acquisition and Sale resulted in the Fund's
receipt of a one-day profit totaling $147,250.01. Finally, the
applicant represents that the Acquisition was fair to the Fund since
the Fund paid no more than the current fair market value for the Bonds
at the time of the Acquisition.
11. In summary, the applicant represents that the requested
retroactive individual exemption will satisfy the criteria of section
408(a) of the Act for the following reasons:
(a) The Acquisition was a one-time transaction for cash;
(b) The Fund paid no more than the current fair market value of the
Bonds as of the date of the Acquisition;
(c) The Fund paid no commissions or expenses with respect to the
Acquisition;
(d) The Acquisition and the Sale resulted in the Fund's receipt of
a one-day profit totaling $147.250.01;
[[Page 354]]
(e) Upon identifying the Acquisition as a ``prohibited
transaction'', MS&Co and Alliance, an investment manager for the Fund,
acted promptly to comply with the relevant provisions of ERISA and the
Code;
(f) Alliance and MS&Co took whatever actions were necessary to
ensure that the Fund was adequately protected with respect to the
Acquisition;
(g) Subsequent to the Acquisition, Alliance implemented an internal
computer system designed to prevent transactions between client plans
and named fiduciaries with respect to such plans; and
(h) The transaction was not part of an agreement, arrangement or
understanding designed to benefit a party in interest.
FOR FURTHER INFORMATION CONTACT: Christopher J. Motta of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
Union Bank of California (UBOC), Located in San Francisco,
California
[Application No. D-10976]
Proposed Exemption
Section I--Retroactive and Prospective Exemption for In-Kind Redemption
of Assets
If the proposed exemption is granted, the restrictions of section
406(a) and 406(b) of ERISA and the sanctions resulting from the
application of section 4975 of the Code by reason of section 4975(c)(1)
(A) through (F) of the Code, shall not apply, as of June 15, 2001, to
certain in-kind redemptions (the Redemptions) by the Union Bank of
California Retirement Plan or any other employee benefit plan sponsored
by UBOC or an affiliate of UBOC (an In-house Plan) of shares (the
Shares) of proprietary mutual funds (the Portfolios) offered by the
HighMark Funds or other investment companies (the Funds) for which
HighMark Capital Management, Inc. or an affiliate thereof (the Adviser)
provides investment advisory and other services, provided that the
following conditions are met:
(A) The In-house Plan pays no sales commissions, redemption fees,
or other similar fees in connection with the Redemptions (other than
customary transfer charges paid to parties other than UBOC and
affiliates of UBOC (UBOC Affiliates));
(B) The assets transferred to the In-house Plan pursuant to the
Redemptions consist entirely of cash and Transferable Securities.
Notwithstanding the foregoing, Transferable Securities which are odd
lot securities, fractional shares and accruals on such securities may
be distributed in cash;
(C) With certain exceptions defined below, the In-house Plan
receives a pro rata portion of the securities of the Portfolio upon a
Redemption that is equal in value to the number of Shares redeemed for
such securities, as determined in a single valuation performed in the
same manner and as of the close of business on the same day in
accordance with the procedures established by the Funds pursuant to
Rule 2a-4 under the Investment Company Act of 1940, as amended from
time to time (the 1940 Act), (using sources independent of UBOC and
UBOC Affiliates);
(D) UBOC, the Adviser, or any affiliate thereof, does not receive
any fees, including any fees payable pursuant to Rule 12b-1 under the
1940 Act in connection with any redemption of the Shares;
(E) Prior to a Redemption, UBOC provides in writing to an
independent fiduciary, as such term is defined in Section II (an
Independent Fiduciary), a full and detailed written disclosure of
information regarding the Redemption;
(F) Prior to a Redemption, the Independent Fiduciary provides
written approval for such Redemption to UBOC, such approval being
terminable at any time prior to the date of the Redemption without
penalty to the In-house Plan, and such termination being effectuated by
the close of business following the date of receipt by UBOC of written
or electronic notice regarding such termination (unless circumstances
beyond the control of UBOC delay termination for no more than one
additional business day);
(G) Before approving a Redemption, based on the disclosures
provided by the Portfolios to the Independent Fiduciary and discussions
with appropriate operational personnel of the In-house Plan, UBOC, and
the Adviser as necessary to form a basis for making the following
determinations, the Independent Fiduciary determines that the terms of
the Redemption are fair to the participants of the In-house Plan and
comparable to and no less favorable than terms obtainable at arms-
length between unaffiliated parties;
(H) Not later than thirty (30) business days after the completion
of a Redemption, UBOC or the relevant Fund provides to the Independent
Fiduciary a written confirmation regarding such Redemption containing:
(i) The number of Shares held by the In-house Plan immediately
before the Redemption (and the related per Share net asset value and
the total dollar value of the Shares held),
(ii) The identity (and related aggregate dollar value) of each
security provided to the In-house Plan pursuant to the Redemption,
including any security valued in accordance with the Funds' procedures
for obtaining current prices from independent market-makers,
(iii) The current market price of each security received by the In-
house Plan pursuant to the Redemption, and
(iv) The identity of each pricing service or market-maker consulted
in determining the value of such securities;
(I) The value of the securities received by the In-house Plan for
each redeemed Share equals the net asset value of such Share at the
time of the transaction, and such value equals the value that would
have been received by any other investor for shares of the same class
of the Portfolio at that time;
(J) Subsequent to a Redemption, the Independent Fiduciary performs
a post-transaction review which will include, among other things,
testing a sampling of material aspects of the Redemption deemed in its
judgment to be representative, including pricing. For Redemptions
occurring on June 15, 2001,the Independent Fiduciary's review included
testing a limited sampling of certain material aspects of the
Redemption deemed in its judgment to be representative; \8\
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\8\ The reason for this difference is to conform to the language
used in the initial independent fiduciary agreement that U.S. Trust
and UBOC entered into with respect to the June 15, 2001
transactions.
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(K) Each of the In-house Plan's dealings with: the Funds, the
Adviser, the principal underwriter for the Funds, or any affiliated
person thereof, are on a basis no less favorable to the In-house Plan
than dealings between the Funds and other shareholders holding shares
of the same class as the Shares;
(L) UBOC maintains, or causes to be maintained, for a period of six
years from the date of any covered transaction such records as are
necessary to enable the persons described in paragraph (M) below to
determine whether the conditions of this exemption have been met,
except that (i) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of UBOC, the
records are lost or destroyed prior to the end of the six-year period,
(ii) no party in interest with respect to the In-house Plan other than
UBOC 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 such records are not maintained or are not
available for examination as required by paragraph (M) below.
[[Page 355]]
(M)(1) Except as provided in subparagraph (2) of this paragraph
(M), and notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (L) above are
unconditionally available at their customary locations for examination
during normal business hours by (i) any duly authorized employee or
representative of the Department of Labor, the Internal Revenue
Service, or the Securities and Exchange Commission, (ii) any fiduciary
of the In-house Plan or any duly authorized representative of such
fiduciary, (iii) any participant or beneficiary of the In-house Plan or
duly authorized representative of such participant or beneficiary, (iv)
any employer with respect to the In-house Plan, and (v) any employee
organization whose members are covered by such In-house Plan.
(2) None of the persons described in paragraphs (M)(1)(ii) through
(v) shall be authorized to examine trade secrets of UBOC, the Funds, or
the Adviser, or commercial or financial information which is privileged
or confidential.
(3) Should UBOC, the Funds, or the Adviser refuse to disclose
information on the basis that such information is exempt from
disclosure pursuant to paragraph (M)(2) above, UBOC, the Funds, or the
Adviser shall, by the close of the 30th day following the request,
provide a written notice advising that person of the reasons for the
refusal and that the Department may request such information.
Section II--Definitions
For purposes of this proposed exemption,
(A) The term ``affiliate'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(B) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(C) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Portfolio's
prospectus and statement of additional information, and other assets
belonging to the Portfolio, less the liabilities charged to each such
Portfolio, by the number of outstanding shares.
(D) The term ``Independent Fiduciary'' means a fiduciary who is:
(i) Independent of and unrelated to UBOC and its affiliates, and (ii)
appointed to act on behalf of the In-house Plan with respect to the in-
kind transfer of assets from one or more Portfolios to or for the
benefit of the In-house Plan. For purposes of this exemption, a
fiduciary will not be deemed to be independent of and unrelated to UBOC
if: (i) such fiduciary directly or indirectly controls, is controlled
by or is under common control with UBOC; (ii) such fiduciary directly
or indirectly receives any compensation or other consideration in
connection with any transaction described in this exemption; (except
that an Independent Fiduciary may receive compensation from UBOC in
connection with the transactions contemplated herein if the amount or
payment of such compensation is not contingent upon or in any way
affected by the Independent Fiduciary's ultimate decision); and (iii)
more than 1 percent (1%) of such fiduciary's gross income, for federal
income tax purposes, in its prior tax year, will be paid by UBOC and
its affiliates in the fiduciary's current tax year.
(E) The term ``Transferable Securities'' shall mean securities (1)
for which market quotations are readily available as determined
pursuant to procedures established by the Funds under Rule 2a-4 of the
1940 Act; and (2) which are not: (i) securities which may not be
publicly offered or sold without registration under the Securities Act
of 1933; (ii) securities issued by entities in countries which (a)
restrict or prohibit the holding of securities by non-nationals other
than through qualified investment vehicles, such as the Funds, or (b)
permit transfers of ownership of securities to be effected only by
transactions conducted on a local stock exchange; (iii) certain
portfolio positions (such as forward foreign currency contracts,
futures and options contracts, swap transactions, certificates of
deposit and repurchase agreements) that, although they may be liquid
and marketable, involve the assumption of contractual obligations,
require special trading facilities or can only be traded with the
counter-party to the transaction to effect a change in beneficial
ownership; (iv) cash equivalents (such as certificates of deposit,
commercial paper and repurchase agreements; and (v) other assets which
are not readily distributable (including receivables and prepaid
expenses), net of all liabilities (including accounts payable).
(F) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of ERISA (or a ``member of the family,'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
sister, or a spouse of a brother or a sister.
Summary of Facts and Representations
1. UnionBanCal Corporation (UNBC) is a bank holding company
headquartered in San Francisco, California, the majority of the shares
of which are owned by The Bank of Tokyo--Mitsubishi, Ltd., which in
turn is wholly owned by Mitsubishi Tokyo Financial Group, Inc. UBOC, a
federally chartered bank also headquartered in San Francisco, is a
wholly owned subsidiary of UNBC. As of December 31, 2000, UNBC had
approximately $35.2 billion in total assets.
2. UBOC is the trustee of the Union Bank of California Retirement
Plan (the Retirement Plan). The Retirement Plan is an In-house defined
benefit Plan maintained by UBOC for certain current and former
employees of UBOC and UBOC Affilates. As of January, 2001, the
Retirement Plan had approximately 13,895 participants. As of May 31,
2001 the Retirement Plan had approximately $616 million in assets.
3. According to the applicant, UBOC's Employee Deferred
Compensation and Benefit Plans Administrative Committee (the Committee)
determined previously that the Retirement Plan would benefit from the
investment of its assets in certain Portfolios of the HighMark Funds
\9\ (the HighMark Portfolios). The HighMark Portfolios are mutual fund
portfolios organized within the HighMark Funds. The HighMark Funds and
any other Funds to which the exemption may apply are open-end
investment companies registered under the 1940 Act with respect to
which HighMark Capital Management, Inc. or an affiliate (the Adviser)
acts as an investment adviser.
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\9\ The HighMark Funds formerly were known as The HighMark
Group.
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At the time, the Committee considered the HighMark Portfolios to be
an appropriate vehicle for diversifying the Retirement Plan's assets.
In addition, the Committee determined that investment in the HighMark
Portfolios by the Retirement Plan would allow the Retirement Plan to
continue to use in-house investment managers that had provided
investment services to the Plan. As a result, the Committee decided to
invest Retirement Plan assets in the HighMark Portfolios in accordance
with Prohibited
[[Page 356]]
Transaction Exemption 77-3 (PTE 77-3, 42 FR 18734 (1977)).\10\
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\10\ The applicant has not requested exemptive relief with
respect to any investment in the HighMark Portfolios by the
Retirement Plan. The applicant notes that the Retirement Plan may
acquire or redeem shares in the HighMark Portfolios or any other
Funds pursuant to Prohibited Transaction Exemption (PTE) 77-3. In
this regard, PTE 77-3 permits the acquisition or sale of shares of a
registered, open-end investment company be an employee benefit plan
covering only employees of such investment company, employees of the
investment adviser or principal underwriter for such investment
company, or employees of any affiliated person (as defined therein)
of such investment adviser or principal underwriter, provided
certain conditions are met. The Department is expressing no opinion
in this proposed exemption regarding whether any transactions with
the Funds by the Retirement Plan or any other In-house Plan is
covered by PTE 77-3.
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4. The applicant states that the Committee decided recently to
reallocate the management of Retirement Plan assets among the
affiliated and unaffiliated investment managers who would manage such
assets on a separate account basis.\11\ The allocation of assets among
the managers was based on a revised, comprehensive asset allocation
strategy and policy developed by the Committee with the assistance of
an independent consulting firm. The applicant notes such management
avoids mutual fund fees and regulatory costs associated with investment
in SEC-registered mutual fund portfolios.
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\11\ The affiliated managers would include HighMark Capital
Management, Inc. The applicant states that HighMark Capital
Management, Inc. manages any separate account holding In-house Plan
assets outside the Funds without compensation from the In-house
Plan, other than reimbursement of direct expenses as permitted by
ERISA.
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5. HighMark Capital Management, Inc., a wholly-owned subsidiary of
UNBC (HCM), serves as investment adviser to each of the Portfolios of
the HighMark Funds. HCM is registered under the Investment Advisers Act
of 1940 (the Advisers Act). The applicant describes the HighMark Funds
and Portfolios as follows:
HighMark Funds, a Massachusetts business trust, is an open-end
management investment company registered under the 1940 Act. HighMark
Funds currently is comprised of thirteen portfolios, including the
following three Portfolios:
(i) HighMark Value Momentum Fund
(ii) HighMark Growth Fund
(iii) HighMark Small Cap Value Fund
As previously noted, HCM serves as investment adviser to each of
the HighMark Portfolios listed above. The applicant represents that, in
addition, HCM, UBOC, and UBOC Affiliates may provide other services to
the HighMark Funds and the HighMark Portfolios, including accounting,
administration, and shareholder services.
6. The applicant also represents that, as of June 15, 2001:
(i) A total of approximately $63.2 million in Retirement Plan
assets was invested in the HighMark Value Momentum Fund (representing a
10.51% ownership in such Portfolio);
(ii) A total of approximately $46.1 million in Retirement Plan
assets was invested in the HighMark Growth Fund (representing a 12.40%
ownership interest in such Portfolio); and
(iii) A total of approximately $61.7 million in Retirement Plan
assets was invested in the HighMark Small Cap Value Fund (representing
a 43.94% ownership interest in such Portfolio).\12\
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\12\ As previously noted, the Department is expressing no
opinion regarding the applicability of PTE 77-3 to the acquisition
of the Shares by the Retirement Plan. In addition, the Department is
expressing no opinion as to the applicability of section 404 of
ERISA to the acquisition of the Shares by the Retirement Plan. In
this regard, the Department directs the applicant's attention to an
advisory opinion issued to Federated Investors [Advisory Opinion 98-
06A (July 30, 1998)], in which the Department noted that if the
decision by a plan fiduciary to enter into a transaction is not
``solely in the interest'' of the plan's participants and
beneficiaries, e.g., if the decision is motivated by the intent to
generate seed money that facilitates the marketing of the mutual
fund, then the plan fiduciary would be liable for any loss resulting
from such breach of fiduciary responsibility, even if the
acquisition of mutual fund shares was exempt by reason of PTE 77-3.
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7. The applicant represents that, on June 15, 2001, the Retirement
Plan redeemed all of its Shares in the HighMark Value Momentum Fund and
the HighMark Growth Fund and approximately $40 million of its Shares of
the HighMark Small Cap Value Fund (the June 15, 2001 Redemptions). The
applicant further represents that the June 15, 2001 Redemptions were an
appropriate means of effectuating this diversification of investment
managers and the shift to separate account management for the
Retirement Plan. In this regard, the applicant represents that the
HighMark Funds, under the supervision of the HighMark Funds' board of
trustees (none of whom are directors, officers or employees of UBOC,
HCM, or their affiliates), had the option to determine whether to
effect the June 15, 2001 Redemptions in cash or in kind, and determined
to effect such Redemptions in kind.\13\
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\13\ The applicant represents that the HighMark Funds' board of
trustees in 2000 adopted a resolution establishing objective
procedures for in-kind redemptions intended to conform with the
requirements set forth in a no-action letter issued by the staff of
the Securities and Exchange Commission re Signature Financial Group,
Inc. (1999 SEC No-Act.LEXIS 981, avail. 12/28/99)) (``the Signature
Financial letter'') governing in-kind redemptions of shares held by
``affiliated shareholders'' of the HighMark Funds. The procedures
require, among other things, that the redemption be effected on a
pro rata basis, based on the relevant HighMark Portfolios' current
net assets at the time of redemption, and that the board of trustees
verify that an in-kind redemption is effected in accordance with the
procedures.
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8. The applicant represents that it is possible that the Committee
or other fiduciaries of the Retirement Plan or other In-house Plans
\14\ may at a later date determine that it is in the best interest of
the Retirement Plan or other In-house Plan and its participants and
beneficiaries to redeem such Plan's interest in HighMark Portfolios or
other Funds, other than those described in Paragraphs 5 and 6 above,
for which UBOC or a UBOC Affiliate provides investment advisory
services. Consequently, in the event that this proposed exemption is
granted, and to the extent that all of the terms and conditions of the
exemption, as granted, are met, the relief requested herein shall apply
to any such future redemption that is effected in-kind.
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\14\ The applicant informed the Department that on November 26,
2001, an in-kind distribution was made of the Retirement Plan's
entire investment in the HighMark International Fund. U.S. Trust
served as the independent fiduciary for this transaction. The
applicant represents that UBOC also sponsors a 401(k) Plan which
permits participants to direct the investment of their plan accounts
among various investment options, including several HighMark Funds.
According to the applicant, the 401(k) plan intends to redeem all of
its shares in the Highmark Growth Fund and the HighMark Large Cap
Value Fund (formally known as the Income Equity Fund) in connection
with a change of investment options. The applicant has been informed
by the Funds that it will effect the requested redemptions in-kind.
According to the applicant, the securities will be distributed to
mutual funds that replace the Highmark Growth Fund and the Highmark
Large Cap Value Fund as investment options under the 401(k) Plan.
UBOC anticipates that these redemptions would occur on or about
December 14, 2001, subject to completion of the independent
fiduciaries review and approval of the transactions.
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9. The applicant states that the June 15, 2001 Redemptions involved
ministerial transactions performed in accordance with pre-established,
objective procedures. As a result, the applicant represents that the
transactions did not permit UBOC or a UBOC Affiliate to use its
influence or control to purchase particular securities from the
HighMark Portfolios. In addition, the applicant states that all Shares
are offered and sold exclusively through the use of prospectuses and
materials provided pursuant to the requirements of the Securities Act
of 1933 and the 1940 Act and the rules and regulations thereunder.
10. The applicant states that, to the extent possible, the
Retirement Plan transferred Shares in return for a proportionate share
of the securities
[[Page 357]]
held by each HighMark Portfolio in the June 15, 2001 Redemptions.
According to the applicant, the Retirement Plan received only cash and
Transferable Securities pursuant to the June 15, 2001 Redemptions. In
this regard, each Transferable Security subject to a Redemption was
transferred in-kind to the Retirement Plan. However odd lot securities,
fractional shares and accruals on such securities were transferred in
cash.\15\ The applicant states that the June 15, 2001 Redemptions were
carried out, to the extent possible, on a pro rata basis as to the
number and kind of securities transferred to the Retirement Plan.\16\
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\15\ According to the report submitted by the Independent
Fiduciary, none of the HighMark Portfolios held securities which
were not Transferable Securities at the time of the June 15, 2001
Redemptions, and, therefore, there was no cash adjustment to reflect
the value of such securities. The applicant states, however, that
such cash adjustments may be made with respect to future Redemptions
to the extent relevant Fund holds such excluded securities.
\16\ According to the applicant, the securities transferred from
each HighMark Portfolio in the June 15, 2001 Redemptions were
selected under a ``first in, first out'' (FIFO) procedure. Under
this procedure, ``tax lots'' of securities to be distributed in kind
in satisfaction of the in-kind redemption were selected on the basis
of when the securities were acquired for the Portfolio, with the
securities held longest by the Portfolio being distributed first,
until distribution of the Plan's pro rata share of such security was
completed. The applicant represents that the FIFO procedure is the
one normally used by the High Mark Funds equity and fixed income
funds for selecting securities to be sold or distributed in kind.
The applicant further represents that with respect future in-kind
redemptions pursuant to this exemption, securities will also be
selected on a ``first in, first out'' basis or similar objective,
ministerial procedure.
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11. The applicant represents that, for purposes of the June 15,
2001 Redemptions, the values of the HighMark Portfolio securities were
determined based on the current market price of such securities as of
the close of business on June 15, 2001 (the Valuation Date). As
required by the no action letter re Signature Financial Group, Inc.
issued by the staff of the Securities and Exchange Commission, the
value of the securities in each Portfolio were determined by using the
valuation procedures established by the HighMark Funds in accordance
with Rule 2a-4 under the 1940 Act.\17\ In this regard, responsibility
for valuations rests with the HighMark Funds' administrator (the
Administrator), which is unrelated to UBOC. The Administrator has
contracted with independent, third-party pricing agents approved by the
HighMark Funds' board of trustees to provide security quotations.\18\
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\17\ In the no action letter to Signature Financial Group, Inc.
discussed above, the Division of Investment Management of the SEC
states that it will not recommend enforcement action pursuant to
Section 17(a) of the Investment Company Act of 1940 for certain in-
kind distributions of portfolio securities to an affiliate of a
mutual fund. Funds seeking to use this ``safe harbor'' must value
the securities to be distributed to an affiliate in an in-kind
distribution ``in the same manner as they are valued for purposes of
computing the distributing fund's net asset value.'' The applicant
represented that, having adopted the Signature Financial Letter
procedures for use in its affiliate transactions, it must use those
procedures for transactions with its in-house plans, as these in-
house plans are affiliates of the mutual fund. The Department agreed
to the use of the Signature Financial Letter procedures for
determining the value of the securities in this in-kind transaction,
with certain limitations.
The Signature Financial Letter requires pro rata distribution of
the securities. The letter does not address the marketability of
such securities. The range of securities distributed pursuant to
this ``safe harbor'' may therefore be broader than range of
securities covered by SEC Rule 17a-7, 17 CFR Sec. 270.17a-7. In
granting past exemptive relief with respect to in-kind transactions
involving mutual funds, the Department has required that the
securities being distributed in-kind fall within Rule 17a-7. One of
the requirements of Rule 17a-7 is that the securities are those for
which ``market quotations are readily availabale.'' SEC Rule 17a-
7(a). The Department has determined, and the applicant agrees, that
exemptive relief in this case will also be limited to in-kind
distribution of securities for which market quotations are readily
available. The value of any other securities will be paid to the
plan in cash.
\18\ Under the exemption requested by UBOC, the Plan will
receive only securities for which market quotations are readily
available (as determined pursuant to the Funds' procedures described
above) or cash.
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12. The applicant represents that, in connection with the June 15,
2001 Redemptions, U.S. Trust Company, N.A. (U.S. Trust), a federally
chartered bank, confirmed its independence from UBOC and is qualified
to serve as an Independent Fiduciary, as that term is defined in
Section II of the proposed exemption. U.S. Trust, in turn, represented
that it understood and accepted the duties, responsibilities and
liabilities in acting as a fiduciary under ERISA for the Retirement
Plan.
U.S. Trust represents that it was responsible for (i) determining
whether the terms of each Redemption of Shares of the HighMark
Portfolios was fair to the participants of the Retirement Plan and
comparable to and no less favorable than terms that would be reached at
arms' length between unaffiliated parties, and (ii) opining as to the
fairness and reasonableness of each such Redemption, as compared to a
redemption for cash and subsequent reinvestment of such cash. This
determination and opinion was set forth in a written report (the
Report) dated June 8, 2001. Specifically, in the Report, U.S. Trust
stated that:
(a) the Redemptions would not involve certain transaction costs
otherwise incurred in a cash redemption;\19\
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\19\ The Report states that, with respect to the Redemptions
involving Shares of the HighMark Value Momentum Fund and the
HighMark Growth Fund, if the Retirement Plan were to receive cash
rather than securities pursuant to the transaction, substantially
all (in the case of the HighMark Value Momentum Fund) or the
majority (in the case of the HighMark Growth Fund) of that cash
would be reinvested in securities which would result in brokerage
commissions and a buy-sell spread, the costs of which would be
incurred by the Retirement Plan. The Report states further that
depending on the form and timing of the Redemptions, part of the
Portfolios' selling costs might be absorbed by the Retirement Plan
as a shareholder in the Portfolios. Therefore, according to U.S.
Trust, to the extent that the Redemption of the Retirement Plan's
Shares of the HighMark Value Momentum Fund and the HighMark Growth
Fund were effected in-kind, those costs would be avoided.
U.S. Trust notes, however, that the Retirement Plan would sell
substantially all of the securities received in redemption of its
Shares of the HighMark Small Cap Value Fund shortly after the
Redemption. In this regard, the applicant represents that the
unaffiliated investment manager appointed to manage the ``small
capitalization stock'' portion of the Retirement Plan's assets on a
separate account basis after the June 15, 2001 Redemptions pursues
an investment strategy that is different from that pursued by the
HighMark Small Cap Value Fund. Accordingly, the Retirement Plan, at
the request of the new manager, sold substantially all of the
securities it received from the HighMark Small Cap Value Fund in
connection with the June 15, 2001 Redemptions. However, UBOC
contributed a cash payment to the Retirement Plan in an amount
estimated by U.S. Trust to be equal to the difference between the
transaction costs associated with the Retirement Plan's in-kind
redemption of Shares of the HighMark Small Cap Value Fund and the
transaction costs associated with a hypothetical cash redemption of
such Shares. In calculating the transaction costs of a hypothetical
cash redemption, U.S. Trust assumed that, prior to the cash
redemption, the Fund would raise cash by selling the securities that
were, in fact, distributed in kind. Under this scenario, those
selling costs would be allocated proportionately across all
shareholders in the Fund (including the Retirement Plan) before the
Retirement Plan received its cash distribution. U.S. Trust concluded
that UBOC's cash payment to the Retirement Plan made the Retirement
Plan whole for redeeming its HighMark Small Cap Value Fund Shares in
kind rather than in cash and, consequently, the redemption of such
shares was fair to Retirement Plan participants.
In connection with the November 26, 2001 in-kind distribution
from the HighMark International Fund, the same issue arose, i.e.,
the new investment manager choose not to retain most of the
securities distributed in kind. As in the earlier Small Cap Value
Fund transaction, UBOC has agreed to make a cash payment sufficient
to make the Retirement Plan whole.
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(b) the Shares and cash associated with the Redemptions would be
valued in accordance with procedures established by the HighMark Funds
and applicable law, and that the same procedures are used to determine
the net asset value of the HighMark Portfolios; and
(c) U.S. Trust reviewed a written document detailing the procedures
for in-kind redemptions for affiliated parties, and concluded that it
matched its understanding of procedures for in-kind redemptions.
[[Page 358]]
In the Report, U.S. Trust stated that, based upon its review of the
methodology of the Redemptions of Shares of each of the HighMark
Portfolios and an analysis of the costs associated with the Redemptions
versus a cash redemption for the Retirement Plan's assets held by the
HighMark Portfolios (and, with respect to the HighMark Small Cap Value
Fund, the cash payment to the Retirement Plan noted above), the
Redemptions would be fair to the participants of the Retirement Plan.
The Report also stated that the methodology used to conduct the
Redemptions would be comparable to and no less favorable than a similar
in kind redemption reached at arms' length between unaffiliated
parties. Therefore, U.S. Trust approved the Redemptions from the
HighMark Portfolios, provided the Redemptions were conducted in
accordance with the information provided to it by UBOC and the HighMark
Funds.
The Report also states that, if the Redemptions were thereafter
undertaken, U.S. Trust would confirm in writing whether each such
Redemption was effectuated consistent with the required criteria and
procedures set forth in the Report, based on representations requested
from UBOC and testing a limited sampling of certain material aspects of
the Redemptions, deemed in U.S. Trust's judgment to be representative.
Accordingly, subsequent to the June 15, 2001 Redemptions, U.S. Trust
conducted the post-transaction review described above and concluded,
based on information provided to it, that the Retirement Plan received
its pro rata portion of each Transferable Security (rounded to the
nearest round lot) held by the HighMark Portfolios and its pro rata
portion of cash that the HighMark Portfolios held based on the Plan's
ownership percentage of each such Portfolio (or, in the case of the
Small Cap Fund, the percentage of the Small Cap Fund that the
Redemption amount represented), and that the June 15, 2001 Redemptions
were effectuated in a manner consistent with the required criteria and
procedures set forth in the Report.
13. In summary, it is represented that the June 15, 2001 and
November 26, 2001 Redemptions satisfied, and any Redemptions to occur
in the future will satisfy, the statutory criteria for an exemption
under section 408(a) of ERISA for the following reasons:
(A) The In-house Plan pays no sales commissions, redemption fees,
or other similar fees in connection with the Redemptions (other than
customary transfer charges paid to parties other than UBOC and UBOC
Affiliates);
(B) The assets transferred to the In-house Plan pursuant to the
Redemptions consist entirely of cash and Transferable Securities.
Notwithstanding the foregoing, odd lot securities, fractional shares
and accruals on such securities may be distributed in cash;
(C) With certain exceptions defined below, the In-house Plan
receives a pro rata portion of the securities of the Portfolio upon a
Redemption that is equal in value to the number of Shares redeemed for
such securities, as determined in a single valuation performed in the
same manner and as of the close of business on the same day in
accordance with the procedures established by the Funds pursuant to
Rule 2a-4 under the 1940 Act (using sources independent of UBOC and
UBOC Affiliates);
(D) UBOC, or any UBOC affiliate, does not receive any fees,
including any fees payable pursuant to Rule 12b-1 under the 1940 Act,
in connection with any Redemption of the Shares;
(E) Prior to a Redemption, UBOC provides in writing to the
Independent Fiduciary a full and detailed written disclosure of
information regarding the Redemption;
(F) Prior to a Redemption, the Independent Fiduciary provides
written approval of such Redemption to UBOC, such approval being
terminable at any time prior to the date of the Redemption without
penalty to the In-house Plan, and such termination being effectuated by
the close of business following the date of receipt by UBOC of written
or electronic notice regarding such termination (unless circumstances
beyond the control of UBOC delay termination for no more than one
additional business day);
(G) Before approving a Redemption, based on the disclosures
provided by the Portfolios to the Independent Fiduciary and discussions
with appropriate operational personnel of the In-house Plan, UBOC, and
the Adviser as necessary to form a basis for making the following
determinations, the Independent Fiduciary determines that the terms of
the Redemption are fair to the participants of the In-house Plan and
comparable to and no less favorable than terms obtainable at arms-
length between unaffiliated parties;
(H) Not later than thirty (30) business days after the completion
of a Redemption, the relevant Fund provides to the Independent
Fiduciary a written confirmation regarding such Redemption containing:
(i) the number of Shares held by the In-house Plan immediately
before the Redemption (and the related per Share net asset value and
the total dollar value of the Shares held),
(ii) the identity (and related aggregate dollar value) of each
security provided to the In-house Plan pursuant to the Redemption,
including any security valued in accordance with the Funds' procedures
for obtaining current prices from independent market-makers,
(iii) the current market price of each security received by the In-
house Plan pursuant to the Redemption, and
(iv) the identity of each pricing service or market-maker consulted
in determining the value of such securities;
(I) The value of the securities received by the In-house Plan for
each redeemed Share equals the net asset value of such Share at the
time of the transaction, and such value equals the value that would
have been received by any other investor for shares of the same class
of the Portfolio at that time;
(J) Subsequent to a Redemption, the Independent Fiduciary performs
a post-transaction review which will include, among other things,
testing a sampling of material aspects of the Redemption deemed in its
judgment to be representative, including pricing; and
(K) Each of the In-house Plan's dealings with the Funds, the
Investment Adviser, the principal underwriter for the Funds, or any
affiliated person thereof, are on a basis no less favorable to the In-
house Plan than dealings between the Funds and other shareholders
holding shares of the same class as the Shares.
Notice to Interested Persons
The applicant will provide notice of the proposed exemption within
30 days after publication thereof in the Federal Register (i) to active
participants in the Retirement Plan by electronic communication through
applicant's on-line employee intranet service and by posting at major
job sites, and (ii) to retiree participants in pay status in the
Retirement Plan by first class mail. Notices posted at major job sites
will include a copy of the proposed exemption as published in the
Federal Register. The notices will inform interested persons of their
right to comment and/or request a hearing. Comments and requests for a
hearing must be received by the Department not later than 60 days from
the date of publication of this notice of proposed exemption in the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Andrea W. Selvaggio of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
[[Page 359]]
Cargill, Incorporated and Associated Companies Salaried Employees'
Pension Plan, et al (the Original Plans) Located in Minneapolis,
Minnesota
[Application Nos. D-11017 through D-11023]
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 proposed
exemption is granted, effective October 18, 1996, the restrictions of
sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act, and the
sanctions resulting from section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to: (1) the
acquisition (the Stock Acquisition) and holding of certain shares of
Cargill, Incorporated common stock (the Common Stock) by the Cargill,
Incorporated and Associated Companies Master Pension Trust (the Master
Trust); and (2) the acquisition, holding and, where relevant, exercise
by the Master Trust of a certain irrevocable put option associated with
the Common Stock (the Put Option); provided that the following
conditions are satisfied:
(A) Prior to the Stock Acquisition, a qualified, independent
fiduciary acting on behalf of the Master Trust (the Independent
Fiduciary) determined that the Stock Acquisition was appropriate for,
and in the best interests of, the Original Plans and the Master Trust.
(B) The $178.75 per share purchase price the Master Trust paid for
each share of Common Stock pursuant to the Stock Acquisition equaled
the August 31, 1996 fair market value of each such share as determined
by a qualified, independent appraiser selected by the Independent
Fiduciary.
(C) Subsequent to the Stock Acquisition, the Independent Fiduciary
represented the interests of the Master Trust with respect to the
Master Trust's holding of the Common Stock and the Master Trust's
holding of the Put Option, and will continue to represent such
interests as long as the Master Trust holds such stock and Put Option.
(D) Subsequent to the Stock Acquisition, the Independent Fiduciary
took and will take whatever action is necessary to protect the rights
of the Master Trust with respect to the Master Trust's holding of the
Common Stock and the Master Trust's holding of the Put Option.
(E) Upon request by the Independent Fiduciary, Cargill,
Incorporated (Cargill) purchased, or will purchase, all or a portion of
the Common Stock held by the Trust, in accordance with the terms of the
Put Option, for the greater of: (1) the price of the Common Stock as of
the date of the Stock Acquisition; or (2) the fair market value of the
Common Stock as of the date the Put Option is exercised.
(F) Subsequent to the Stock Acquisition, the Common Stock did not,
at any time, represent more than ten percent (10%) of the total fair
market value of the assets held by: (1) any Original Plan; or (2) after
the Original Plans were merged into each other on January 1, 1997, any
remaining Original Plan that continued to have an undivided interest in
the assets of the Master Trust (a Remaining Plan).
(G) For purposes of securing its obligations with respect to the
Put Option, Cargill established, and will continue to maintain, an
escrow account containing cash and/or U.S. government securities
amounting to at least 25 percent (25%) of the total current fair market
value of the Common Stock held by the Master Trust.
(H) All transactions between Cargill and the Master Trust, or
between Cargill and any Original Plan or Remaining Plan (collectively,
the Plans), arising in connection with the Stock Acquisition, were no
less favorable to the Master Trust or Plan than arm's-length
transactions involving unrelated parties.
(I) Cargill reimbursed the Master Trust, with interest (the
Reimbursement), for the Master Trust's payment of certain legal
expenses associated with the Master Trust's holding of the Common Stock
(the Legal Fees).
(J) Cargill paid, and will continue to pay, the fees of the
Independent Fiduciary and its financial advisor to the extent such fees
relate to either the Stock Acquisition or the continued holding of the
Common Stock and the Put Option by the Master Trust.
(K) At no time subsequent to the Stock Acquisition has the Master
Trust held more than 25% of the aggregate amount of Common Stock issued
and outstanding.
(L) Cargill adopts written procedures which require that a
Remaining Plan fiduciary: (1) review all expenses submitted for payment
by the Master Trust; and (2) approve the payment of only those expenses
that are reasonable and necessary for the administration of a Remaining
Plan.
(M) Cargill adopts written procedures which require that
independent legal counsel provide Cargill with a written opinion
regarding the payment by the Master Trust or a Remaining Plan of
expenses associated with a transaction between Cargill and a Remaining
Plan.
(N) In the event this proposed exemption is granted, Cargill,
within 60 days of the date of such grant, files Form 5330 with the
Internal Revenue Service and pays the applicable excise taxes with
respect to the Master Trust's payment of the Legal Fees.
EFFECTIVE DATE: The effective date of this proposed exemption, if
granted, is October 18, 1996.
Summary of Facts and Representations
1. Cargill is a Delaware corporation established in 1865 by William
W. Cargill (Mr. Cargill). Cargill is engaged in, among other things,
the wholesaling of agricultural and other bulk commodities. As of
February 28, 2001, Cargill had approximately 85,000 employees and
annual revenues in excess of $47 billion.
2. By October of 1993, Cargill had established certain tax
qualified defined benefit plans (the Original Plans). At that time, the
Original Plans were comprised as follows:
a. Cargill, Incorporated and Associated Companies Salaried
Employees' Pension Plan (the Salaried Employees' Pension Plan);
b. Cargill, Incorporated Pension Plan for Seaboard Grain Miller
Represented Employees (the Seaboard Grain Miller Employees' Pension
Plan);
c. Cargill, Incorporated and Associated Companies Pension Plan for
Grain Miller Represented Employees (the Grain Miller Employees' Pension
Plan);
d. Cargill, Incorporated and Associated Companies Pension Plan for
Union Represented Hourly Wage Employees (the Hourly Wage Employees'
Pension Plan);
e. Cargill, Incorporated and Associated Companies Pension Plan for
Production Employees (the Production Employees' Pension Plan);
f. Cargill, Incorporated and Associated Companies Pension Plan for
Poultry Products Employees (the Poultry Products Employees' Pension
Plan); and
g. Cargill, Incorporated and Associated Companies Pension Plan for
Union Represented Poultry Products Employees (the Union Poultry
Products Employees' Pension Plan);
3. The Common Stock is one of five classes of stock authorized by
Cargill. Each share of Common Stock, and, generally, each share of
Cargill's other classes of stock, is entitled to one vote. In addition,
holders of the Common Stock are entitled to receive dividends on their
shares in an amount decided annually by Cargill's Board of Directors.
[[Page 360]]
4. Prior to October 18, 1996, the Common Stock was held solely by
the lineal descendants of Mr. Cargill and their spouses and ex-spouses
(the Cargill Common Stock Holders), either directly or indirectly
through corporations and trusts of which they are beneficiaries.\20\ On
October 18, 1996, the Original Plans obtained a portion of the Common
Stock through the Stock Acquisition.\21\ In this regard, on that date,
the Master Trust acquired 167,832 shares of the Common Stock pursuant
to the Stock Acquisition, for a purchase price of $178.75 per Share.
The applicant represents that the Original Plans paid cash for the
Common Stock, the aggregate value of which was $29,999,970 as of the
date of the Stock Acquisition. According to the applicant, immediately
after the Stock Acquisition, the Common Stock represented less than 10%
of the assets in the Master Trust.\22\
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\20\ As a result, the Common Stock did not satisfy the
definition of ``qualifying employer security''. In this regard, with
respect to defined benefit plans, 407(d)(5)(A) of the Act defines a
``qualifying employer security'' as, among other things, ``stock''
which satisfies the requirements of section 407(f)(1) of the Act.
Section 407(f)(1)(b) of the Act states that ``stock'' meets the
requirements of that section to the extent that at least 50 percent
of the aggregate amount of stock of the same class issued and
outstanding at the time of acquisition is held by persons
independent of the issuer.
\21\ Since the Common Stock was not a ``qualifying employer
security'', the Stock Acquisition violated section 407(a)(1)(A) of
the Act which provides that a plan may not acquire or hold any
employer security which is not a qualifying employer security. In
violating section 407(a) of the Act, the Stock Acquisition also
violated section 406(a)(1)(E) of the Act which provides that a
fiduciary with respect to a plan shall not cause the plan to engage
in a transaction involving the acquisition, on behalf of the plan,
of any employer security in violation of section 407(a) of the Act.
\22\ The applicant states that, as of November 30, 2000, the
Common Stock represented approximately 4% of the total assets held
by the Master Trust.
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5. The applicant represents that State Street Bank and Trust
Company (State Street) acted as Independent Fiduciary for purposes of
the Stock Acquisition. State Street represents that it is independent
of Cargill and receives less than 1% of its aggregate annual gross
revenue from Cargill. In addition, State Street represents that it is
qualified to act as Independent Fiduciary on behalf of the Master Trust
due to its status as one of the country's largest trust companies and
its extensive experience in managing retirement plan assets. The
applicant represents that, subsequent to the Stock Acquisition, State
Street has acted as Independent Fiduciary with respect to the Plans'
continued holding of the Common Stock and the Put Option.
6. The applicant represents that, for purposes of the Stock
Acquisition, the Cargill Common Stock Holders proposed a price of
$178.75 per share. The applicant states that the Independent Fiduciary
retained a qualified, independent advisor for the purpose of
determining whether: (1) the proposed $178.75 per share sale price
exceeded the fair market value of such shares; and (2) the terms of the
proposed Stock Acquisition were fair and reasonable to the Master Trust
from a financial point of view. In this regard, the applicant states
that the Independent Fiduciary selected Duff & Phelps Financial
Consulting Co. (Duff & Phelps) to make such determinations.
In a letter dated October 18, 1996, Duff and Phelps stated that, in
its capacity as financial advisor to the Independent Fiduciary for
purposes of the Stock Acquisition, it reviewed, among other things:
audited financial statements of Cargill; unaudited interim financial
statements of Cargill for the three months ended August, 31, 1996; and
certain internal documents and analyses provided by Cargill management.
In carrying out its duties, Duff and Phelps stated that it additionally
reviewed relevant financial and operating information for specific
publicly traded companies which it deemed comparable in whole or in
part to Cargill.
Upon this review, Duff and Phelps compared Cargill's historical
results and future prospects against several sets of publicly traded
companies. Duff and Phelps stated that the fair market value of the
Common Stock was thereafter determined upon reviewing the relative
performance and pricing multiples of such companies and discounting the
derived common stock value to reflect the illiquidity of the Common
Stock. In the October 18, 1996 letter, Duff and Phelps concluded that:
(a) the price of $178.75 per share to be paid by the Master Trust was
not in excess of fair market value within the meaning of ERISA; and (b)
the terms of the proposed Stock Acquisition were fair and reasonable to
the Master Trust from a financial point of view.
The applicant represents that, upon the Independent Fiduciary's
review of the information provided by Duff and Phelps, the Independent
Fiduciary determined that, as of October 18, 1996, the Stock
Acquisition was appropriate for, and in the best interests of, the
Original Plans and the Master Trust. The applicant states that, in
consideration of this, on that date, the Independent Fiduciary directed
that the Master Trust acquire the Common Stock pursuant to the Stock
Acquisition.
7. The applicant represents that at no time subsequent to the Stock
Acquisition did the Common Stock represent more than 10% of the fair
market value of any Original Plan or, after the merging of the Original
Plans (see paragraph 9), any Remaining Plan. The applicant additionally
represents that the Master Trust has never held, and will never hold,
more than 25% of the aggregate amount of Cargill's issued and
outstanding Common Stock.
8. In addition to receiving the Common Stock pursuant to the Stock
Acquisition, the Trust received the Put Option. In this regard, the
Trust received an option which requires that Cargill, at the direction
of the Independent Fiduciary, purchase from the Master Trust any or all
of the Common Stock held by the Master Trust. According to the terms of
the Put Option, the price of any share sold pursuant to a Put Option
shall be the greater of: (1) the price at which the Master Trust
acquired the Common Stock; or (2) the fair market value of the Common
Stock as of the date the Put Option is exercised. The applicant
represents that the Put Option has remained in effect since the Stock
Acquisition and will continue to remain in effect to the extent the
Master Trust continues to hold any of the Common Stock.
9. After the Stock Acquisition, Cargill decided to merge certain of
the Original Plans. In this regard, on January 1, 1997, the Seaboard
Grain Miller Employees' Pension Plan, the Grain Miller Employees'
Pension Plan, and the Union Poultry Products Employees' Pension Plan
were merged into the Salaried Employees' Pension Plan. In addition, at
the same time, the Poultry Products Employees' Plan was merged into the
Production Employees' Pension Plan. Thus, after the mergers, the
following plans remained: the Salaried Employees' Pension Plan having
22,726 participants and $652,213,466 in total assets as of December 31,
1999; the Production Employees' Pension Plan having 6,564 participants
and $48,773,333 in total assets as of December 31, 1999; and the Hourly
Wage Employees' Pension Plan having 8,449 participants and $147,72,972
in total assets as of December 31, 1999.
10. Subsequent to the Stock Acquisition, State Street retained
responsibility for monitoring the Master Trust's continued ownership of
the Common Stock. Thus, for as long as the Master Trust held the Common
Stock, State Street, as Independent Fiduciary, was required to
determine whether it would be in the interests of the Master Trust for
the Master Trust to exercise
[[Page 361]]
the Put Option. State Street was, therefore, responsible for monitoring
the financial status of Cargill at regular intervals to determine
whether the Common Stock continued to be a stable and prudent
investment for the Plans and the Master Trust.
State Street was also given full investment discretion with respect
to the Common Stock. As a result, State Street had the authority to:
(1) Direct the trustee of the Master Trust with respect to the exercise
of voting rights, conversion rights or tender offers; (2) join in or
oppose voting trusts, mergers, consolidations, foreclosures,
reorganizations, recapitalizations and liquidations and (3) exercise
any and all rights relating to the Common Stock. The applicant
represents that State Street will continue to have each of these
responsibilities for as long as the Master Trust and the Plans hold the
Common Stock.
11. Cargill established, and continues to maintain, an escrow
account (the Escrow Account) to secure Cargill's obligations under the
Put Option. The applicant represents that the Escrow Account will
remain in effect for the duration of the Trust's ownership of any of
the Common Stock and will be maintained at an independent banking
institution approved by State Street. The purpose of the Escrow
Account, the applicant states, is to ensure that the Master Trust will
receive a price for the Common Stock that is in accordance with the
terms of the Put Option. Specifically, pursuant to any exercise of the
Put Option by the Master Trust, State Street is entitled, as
Independent Fiduciary, to draw upon the Escrow Account to satisfy
Cargill's obligations under the terms of the Put Option in the event
Cargill fails to purchase the Common Stock at the price required by
such option. According to the applicant, the Escrow Account contains
only cash and/or United States government securities amounting to at
least 25% of the total fair market value of the Common Stock held by
the Master Trust. Subsequent to the Stock Acquisition, the Master Trust
has at all times had, the applicant states, a lien against the assets
in the Escrow Account that gives the Master Trust priority over all
creditors of Cargill with respect to the assets in the Escrow Account.
The applicant represents that this lien will remain in place to the
extent the Master Trust continues to hold any of the Common Stock.
12. Cargill previously received temporary exemptive relief,
pursuant to Prohibited Transaction Exemption (PTE) 94-23 (59 FR 10830
(March 8, 1994)), for the purchase and holding of Common Stock by the
Master Trust.\23\ Subsequent to the publication of the proposed
exemption in the Federal Register (58 FR 58194 (October 29, 1993), the
Department received a written comment objecting to the Master Trust's
payment of the fees of State Street and Duff and Phelps. In response,
as noted in PTE 94-23, Cargill agreed to pay such fees in order to
avoid the depletion of the assets of the Master Trust.
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\23\ In this regard, the relief provided by PTE 94-23 expired on
March 8, 1999 with respect to the acquisition of Common Stock by the
Master Trust. As noted in the granted exemption, however, the Master
Trust was allowed to hold the Common Stock subsequent to the end of
the five year period.
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Cargill failed to meet this requirement when it inadvertently
caused the Master Trust to pay the Legal Fees. In this regard,
subsequent to the Stock Acquisition, Cargill directed that the Master
Trust pay certain of the Independent Fiduciary's legal fees, the amount
of which totaled $80,791. The applicant represents that such payment
was due, in part, to certain personnel changes occurring within
Cargill. Since Cargill failed to act in accordance with the
representations it made in response to a commentator under PTE 94-23,
the relief provided by the exemption ceased to be available. As a
result, the applicant is seeking retroactive relief for the Stock
Acquisition, as well as the Plans' subsequent holding of the Common
Stock, and the acquisition, holding and potential exercise of the Put
Option, by means of this proposed exemption.
13. The applicant states that Cargill has taken the appropriate
steps to reimburse the Master Trust for its payment of the Legal Fees.
In this regard, the applicant represents that the Master Trust was
reimbursed $80,791 for the Legal Fees. The applicant states that, in
addition, Cargill paid certain interest to the Master Trust. According
to the applicant, the amount of such interest, $36,696, represented the
Master Trust's overall rate of return on its entire portfolio of
investments from the date the Legal Fees were paid by the Master Trust
to the date the Legal Fees were refunded to the Master Trust.
The applicant represents that Cargill will undertake certain steps
to prevent future inappropriate payments of expenses by the Master
Trust. In this regard, the applicant represents that, if this proposed
exemption is granted, Cargill will designate a fiduciary, as such term
is defined by the Act, to review all expenses submitted for payment by
the Master Trust. The applicant represents that, only upon such
fiduciary's determination that an expense is reasonable and necessary
for the administration of a Remaining Plan will the fiduciary approve,
in writing, the payment of the expense. In addition, the applicant
represents that no expense associated with any transactions between
Cartill and a Remaining Plan will be paid by such Remaining Plan unless
Cargill obtains a written opinion from independent legal counsel.
14. In summary, that applicant represents that the proposed
exemption is protective of, and in the best interests of, the Remaining
Plans and the Master Trust since:
(A) Prior to the Stock Acquisition, the Independent Fiduciary
determined that the Stock Acquisition was appropriate for, and in the
best interests of, the Original Plans and the Master Trust.
(B) The $178.75 per share purchase price the Master Trust paid for
each share of Common Stock pursuant to the Stock Acquisition equaled
the August 31, 1996 fair market value of each such share as determined
by a qualified, independent appraiser selected by the Independent
Fiduciary.
(C) Subsequent to the Stock Acquisition, the Independent Fiduciary
represented the interests of the Master Trust with respect to the
Master Trust's holding of the Common Stock and the Master Trust's
holding of the Put Option, and continues to represent such interests as
long as the Master Trust holds such stock and Put Option.
(D) Subsequent to the Stock Acquisition, the Independent Fiduciary
protected the rights of the Master Trust with respect to the Master
Trust's holding of the Common Stock and the Master Trust's holding of
the Put Option, and will continue to protect such rights as long as the
Master Trust holds such stock and Put Option.
(E) Upon request by the Independent Fiduciary, Cargill purchased,
or will purchase, all or a portion of the Common Stock held by the
Trust, in accordance with the terms of the Put Option, for the greater
of: (1) The price of the Common Stock as of the date of the Stock
Acquisition; or (2) the fair market value of the Common Stock as of the
date any Put Option is exercised.
(F) Subsequent to the Stock Acquisition, the Common Stock did not,
at any time, represent more than ten percent (10%) of the total fair
market value of the assets held by any Original Plan or any Remaining
Plan.
(G) For purposes of securing its obligations with respect to the
Put Option, Cargill established, and will continue to maintain, an
escrow account containing cash and/or U.S. government securities
amounting to at least 25% of the total current fair market value of the
[[Page 362]]
Common Stock held by the Master Trust.
(H) All transactions between Cargill and the Master Trust; or
between Cargill and a Plan, arising in connection with the Stock
Acquisition, were no less favorable to the Master Trust or Plan than
arm's-length transactions involving unrelated parties.
(I) Cargill reimbursed the Master Trust, with interest (i.e., the
Reimbursement), for the Legal Fees.
(J) Cargill paid, and will continue to pay, the fees of the
Independent Fiduciary and its financial advisor to the extent such fees
relate to either the Stock Acquisition or the continued holding of the
Common Stock and the Put Option by the Master Trust.
(K) At no time subsequent to the Stock Acquisition has the Master
Trust held more than 25% of the aggregate amount of Common Stock issued
and outstanding.
(L) Cargill adopts written procedures requiring that a plan
fiduciary: (1) review all expenses submitted for payment by the Master
Trust; and (2) approve the payment of only those expenses that are
reasonable and necessary for the administration of a Remaining Plan.
(M) Cargill adopts written procedures requiring that independent
legal counsel provide Cargill with a written opinion regarding the
payment by the Master Trust or a Remaining Plan of expenses associated
with a transaction between Cargill and a Remaining Plan.
(N) In the event this proposed exemption is granted, Cargill,
within 60 days of the date of such grant, files Form 5330 with the
Internal Revenue Service and pays the applicable excise taxes with
respect to the Master Trust's payment of the Legal Fees.
Notice to Interested Persons: The applicant represents that notice
to interested persons will be made within twenty (20) business days
following publication of this notice in the Federal Register. Comments
and requests for a hearing must be received by the Department not later
than sixty (60) days from the date of publication of this notice of
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Christopher Motta of the Department,
telephone (202) 693-8544. (This is not a toll-free number.)
Blue Cross and Blue Shield of Kansas, (the Company) and Anthem
Insurance Companies, Inc. (Anthem), Located in Topeka, KS and
Indianapolis, IN, Respectively
[Application No. D-11030]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act (or ERISA) and 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).\24\
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\24\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of 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 the receipt of cash (Cash), including without
limitation, Cash held in an escrow fund (the Escrow Fund), by any
eligible policyholder (the Eligible Policyholder) of the Company and
Anthem, the Company's future parent,\25\ which is an employee benefit
plan (the Plan), as well as the Blue Cross and Blue Shield of Kansas,
Inc. Health Benefit Plan (the Company Health Plan), which is sponsored
by the Company, in exchange for the termination of such Plan's
membership interest in the Company, in accordance with the terms of a
plan of conversion (the Plan of Conversion) adopted by the Company and
implemented pursuant to Article 40, Chapter 40 of the Kansas Statutes
Annotated (the K.S.A.)
The proposed exemption is subject to the general conditions set
forth below in Section II.
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\25\ For purposes of this proposed exemption, references to the
Company will generally include references to Anthem, unless noted,
or unless the context requires otherwise.
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Section II. General Conditions
(a) The Plan of Conversion is implemented in accordance with
procedural and substantive safeguards that are imposed under Kansas
Insurance Law for a ``sponsored demutualization'' and is subject to
review and approval by the Kansas Insurance Commissioner (the
Commissioner).
(b) The Commissioner reviews the terms of the options that are
provided to Eligible Policyholders of the Company as part of such
Commissioner's review of the Plan of Conversion, and only approves the
Plan following a determination that --
(1) Such Plan is (i) fair and equitable to policyholders, (ii)
complies with the requirements of Kansas law, and
(iii) does not unjustly enrich any officer, director, agent or
employee of the company; and
(2) The new stock insurer meets the minimum requirements to obtain
a certificate of authority to transact business in Kansas and its
operation is not hazardous to existing or future policyholders or the
public.
(c) Each Eligible Policyholder has an opportunity to vote at a
special meeting to approve the Plan of Conversion after receiving full
written disclosure from the Company.
(d) With the exception of the Company Health Plan, one or more
independent fiduciaries of a Plan that is an Eligible Policyholder
elects to receive Cash pursuant to the terms of the Plan of Conversion
and neither the Company 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 acquisition.
(e) In the case of the Company Health Plan, a committee (the
Company Health Plan Committee), comprised of management-level employees
of the Company, determines whether to vote for or against the
implementation of the Plan of Conversion, but does not otherwise
exercise investment discretion over the Company Health Plan's assets.
(f) All Eligible Policyholders that are Plans participate in the
demutualization on the same terms and conditions as other Eligible
Policyholders that are not Plans.
(g) One-third of the total Cash consideration is distributed to an
Eligible Policyholder on a pro rata basis as the ``fixed component''
and the remaining two-thirds Cash consideration is allocated among each
Eligible Policyholder as the ``variable component'' in accordance with
a fair and objective standard, based upon actuarial formulas which take
into account a policy's past and future contributions to the Company's
surplus.
(h) No Eligible Policyholder pays any brokerage commissions or fees
in connection with the receipt of the demutualization consideration.
(i) All of the Company's policyholder obligations remain in force
and are not affected by the Plan of Conversion.
(j) The terms of the transactions are at least as favorable to the
Plans as an
[[Page 363]]
arm's length transaction with an unrelated party.
Section III. Definitions
For purposes of this proposed exemption,
(a) The term ``Blue Cross and Blue Shield of Kansas, Inc.'' means
the Company and its future parent, Anthem, unless otherwise noted, or
unless the context requires otherwise.
(b) An ``affiliate'' of the Company includes --
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the Company (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual.); and
(2) Any officer, director or partner in such person.
(c) The term ``Eligible Policyholders'' means persons who,
according to the Company's records, are the holders of certain in force
group and non-group insurance policies of the Company on the date on
which the Company's Board of Directors approves and adopts the Plan of
Conversion.
Summary of Facts and Representations
Description of the Parties
1. The Company, which is located in Topeka, Kansas, is a mutual
insurance company organized in 1992 under Kansas law. Through its
operating divisions and subsidiaries, the Company is engaged in a
variety of activities including providing accident and health coverage
to subscribers, substantially all of whom are residents of the State of
Kansas. The Company also performs administrative services and claims
processing for other Blue Cross and Blue Shield plans' subscribers and
for programs such as Medicare, Medicaid and the Federal Employee Health
Benefits Program. As of December 31, 2000, the Company had total assets
of approximately $731 million. As of February 9, 2001, the Company's
most recent financial strength rating from A.M. Best Company, Inc. was
``A-'' or ``Excellent.''
As a mutual insurance company, the Company does not have capital
stock but instead has members (Members) who are owners of policies and
contracts issued by the Company. A policyholder's membership interest
in the Company includes the right to vote, and to participate in the
distribution of the Company's surplus in the event of the Company's
voluntary dissolution or liquidation. Each Member has one vote.
Pursuant to Article 40, Chapter 40 of the Kansas Statutes Annotated
(i.e., the K.S.A.), the Company may be converted to a stock company
under a process called ``demutalization.'' In the event of such a
demutualization, Eligible Policyholders of the Company may receive Cash
consideration (some or all of which may be held in an escrow fund, as
described below) in exchange for their mutual membership interests in
the Company. The Company's demutualization will not affect the rights
of policyholders under their insurance contracts. In addition, only the
Company's policyholders, and not policyholders of an affiliate of the
Company, may vote and receive Cash consideration in connection with the
demutualization.
2. The Company provides a variety of insurance products to both
non-group and group policyholders. As of October 25, 2001, the Company
had 171,403 Eligible Policyholders. The non-group policyholders include
124,347 Medicare Supplement policyholders and 36,317 policyholders
holding non-group major medical policies or specialty policies such as
``cancer only'' indemnity policies. The remaining 10,739 are group
policyholders. Of the group policyholders, approximately 6,000 are
ERISA-covered welfare plans.
3. Anthem, which will become the ultimate parent of the Company
pursuant to the Plan of Conversion, maintains its principal place of
business in Indianapolis, Indiana. Anthem is currently organized as a
stock insurance company under the laws of the State of Indiana.
Together with its subsidiaries, Anthem is one of the nation's largest
health benefits companies. As an independent licensee of the Blue Cross
Blue Shield Association (BCBSA), Anthem and its affiliates offer BCBSA-
branded products throughout Indiana, Ohio, Kentucky, Connecticut,
Colorado, Nevada, New Hampshire and Maine. In addition, Anthem and its
affiliates provide health care coverage or services to over 7 million
people in these states. As of December 31, 2000, Anthem had
approximately $5.7 billion in assets, $3.8 billion in liabilities and
surplus of $1.9 billion.
4. The Company sponsors the Company Health Plan, a welfare plan
which is expected to be an Eligible Policyholder entitled to receive
consideration in connection with the implementation of the Plan of
Conversion discussed herein. The Company Health Plan provides health
insurance benefits to approximately 2,200 employee and retiree
participants (and their respective dependents) through three separate
benefit programs based on the participants' location within Kansas: (a)
a health maintenance organization program with a self-referral benefit;
(b) a preferred provider program; and (c) a traditional major medical
program. Each program includes coverage for medical care,
hospitalization, prescription drugs, and dental care, subject to the
terms and conditions of the program. Thus, the Company Health Plan's
assets consist solely of insurance and premiums withheld from employees
which are remitted to the insurers and there is no valuation of the
assets of such Plan.
Active employees do not have an option among these three programs.
Instead, those living in the service area of the health maintenance
organization are enrolled in that coverage, and those outside the
service area are enrolled in the preferred provider program. Retirees
in the health maintenance organization service area can choose between
that coverage and the traditional major medical program. Retirees
living outside that service area are enrolled in the preferred provider
program. The Company pays 75 percent of the cost of coverage of
employees, retirees and their respective dependents. Under the Plan of
Conversion, the Company may receive approximately $1,178,000 in the
distribution if the total distribution is $321 million. The Company
intends to use the entire amount of the distribution in respect of the
Company Health Plan to defray employee and retiree costs of coverage
within a year of the distribution.
The Company Restructuring
5. On May 24, 2001, the Company's Board of Directors (the Board)
authorized management to develop a plan of demutualization (i.e., the
Plan of Conversion) pursuant to which the Company would be converted
from a mutual insurance company to a stock insurance company. The Plan
of Conversion, which was adopted by the Board on October 25, 2001,
provides for the conversion (the Conversion) of the Company into a
stock insurance company and the sale by the Company, pursuant to an
Alliance Agreement, dated as of May 30, 2001 (the Alliance Agreement),
of certain newly-issued shares of common stock to Anthem, Anthem West,
Inc., an Indiana company and a wholly-owned subsidiary of Anthem, or to
Anthem, Inc., a newly-formed public holding company and the parent of
Anthem, to hold all of the shares of its common stock.\26\ In the
[[Page 364]]
Conversion, all policyholders' membership interests in the Company will
be extinguished in exchange for a special distribution (the Special
Distribution), to the extent declared by the Board, plus an additional
amount of Cash that will be deposited into the Escrow Fund (described
in Representation 9 of the proposal) and distributed, after resolution
of a potential contingent litigation matter (the Contingent Litigation
Matter) of the Company, to the Eligible Policyholders as provided in
the Plan of Conversion.
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\26\ Anthem has separately applied to the Department for an
administrative exemption in connection with its contemplated
demutualization. On November 6, 2001, the Department issued a final
exemption (Prohibited Transaction Exemption 2001-44) to Anthem at 66
FR 56133.
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The Board believes that the Company's Conversion into a stock
corporation and the sale of the Company to Anthem, which makes possible
the distribution of the value of the Company to Eligible Policyholders,
is in the best interests of the Company's policyholders. If the Company
is to continue to provide high quality insurance services at reasonable
costs to its policyholders in a health insurance market that has become
national in scope, it must spread its costs over a sufficiently large
policyholder base. The Company, however, holds a certificate of
authority to sell insurance only in Kansas.
Even if it were to seek to sell coverage in other states, it could
not use the Blue Cross and Blue Shield names and service marks to do
so, for those names and service marks are controlled by the BCBSA,
whose licensees are provided exclusive areas within which they may use
those names and service marks.
In addition to being unable to expand geographically, the Company
finds that its potential customer base within the state shrinks every
year, as national corporations purchase or supplant local businesses.
The Company is also unable to diversify its risks geographically. An
adverse local illness, or adverse local legislation, or a natural
disaster could have substantial impact on its financial soundness. The
Conversion, wherein the Company will become a part of a substantially
larger, multi-state insurer, will benefit the Company and its
policyholders in several ways:
The Conversion will provide the Company with sufficient
capital to compete with national commercial companies as well as access
to a larger total capital pool with which to acquire other health plans
or related businesses.
The Conversion will enable the Company to take advantage
of economies of scale by eliminating duplicative resources and
streamlining its compliance efforts in an increasingly complex
regulatory environment.
By virtue of the Company's becoming part of the
diversified geographical base of Anthem that results from the
demutualization, the Company will have increased flexibility in
responding to localized adverse risk events, avoiding the twin perils
of decreased financial stability or excessive increases in rates to
avoid financial instability. By having such a diversified base, the
Company will have the ability to participate better in insurance
offerings to multi-state accounts.
The Conversion will result in the Company being able to
offer a greater variety of career paths to its employees and the
potential for greater and more varied challenges, which in turn should
permit it to continue to attract and retain the kinds of employees
needed to provide its policyholders with quality service.
The Conversion will allow the Company to take advantage of
best practices in health insurance from Anthem and its health insurance
affiliates.
The Conversion will allow the Company to maintain a
significant level of local employment.
The Conversion will provide for sustained local input into
medical policy.
The Conversion will provide Eligible Policyholders with an
opportunity to receive Cash in exchange for their otherwise illiquid
membership interests, which will be extinguished. Thus, Eligible
Policyholders will realize economic value from their membership
interests that is not currently available to them so long as the
organization remains a mutual company.
6. Accordingly, the Company requests an administrative exemption
from the Department which, if granted, will permit the receipt of Cash
(including, without limitation, the Cash consideration to be held in
the Escrow Fund described herein) by an Eligible Policyholder that is a
Plan, including the Company Health Plan, in exchange for such Eligible
Policyholder's membership interest in the Company, in accordance with
the Plan of Conversion adopted by the Company and implemented pursuant
to Kansas Insurance Law.
The Company represents that the receipt of Cash by a Plan, in
exchange for such Eligible Policyholders' mutual membership interest in
the Company, may be viewed as a prohibited sale or exchange of property
between the Plan and the Company in violation of section 406(a)(1)(A)
of the Act. Moreover, the Company states that the transaction may also
be construed as a transfer of plan assets to, or a use of plan assets
by or for the benefit of, a party in interest in violation of section
406(a)(1)(D) of the Act.
The proposed exemption is conditioned upon a number of substantive
safeguards. Among the safeguards is the requirement that distributions
to Plans pursuant to the exemption must be on terms that are no less
favorable to the Plans than Eligible Policyholders that are not Plans.
In this regard, Plans that are Eligible Policyholders must participate
in the demutualization transaction on the same terms and conditions as
Eligible Policyholders that are not Plans. Further, the demutualization
will not, in any way, change premiums or reduce policy benefits,
guarantees or other policy obligations of the Company to its
policyholders and contractholders.
Procedural Requirements under Kansas Insurance Law for Restructuring
7. Kansas Insurance Law provides a regulatory framework for the
conversion of a mutual insurance company into a stock company,
including a ``sponsored demutualization,'' whereby all of the stock of
an insurer is acquired by another company in return for cash. It is
represented that the Company's proposed Conversion will be in the
nature of a ``sponsored demutualization.''
K.S.A. 40-4002 requires the demutualizing insurer's board of
directors to adopt, by a two-thirds majority, a resolution stating the
reasons a conversion to a stock insurance company would be in the best
interests of the policyholders of the mutual insurance company.
Following adoption of the resolution, a detailed plan of conversion
will be developed and approved by a two-thirds majority of the board.
The plan of conversion must also be submitted to the Kansas Insurance
Commissioner for approval, subject to certain hearing requirements.
Additionally, such plan must be approved by two-thirds of the
policyholders of the mutual insurer (or by a simple majority, if a
majority of policyholders vote) at a meeting called for the purpose of
considering the plan of conversion.\27\ Policyholders may vote in
person or by proxy. A copy of the plan of conversion and any
information the Commissioner deems necessary to
[[Page 365]]
policyholder understanding, including a summary of the plan of
conversion, must be furnished to policyholders.
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\27\ It is represented that neither the Company 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 any election made by an Eligible Policyholder that
is a Plan.
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K.S.A. 40-4003a sets forth alternative structures which may be used
for a conversion, including a plan in which policyholders exchange
their membership interests for cash or other consideration, and
requires the insurer to file a plan of conversion complying with the
terms and conditions set forth for such structure. Existing
policyholders of a converting insurer have their rights protected under
K.S.A. 40-4003c, which provides for policies in force on the effective
date of conversion remaining in force, with only voting rights,
assessment provisions, and rights to share in surplus being
extinguished.
The Commissioner is required to hold a hearing regarding the plan
of conversion, giving not less than 20 days' notice to the insurer and
the policyholders of the insurer of the hearing. The Commissioner must
approve the plan if she finds it is fair and equitable to
policyholders, complies with the requirements of the law, does not
unjustly enrich any director, officer, agent or employee of the
company, and the new stock insurer would meet the minimum requirements
to obtain a certificate of authority to transact business in Kansas and
its operation would not be hazardous to existing or future
policyholders or the public. The amount of consideration provided to
policyholders is deemed to be fair and equitable if it is at least
equal to the amount of statutory surplus contributed by policyholders.
If the Commissioner approves the plan of conversion, he or she will
issue a new certificate of authority to the converted insurer and the
date of such issuance is deemed to be the conversion date.
In addition to the provisions governing conversion to a stock
company, because this transaction involves Anthem's acquisition of the
Company's stock, it will also be subject to review under K.S.A. 40-
3304. This provision of the statute regulates the acquisition of a
domestic insurer and requires Commissioner review and public hearings.
As far as timing is concerned, between November 19 and November 27,
2001, the Company sent notices to policyholders regarding a January 11,
2002 policyholder meeting to consider the Plan of Conversion. The
Company anticipates that the Commissioner will hold a hearing on the
Plan of Conversion between January 7 and January 9, 2002 and that the
Commissioner will approve such Plan during the first quarter of 2002.
Distributions to Eligible Policyholders
8. Under the proposed transaction, Eligible Policyholders of the
Company will be entitled to receive total Cash consideration, currently
estimated at $321 million, in exchange for their mutual membership
interests in the Company.\28\ The Cash consideration will consist of
two components. In this regard, one-third of the Cash consideration
will be distributed to Eligible Policyholders, pro rata, as the ``fixed
component'' while the remaining two-thirds will be allocated among
Eligible Policyholders as the ``variable component.'' Such latter
allocation will be made in accordance with a fair and objective
standard, based upon actuarial formulas which will take into account a
policy's past and estimated future contributions to the Company's
surplus.
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\28\ The proceeds of the demutualization will belong to the Plan
if they would be deemed to be owned by the Plan under ordinary
notions of property rights. See ERISA Advisory Opinion 92-02A,
January 17, 1992 (assets of plan generally are to be identified on
the basis of ordinary notions of property rights under non-ERISA
law). It is the view of the Department that, in the case of an
employee welfare benefit plan with respect to which participants pay
a portion of the premiums, the appropriate plan fiduciary must treat
as plan assets the portion of the demutualization proceeds
attributable to participant contributions. In determining what
portion of the proceeds are attributable to participant
contributions, the plan fiduciary should give appropriate
consideration to those facts and circumstances that the fiduciary
knows or should know are relevant to the determination, including
the documents and instruments governing the plan and the proportion
of total participant contributions to the total premiums paid over
an appropriate time period. In the case of an employee pension
benefit plan, or where any type of plan or trust is the
policyholder, or where the policy is paid for out of trust assets,
it is the view of the Department that all of the proceeds received
by the policyholder in connection with a demutualization would
constitute plan assets.'' See ERISA Advisory Opinion 2001-02A,
February 15, 2001.
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On the effective date of the Conversion (the Conversion Date),
Eligible Policyholders will be entitled to receive $190 million in
exchange for their mutual membership interests in the Company. Of this
amount, Anthem will pay $48 million in Cash to the Escrow Fund. In
addition, at or prior to the closing, the Company will declare the
Special Distribution, which will be payable after the closing to the
Eligible Policyholders, in an amount equal to the excess of the
Company's consolidated closing book value over $155 million, subject to
certain rounding considerations.\29\
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\29\ The Alliance Agreement formerly provided that in the event
the Special Distribution equal to the entire excess of the closing
book value over $155 million was not paid, the purchase price would
be increased by 30 percent of the excess of the undistributed
closing book value over $155 million. Under the Alliance Agreement,
as amended, and pursuant to a resolution adopted by the Company on
October 25, 2001, the Special Distribution is currently equal to the
excess of the closing book value over $155 million.
The parties expect that the full amount of the Special
Distribution will be paid. It is represented that it is a condition
to the company's obligation to close that the Commissioner must
grant ``any required approval to the payment of the Special
Distribution'' or the Company will be required to obtain an opinion
from its financial advisor confirming the fairness, from a financial
point of view, of the purchase price to the Eligible Policyholders
in the absence of the Special Distribution.
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The amount of this excess is currently estimated to be
approximately $131 million. The Special Distribution, together with 7
percent interest from the Conversion Date, will be paid directly to the
Eligible Policyholders as soon as is reasonably practicable following
the resolution of the closing balance sheet used to calculate the
amount of the Special Distribution.
As stated above, of the $190 million purchase price, $48 million
will be held in the Escrow Fund pending the resolution of the
Contingent Litigation Matter, involving a subpoena dated February 28,
2001 received by the Company from the Office of the Inspector General,
U.S. Department of Health and Human Services. The subpoena seeks
documents related to an investigation of possible improper claims
against Medicare. The amounts held in the Escrow Fund will be used to
pay all costs, expenses and liabilities related to the Contingent
Litigation Matter, to pay related taxes which might become payable, and
to pay all costs and expenses of the escrow, with any remaining amounts
to be distributed to Eligible Policyholders following the final
resolution of such matter.\30\ At present, the Company has been
responding to the subpoena which underlies the Contingent Litigation
Matter through the production of documents, which production is nearly
complete, except for certain issues with respect to which the Company
is awaiting clarification from the U.S. Department of Justice.
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\30\ Even if the entire Escrow Fund were applied to costs
related to the Contingent Litigation Matter, it is represented that
Eligible Policyholders would still receive $142 million plus the
Special Distribution amount (currently estimated at $131 million)
within 90 to 120 days after the Conversion Date. Thus, the Company
asserts that there is no possibility that Eligible Policyholders
will receive nothing in return for their mutual membership
interests.
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Both the Special Distribution and any amounts remaining in escrow
will be distributed to Eligible Policyholders in accordance with the
distribution principles set forth in the Plan of Conversion. The Board
has received an opinion from Dresdner Kleinwort
[[Page 366]]
Wasserstein, independent financial advisors to the Company, that the
purchase price payable to the Eligible Policyholders and into the
Escrow Fund for the benefit of the Eligible Policyholders pursuant to
the Alliance Agreement is ``fair'' to the Eligible Policyholders, from
a financial point of view.
The Escrow Fund
9. The Alliance Agreement provides that $48 million of the $190
million purchase price to be received by the Company from Anthem will
be deposited by the Company (or Anthem or its specified affiliate on
the Company's behalf) into the Escrow Fund. The Escrow Fund will be a
separately-designated, interest-bearing deposit account established on
or prior to the Conversion Date, under the terms of an escrow agreement
(the Escrow Agreement) which will be entered into by and among the
Company, Anthem and an escrow agent (the Escrow Agent).\31\ The Escrow
Agent will be an unrelated New York bank with trust powers that is
selected by the Company, and accepted by Anthem, to act as Escrow Agent
under the Escrow Agreement.
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\31\ It is represented that the Escrow Fund was required due to
the difficulty in estimating the potential costs related to the
Contingent Litigation Matter and to assure Eligible Policyholders
that the acquisition offers received by the Company did not reflect
any discount to the value of the Company due to the Contingent
Litigation Matter. Thus, the Escrow Fund is intended to facilitate
the Anthem transaction without diminishing potential returns to
policyholders.
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The Company will deposit, into the Escrow Fund, amounts recovered
from insurers with respect to the Contingent Litigation Matter, net of
any reasonable out-of-pocket costs and expenses incurred in effecting
such recovery. The Escrow Fund will also provide funding for the
payment of (a) the net after-tax amount of costs and expenses
attributable solely to the Contingent Litigation Matter and (b) such
other amounts as may be specified in the Escrow Agreement or in the
Alliance Agreement. Following the satisfaction of all such costs and
expenses, the Escrow Agreement will provide for the payment of Cash
consideration by the Company to Eligible Policyholders. Tax benefits
related to the costs and expenses will be determined once they are
finally realized by the Company. However, the Company may withdraw
amounts, from time to time, to cover such costs and expenses.
The Escrow Fund will continue until the Contingent Litigation
Matter has been finally disposed of by binding settlement or court
order, all tax amounts have been finally determined, all amounts that
are reasonably recoverable from any insurer in respect of the
Contingent Litigation Matter are recovered, and all amounts in the
Escrow Fund have been paid or distributed by the Escrow Agent in
accordance with the Escrow Agreement and the Alliance Agreement. Upon
delivery by the Company and the Policyholder Committee of a certificate
certifying that all such amounts have been paid, the Escrow Fund will
terminate and all remaining amounts held in the Escrow Fund will be
distributed to Eligible Policyholders in accordance with the Plan of
Conversion. No amounts need be distributed if the Policyholder
Committee determines that it would be impractical to do so, taking into
account the costs of distribution in relation to the amounts to be
distributed. Any amounts that are not so distributed will instead be
distributed to a charitable foundation selected by the Policyholder
Committee.
Amounts held in the Escrow Fund will be invested by the Escrow
Agent solely in obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States of
America or an agency or instrumentality thereof with a maturity date of
one year or less from the date of investment. All costs and expenses of
maintaining the Escrow Fund, including the fees and expenses of the
Escrow Agent, the costs and expenses of making distributions out of the
Escrow Fund and the fees and expenses of the Policyholder Committee,
will be borne by the Escrow Fund. The rights of Eligible Policyholders
to amounts held in the Escrow Fund will not be represented by any form
of certificate or instrument and will not be transferable or assignable
except by will, the laws of intestacy or by other operation of law.
A committee comprised of five individuals who were members of the
Board of Directors of the Company prior to the Conversion Date and are
acceptable to Anthem (the Policyholder Committee) will oversee the
conduct of the Contingent Litigation Matter.\32\ The Policyholder
Committee will also certify amounts payable to the Company out of the
Escrow Fund for the indemnification of costs incurred by the Company
related to the Contingent Litigation Matter. The Policyholder Committee
may then dispute the amounts claimed by the Company. However, once the
dispute is settled pursuant to provisions in the Alliance Agreement,
the Policyholder Committee will certify the indemnification amounts
payable to the Company.
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\32\ It is represented that no members of the Policyholder
Committee will serve on the Company Health Plan Committee that is
described in Representation 10.
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In addition, the Commissioner will retain regulatory oversight over
the investment and distribution of the assets held in the Escrow Fund
to ensure that the interests of Eligible Policyholders are protected.
The Company expects that less than 25 percent of the interests in
the Escrow Fund will be held by ``benefit plan investors'' within the
meaning of the Department's Plan Asset Regulations, 29 CFR 2510.3-
101(f), and, accordingly, the assets of the Escrow Fund should not
constitute ``plan assets'' subject to the Act. If the Company
determines that 25 percent threshold has been exceeded by Plan
investors, it will inform the Department of this determination.
Company Health Plan Oversight
10. The Company has arranged for the retention of a committee,
comprised of three management-level employees, to act as a fiduciary
for the Company Health Plan in connection with the implementation of
the Plan of Conversion. The Company Health Plan Committee will
determine whether to vote for or against the implementation of the Plan
of Conversion. The Company Health Plan Committee's vote on behalf of
the Company Health Plan will represent one vote out of the
approximately 171,403 votes which may be cast by Eligible
Policyholders. The Company does not believe that the Company Health
Plan Committee will exercise any investment discretion with respect to
the type of consideration to be distributed in the demutualization,
since the compensation will consist solely of Cash.
11. 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
procedural and substantive safeguards that are imposed under Kansas law
and will be subject to review and supervision of the Commissioner.
(b) The Commissioner will review the terms and options that are
provided to Eligible Policyholders, including Plans, 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,
among other things, the Plan of Conversion is fair and equitable to
policyholders.
(c) The Plan of Conversion will provide the Company with access to
new sources of capital that should help
[[Page 367]]
sustain the Company's financial strength, increase its ability to
conduct its business efficiently and improve the Company's competitive
position in the insurance industry.
(d) With the exception of the Company Health Plan, one or more
independent Plan fiduciaries will determine whether to vote for or
against the implementation of the Plan of Conversion, following the
receipt of full written disclosure from the Company.
(e) In the case of the Company Health Plan, the Company Health Plan
Committee will determine whether to vote for or against the
implementation of the Plan of Conversion, but it will not otherwise
exercise investment discretion over the Company Health Plan's assets.
(f) Each Eligible Policyholder will have an opportunity to comment
on the Plan of Conversion and will be solely responsible for any
decisions that may permitted under the Plan of Conversion regarding the
Cash consideration to be received in the demutualization.
(g) The proposed exemption will allow Eligible Policyholders that
are Plans to receive Cash in exchange for their membership interests in
the Company, which will be extinguished, and neither the Company 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.
(h) All Plans that are Eligible Policyholders will participate in
the transactions and on the same basis as Eligible Policyholders that
are not Plans.
(i) The demutualization will not, in any way, change premiums or
reduce policy benefits, guarantees or other policy obligations of the
Company to its policyholders and contractholders.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 693-8556. (This is not a toll-free number.)
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 27th day of December, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 02-24 Filed 1-2-02; 8:45 am]
BILLING CODE 4510-29-P