[Federal Register: March 23, 2005 (Volume 70, Number 55)]
[Notices]
[Page 14716-14732]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23mr05-154]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-10993, et al.]
Proposed Exemptions; PAMCAH-UA Local 675 Pension Plan (Pension
Plan) (Collectively the Plans)
AGENCY: Employee Benefits Security 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 Employee Benefits Security
Administration (EBSA), 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 EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffitt.betty@dol.gov'', 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 Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations. PAMCAH-UA Local 675 Pension
Plan (Pension Plan); PAMCAH-UA Local 675 Training Fund (Training Fund)
(Collectively the Plans) Located in Honolulu, Hawaii [Exemption
Application Nos. D-10993 & L-10994].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August 10, 1990). If the exemption is
granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) The Training Fund's purchase (the
Purchase) of an improved parcel of real property (the Property) located
at 731 Kamehameha Highway, Pearl City, Hawaii from the Pension Plan;
and (2) a loan (the Loan) from the Pension Plan to the Training Fund to
finance the Purchase. This proposed exemption is subject to the
following conditions:
(a) The fair market value of the Property is established by an
independent, qualified, real estate appraiser that is unrelated to the
Plans or any party in interest;
(b) The Training Fund pays no more, and the Pension Plan receives
no less than the fair market value of the Property as determined at the
time of the transaction;
(c) The Pension Plan will, on irreversible default of the Training
Fund, reassume the ownership of the Property automatically without
[[Page 14717]]
requirement of a foreclosure and cancel the promissory note;
(d) Under the terms of the Loan, the Pension Plan in the event of
default by the Training Fund has recourse only against the Property and
not the against the general assets of the Training Fund;
(e) The terms and conditions of the Loan are not less favorable to
the Plans than those obtained in arm's-length transactions with
unrelated parties;
(f) The Plans will not pay any commissions or other expenses with
respect to the transaction;
(g) The Bank of Hawaii (BOH), acting as an independent, qualified
fiduciary for the Training Fund, has determined that the transactions
are in the best interest of the Training Fund and its participants and
beneficiaries;
(h) The First Hawaiian Bank (FHB), acting as an independent,
qualified fiduciary for the Pension Plan, has determined that the
transactions are in the best interest of the Pension Plan and its
participants and beneficiaries; and
(i) FHB will monitor the terms and conditions of the Loan
throughout the duration of the Loan and take whatever actions are
necessary to protect the rights of the Pension Plan.
Summary of Facts and Representations
1. The Plans are jointly trusteed Taft-Hartley style plans formed
and maintained pursuant to section 302(c)(5) of the Labor Management
Relations Act, as amended. The Plans are operated pursuant to a
collective bargaining agreement by and between Local Union 675 of the
United Association of Journeymen and Apprentice Plumbers and
Pipefitters of the United States and Canada AFL-CIO (the Union) and
various employers.
As of July 30, 2004, the Pension Plan had approximately 2,000
participants and total assets of $346,501,758 and the Training Fund had
approximately 1,030 participants and total assets of $1,858,697. The
participants of the Plans are engaged as plumbers, pipefitters, steam
fitters, welders, air condition, refrigeration and fire sprinklers
mechanics. The Union is headquartered in Honolulu, Hawaii, and
collectively bargains on behalf of the employees it represents in the
state of Hawaii.
2. The Plans are administered by an administrative office (Ad
Office) located in Honolulu, Hawaii. The geographical jurisdiction of
both Plans includes the state of Hawaii. The Ad Office is under the
control of a committee comprised of an employer trustee and a union
trustee (Ad Committee). The Ad Committee allocates the operating
expenses of the Ad Office by a reasonable charge to the various funds
and programs utilizing its services, subject to the approval of the
respective Plan for which administrative services are performed.
3. The Property consists of a 36,791 square foot land area with a
metal frame warehouse building with four individual bay units that are
adjacent to each other. Since September 1, 1991, the Training Fund has
leased a 15,840 square foot unit of the warehouse owned by the Pension
Plan. The Training Fund pays fair market value rent for the leased
premises. However, because the trustees of the Plans are the same, the
trustees were concerned about the leasing arrangement being a potential
prohibited transaction under 406(b)(2) of the Act. The Training Fund
applied for and received a prohibited transaction exemption from the
Department (Prohibited Transaction Exemption (PTE)) 93-80 (58 FR 60216,
November 15, 1993) for the leasing arrangement.
4. The Training Fund now seeks to purchase a fee simple interest in
the Property that includes the portion currently being leased from the
Pension Plan at fair market value.\1\ The Pension Plan owns the
Property in fee simple.
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\1\ The Department notes that the Purchase of the Property
involves a substantial percentage of Training Fund assets. The
Department expresses no opinion herein concerning the application of
section 404 of the Act to the amount of expenditure of Training Fund
assets for the Purchase of the Property. In this regard, the
Department notes that the fact that a transaction is the subject of
an exemption under section 408(a) of the Act does not relieve
fiduciaries or other parties in interest from the general fiduciary
responsibility provisions of section 404 of the Act. Section
404(a)(1)(A) and (B) of the Act requires, among other things, that a
fiduciary discharge his duties with respect to a plan solely in the
interest of the plan's participants and beneficiaries and in a
prudent fashion. Accordingly, it is the responsibility of the
fiduciaries to ensure that the purchase of the Property is prudent,
taking into account the costs and benefits associated with the
ownership of the Property.
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5. The Property was appraised by the real estate appraisal firm of
Yamaguchi & Yamaguchi, Inc. (the Appraiser). In an appraisal report
dated April 18, 2002, the Appraiser utilized the income approach to
place the fair market value of the Property at $2,500,000. On July 1,
2004, the Appraiser updated the appraisal report to reflect the
Property as valued at $2,590,000.
6. The Training Fund seeks to purchase the Property to have a rent-
free training facility; while the Pension Plan wishes to sell the
Property at fair market value and reinvest the proceeds in a
potentially higher yielding investment. The Training Fund currently
pays the Pension Plan $16,292.83 per month in rent and monthly common
area maintenance (CAM) for space it occupies on the Property. The
Pension Fund rents a 4,200 sq., ft. unit to an unrelated third party
for $4,578 per month in rent (including CAM). Additional potential
revenue may be realized from a 3,200 sq. ft. vacant unit located on the
Property.
7. BOH, acting as independent fiduciary for the Training Fund,
represents that under the terms of the Purchase, the Training Fund will
make a 10% down payment of the purchase price to the Pension Plan and
the balance will be financed by the Pension Plan pursuant to a purchase
money mortgage at 7% simple interest, for a term of 30 years, with
monthly payments estimated at $14,969.31 or $179,631.72 per annum. The
mortgage payment will be approximately $15,872.28 less per annum than
the current rent paid by the Training Fund.
As the landlord, the Training Fund will be responsible for CAM on
the vacant space, currently projected at $384 per month or $4,608 per
annum. Therefore, it is projected that the Training Fund will save
$11,264.28 per annum from the current rent payments. In addition, the
Training Fund will avoid increased rental rate increases. BOH,
represents; (a) That an independent appraisal has determined a market
value of the Property; (b) the Training Fund will secure a permanent
home for training the plumbers and pipefitters; (c) the mortgage
payments are estimated to be less than current rent payments resulting
in lower out of pocket expense for the Training Fund and (d) there is a
potential for increased income for the Training Fund when the vacant
space is leased. Based upon the review of the information submitted to
BOH, BOH represents that the Purchase of the Property and the Loan is
in the best interest of the Training Fund.
The applicant represents that if the Property had no other tenants,
the Training Fund would still be able to pay the debt service on its
own, since it is paying less for the debt service than it is paying in
rent. In addition, the common area maintenance expenses for the
building are paid by the tenant under the requirements of the tenant
lease, so there is an insignificant risk of repair and maintenance
costs reducing the cash flow to an extent which would prevent the
Training Fund from meeting its debt service requirements.
The Training Fund has been and is financially stable. The Labor
Agreement (the Agreement) covers a 5 year period beginning January 5,
2003 and ending January 5, 2008. The Agreement has been in existence
for approximately 40 years. The rate paid to the Training Fund has been
relatively stable for many years and is scheduled to increase
[[Page 14718]]
incrementally over the 5-year term of the Agreement from $1.20 to $1.60
per hour, an average increase of 7% per year. The Agreement resulted in
strengthening the Training Fund's ability to generate sufficient cash
flow for debt service purposes. Net assets available for benefits have
been increasing since the year 2000. As a practical matter, since the
leaders of the plumbing and pipefitting industry are the trustees of
the Plans in addition to being the employer's collective bargaining
representatives, it is anticipated that the Training Fund has
sufficient funding to meet its obligations by adjusting the
contribution rate as needed.
8. FHB will serve as the independent fiduciary for the Pension
Plan. FHB has determined the proposed interest rate for the Loan is at
market. Additionally, the current cash flow and liquidity of the
Training Fund are adequate to service a 30-year loan at a 7% interest
rate. The loan documents supporting the Loan adequately secure the
Pension Plan's lien position. Assuming the purchase price will be fair
market value at the time of the transaction, FHB is of the opinion that
the sale is prudent and beneficial to the Pension Plan. FHB will
monitor the terms and conditions of the Loan throughout the duration of
the Loan and take whatever actions are necessary to protect the rights
of the Pension Plan.
9. If the Training Fund becomes unable to pay the debt service, the
Pension Plan would either foreclose on the mortgage or negotiate a work
out agreement with the Training Fund to pay the delinquency. FHB
represents that the Pension Plan will, on irreversible delinquency of
the Training Fund, reassume the ownership of the Property automatically
without requirement of a foreclosure and cancel the promissory note.
Notwithstanding the foregoing, the Pension Fund is entitled to all
moneys owed up to the date of default.
10. In summary, the applicant states that the transactions have
satisfied the statutory criteria of section 408(a) of the Act because:
(a) The fair market value of the Property is established by an
independent, qualified, real estate appraiser that is unrelated to the
Plans or any party in interest; (b) the Training Fund pays no more, and
the Pension Plan receives no less than the fair market value of the
Property as determined at the time of the transaction; (c) the Pension
Plan will, on irreversible default of the Training Fund, reassume the
ownership of the Property automatically without requirement of a
foreclosure and cancel the promissory note; (d) under the terms of the
Loan, the Pension Plan in the event of default by the Training Fund has
recourse only against the Property and not against the general assets
of the Training Fund; (e) the terms and conditions of the Loan are not
less favorable to the Plans than those obtained in arm's-length
transactions with unrelated parties; (f) the Plans will not pay any
commissions or other expenses with respect to the transaction; (g) BOH,
acting as an independent, qualified fiduciary for the Training Fund,
has determined that the transactions are in the best interest of the
Training Fund and its participants and beneficiaries; (h) FHB, acting
as an independent, qualified fiduciary for the Pension Plan, has
determined that the transactions are in the best interest of the
Pension Plan and its participants and beneficiaries; and (i) FHB will
monitor the terms and conditions of the Loan throughout the duration of
the Loan and take whatever actions that are necessary to protect the
rights of the Pension Plan.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Khalif I. Ford of the Department,
telephone (202) 693-8540. (This is not a toll-free number.) R.G. Dailey
Company, Inc. Defined Benefit Plan (the Plan) Located in Ann Arbor,
Michigan [Application No. D-11212].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code \2\, shall not apply to the in
kind contributions made to the Plan on August 12, 1999, June 12, 2000,
May 17, 2001, and March 21, 2002 by the Employer, a disqualified person
with respect to the Plan, of certain publicly-traded securities (the
Securities), provided: (a) Each contribution was a one-time
transaction; (b) the Securities were valued at their fair market value
as of the date of the contribution, as listed on a national securities
exchange; (c) no commissions were paid in connection with the
transactions; (d) the terms of the transactions between the Plan and
the Employer were no less favorable to the Plan than terms negotiated
at arm's length under similar circumstances between unrelated parties;
and (e) Mr. Dailey, who was the only person affected by the
transactions, believes that the transactions were in the best interest
of the Plan.
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\2\ Because Mr. Robert M. Dailey was the sole sponsor of R.G.
Dailey Company, Inc. (the Employer) and the only participant in the
Plan, there is no jurisdiction under Title I of the Employee
Retirement Income Security Act of 1974 (the Act). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
Effective Date: If granted, this proposed exemption will be effective
as of August 12, 1999, June 12, 2000, May 17, 2001, and March 21, 2002
for in kind contributions of Securities to the Plan occurring on these
dates.
Summary of Facts and Representations
1. The Employer, which is no longer in existence, was a Michigan
corporation located at 1523 Edinborough Road, Ann Arbor, Michigan. The
Employer was a manufacturer's representative company. The firm
represented companies which molded plastics and were engaged in metal
stamping (primarily, but not exclusively) of automotive parts.
2. The Plan, which is also no longer in existence, was a defined
benefit plan established by the Employer effective April 1, 1995. The
Plan was always a sole participant plan. Mr. Robert M. Dailey, the
President and sole shareholder of the Employer, was the trustee of the
Plan as well as its only participant. On May 31, 2002, the Plan was
terminated, after Mr. Dailey decided to dissolve the Employer. Also as
of that date, the Plan had $572,730 in aggregate assets.
3. In order to satisfy the Employer's contribution requirements to
the Plan, Mr. Dailey, on behalf of the Employer, transferred certain
publicly-traded securities to the Plan's trust account between August
12, 1999 and March 21, 2002. The Securities were issued by unrelated
companies and held in the Employer's corporate account with Morgan
Stanley. Specifically,
a. On August 12, 1999, the Employer contributed to the Plan 2,300
shares of stock issued by America Service Group, Inc. (ASGR) and 4,500
shares of Matria Healthcare, Inc. (MATR) stock. The ASGR stock is
listed on the National Association of Securities Dealers Automatic
Quotation System (NASDAQ). The MATR stock is also listed on the NASDAQ.
[[Page 14719]]
On the date of contribution, the ASGR stock had a fair market value
of $14 per share (or an aggregate fair market value of $32,200) \3\ and
the MATR stock had a fair market value of $5.94 per share (or a total
fair market value of $26,730). (Thus, the total amount of the
contribution was $58,930). At the time of the contribution, the Plan
had total assets of $201,065.
b. On June 12, 2000, the Employer contributed to the Plan 4,000
shares of stock issued by Input/Output, Inc. (IO), an additional 2,000
shares of ASGR stock, and 500 shares of Countrywide Credit Industries,
Inc. (CFC) stock. The IO is listed on the New York Stock Exchange
(NYSE). As noted above, the ASGR stock is listed on the NASDAQ. The CFC
stock is listed on the NYSE.
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\3\ On the date of contribution, ASGR stock had a trading volume
of 10,800 shares.
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On the date of contribution, the IO stock had a fair market value
of $7.25 per share (or an aggregate fair market value of $29,000), the
ASGR stock had a fair market value of $16.00 per share (or an aggregate
fair market value of $32,000),\4\ and the CFC stock had a fair market
value of $33.75 per share (or a total fair market value of $16,875).
(Thus, the total amount of the contribution was $77,875). At the time
of the contribution, the Plan had total assets of $260,495, excluding
the aforementioned contributed Securities. c. On May 17, 2001, the
Employer contributed to the Plan 2,000 shares of stock issued by
Navigant Consulting, Inc. (NCI), an additional 1,000 shares of IO
stock, and 8,000 shares of stock issued by Champion Enterprises, Inc.
(CHB). The NCI is listed on the NYSE. As noted above, the IO stock is
listed on the NYSE. The CHB stock is listed on the NYSE.
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\4\ On the date of contribution, ASGR stock had a trading volume
of 21,00 shares.
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On the date of contribution, the NCI stock had a fair market value
of $7.00 per share (or an aggregate fair market value of $14,000), the
IO stock had a fair market value of $12.55 per share (or an aggregate
fair market value of $12,550), and the CHB stock had a fair market
value of $10.96 per share (or a total fair market value of $87,680).
(Thus, the total amount of the contribution was $114,230). At the time
of the contribution, the Plan had total assets of $316,432, excluding
the aforementioned contributed Securities.
d. On March 21, 2002, the Employer contributed to the Plan 3,000
shares of stock issued by Fleetwood Enterprises, Inc. (FLE) and 800
shares of stock issued by Patterson UTI Energy, Inc. (PTEN). The FLE
stock is listed on the NYSE. The PTEN stock is listed on the NASDAQ.
On the date of contribution, the FLE stock had a fair market value
of $9.72 per share (or an aggregate fair market value of $29,160) and
the PTEN stock had a fair market value of $27.30 per share (or a total
fair market value of $21,840). (Thus, the total amount of the
contribution was $51,000). At the time of the contribution, the Plan
had total assets of $337,669, excluding the aforementioned contributed
Securities. 4. The Plan paid no fees or commissions in connection with
the in kind contribution transactions, each of which was a one-time
transaction. The Securities were valued at their closing prices, as
listed on the applicable exchanges, on the date of each transaction.
Accordingly, an administrative exemption is requested from the
Department. If granted, the exemption would be effective on August 12,
1999, June 12, 2000, May 17, 2001 and March 21, 2002, which are the
dates the Employer contributed the Securities to the Plan.
5. Mr. Dailey represents that he made the in kind contributions of
the Securities in error. However, he indicates that he first consulted
with his accountant, Mr. Philip R. Heller of Heller & Wetzler of
Ypsilanti, Michigan, regarding the form of the contribution. Mr. Dailey
states that he was advised by Mr. Heller that care would need to be
taken to ensure that the Securities were appropriately valued and the
Employer could recognize the capital gains accrued as of the date of
the transfer. In the years thereafter, Mr. Dailey says he again caused
the Employer to make in kind contributions of Securities to the Plan
after consulting with Mr. Heller. Mr. Dailey asserts that at no time
was he ever informed by Mr. Heller that the transactions were
prohibited. Upon learning from his attorney that the in kind
contributions were prohibited transactions, Mr. Dailey explains that he
instructed his legal counsel to request an administrative exemption
from the Department.
6. Mr. Heller explains that he first became aware of the in kind
contribution transactions while performing year-end accounting services
for the Employer. At that time, he states that he was not aware that
such transactions were prohibited because his only concerns were that
the transfers were properly treated as sales on the Employer's books,
that gains or losses were properly recognized, and that the Employer's
pension expense was properly valued. Mr. Heller indicates that he
discussed these matters with Mr. Dailey.
Mr. Heller also states that while he was generally aware of the
prohibited transaction rules of the Act and the Code, he never
conceived that the transfers were prohibited because Mr. Dailey was the
only employee of the Employer, the sole participant in the Plan, and
the Plan Administrator. As Plan Administrator, Mr. Heller states that
Mr. Dailey was highly-qualified to evaluate and select investments for
the Plan. Mr. Heller further states that the only benefit derived by
either the Employer or the Plan from the in kind contributions was the
avoidance of transaction costs.
7. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory requirements for an exemption
under section 4975(c)(2) of the Code because:
(a) Each contribution was a one-time transaction.
(b) The Securities were valued at their fair market value as of the
date of the contribution as listed on a national securities exchange.
(c) No commissions were paid in connection with the transactions.
(d) The terms of the transactions between the Plan and the Employer
were no less favorable to the Plan than terms negotiated at arm's
length under similar circumstances between unrelated parties.
(e) Mr. Dailey, who was the only person affected by the
transactions, believes that the transactions were in the best interest
of the Plan.
Notice to Interested Persons
Because Mr. Dailey was the only participant in the Plan who was
affected by the transactions, it has been determined that there is no
need to distribute the notice of proposed exemption to interested
persons. Therefore, comments and requests for a hearing are due 30 days
after publication of the notice of pendency in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the
Department at (202) 693-8566. (This is not a toll-free number.)
Mutual Service Life Insurance Company (MSL), Located in Arden Hills, MN
[Application No. D-11267]
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
[[Page 14720]]
forth in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).\5\
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\5\ 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 Transaction
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply, effective January 1, 2005, to the receipt of
cash (Cash) or policy credits (Policy Credits) by any eligible member
(Eligible Member), including an Eligible Member which is an employee
benefit plan (within the meaning of section 3(3) of Act), an individual
retirement annuity (within meaning of section 408(b) or 408(A) of the
Code), or a tax sheltered annuity (within the meaning of section 403(b)
of the Code)(each a Plan), including Plans sponsored by MSL for its
employees (the MSL Plans), in exchange for the termination of such
Eligible Member's membership interest in MSL, in accordance with the
terms of a plan of conversion (the Plan of Conversion) adopted by MSL
and implemented pursuant to Minnesota Statues Section 60A.075 (2003).
Section II. General Conditions
This proposed exemption is subject to the following conditions:
(a) The Plan of Conversion was subject to approval, review and
supervision by the Minnesota Commissioner of Commerce (the
Commissioner) and was implemented in accordance with procedural and
substantive safeguards that are imposed under the laws of the State of
Minnesota.
(b) The Commissioner reviewed the terms of the options that were
provided to Eligible Members of MSL as part of such Commissioner's
review of the Plan of Conversion, and approved the Plan of Conversion
following a determination that such Plan of Conversion was fair and
equitable to all Eligible Members.
(c) Each Eligible Member had an opportunity to vote at a special
meeting to approve the Plan of Conversion after full written disclosure
was given to the Eligible Member by MSL.
(d) Any determination to receive Cash or Policy Credits by an
Eligible Member, which was a Plan, pursuant to the terms of the Plan of
Conversion, was made by one or more Plan fiduciaries that were
independent of MSL and its affiliates, and neither MSL nor any of its
affiliates exercised any discretion or provided investment advice,
within the meaning of 29 CFR 2510.3-21(c), with respect to such
decisions.
(e) After each Eligible Member was allocated a fixed amount of
consideration (Fixed Consideration) equivalent to approximately $400,
such Eligible Member also received a variable amount of consideration
(Variable Consideration) for each policy owned by the Eligible Member
on September 30, 2003 (the Record Date) (Variable Component Policy) to
reflect the Eligible Member's estimated past and future contributions
to surplus as determined by an actuarial formula (approved by the
Commissioner) based on specific features of the policies owned by the
Eligible Member on September 30, 2003 (the Actuarial Calculation Date).
(f) In the case of a MSL Plan, the independent Plan fiduciary (the
Independent Fiduciary):
(1) Voted on whether to approve or not to approve the
demutualization;
(2) Elected between consideration in the form of Cash or Policy
Credits on behalf of such MSL Plans;
(3) Reviewed and approved MSL's allocation of Cash or Policy
Credits received for the benefit of the participants and beneficiaries
of the MSL Plans;
(4) Would provide the Department with a complete and detailed final
report as it related to the MSL Plans prior to the granting of the
exemption; and
(5) Would take all actions that were necessary and appropriate to
safeguard the interests of the MSL Plans and their participants and
beneficiaries.
(g) All Eligible Members that were Plans participated in the
transaction on the same basis as all Eligible Members that were not
Plans.
(h) No Eligible Member paid any brokerage commissions or fees in
connection with the receipt of Policy Credits.
(i) All of MSL's policyholder obligations remained in force and
were not affected by the Plan of Conversion.
(j) The terms of the transactions were at least as favorable to the
Plans as an arm's length transaction with an unrelated party.
Effective Date: If granted, this proposed exemption will be
effective as of January 1, 2005.
Section III. Definitions
For the purposes of this proposed exemption,
(a) The term ``MSL'' means Mutual Service Life Insurance Company
and any affiliate of MSL, as defined below in Section III(b).
(b) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with MSL; and
(2) Any officer, director, or partner in any such person.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Independent Fiduciary'' means a fiduciary who is:
(1) Independent of and unrelated to MSL and its affiliates, and (2)
appointed to act on behalf of the MSL Plans with respect to the
demutualization of MSL. For purposes of this proposed exemption, a
fiduciary will not deemed to be independent of and unrelated to MSL if:
(1) Such fiduciary directly or indirectly controls, is controlled by or
is under common control with MSL; (2) such fiduciary directly or
indirectly receives any compensation or other consideration in
connection with any transaction described in this proposed exemption,
except that an Independent Fiduciary may receive compensation for
acting as an Independent Fiduciary from MSL in connection with the
transactions contemplated herein if the amount of payment of such
compensation is not contingent upon or in any way affected by the
Independent Fiduciary's ultimate decision; and (3) the annual gross
revenue received by such fiduciary from MSL and its affiliates during
any year of its engagement, does not exceed 5 percent (5%) of the
Independent Fiduciary's annual gross revenue from all sources for its
prior tax year.
(e) An ``Eligible Member'' means a person (an individual,
corporation, joint venture, limited liability company, association,
trust, trustee, unincorporated entity, organization or government or
any department or agency thereof) who is an owner of a policy that is
in force on the Record Date, i.e., September 30, 2003.
(f) ``Policy Credit'' means consideration to be paid in the form of
an increase in cash value, account value, dividend accumulations, face
amount, extended term period or benefit payment, as appropriate,
depending on the policy.
(g) ``Effective Date'' means the date of the demutualization, which
occurred on January 1, 2005.
(h) ``The Plan of Conversion'' means the process by which MSL will
convert from a mutual life insurance company to a stock life insurance
company, and following consummation of the Stock Purchase Agreement,
will thereafter continue its corporate existence without interruption
as a wholly owned subsidiary of Country Life Insurance
[[Page 14721]]
Company (CLIC). MSL's conversion to a stock insurance company occurred
on the Effective Date (i.e., January 1, 2005) and was subject to the
conditions contained in the Plan of Conversion.
Summary of Facts and Representations
MSL and Affiliated Entities
1. MSL was formerly a mutual life insurance company organized under
Chapter 300 and 60A of the Minnesota Statutes. It has been part of an
affiliated group of companies (herein, the MSI Group) \7\ since
inception. MSL was incorporated in Minnesota in 1934, and since its
incorporation, MSL has been closely affiliated with Mutual Service
Casualty Insurance Company (MSCIC), a mutual insurance company formed
in Minnesota in 1919. Later, MSL became affiliated with Mutual Service
Cooperative (MSC), a service cooperative formed in Minnesota in 1941.
The MSI Group arose during the farmer cooperative movement of the early
twentieth century and both MSL and MSCIC were originally created to
provide insurance for agricultural associations, cooperatives and
individual farmers. The MSI Group was operated independently until it
entered into certain alliances with the companies that comprise COUNTRY
Insurance & Financial Services (herein, the Country Group).
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\7\ The MSI Group, as of 1999, prior to entering into the
alliances described herein, formerly consisted of two mutual
insurance companies (Mutual Service Life Insurance Company and
MSCIC), two stock insurance companies (MSI Insurance Company and
Modern Service Insurance Company), MSC, Cornwall and Stevens (a
specialty agribusiness insurance broker), Pension Solutions, Inc.
(PSI) (an organization that administered pension plans); and the MSI
Insurance Foundation.
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As a mutual insurance company, MSL did not have capital stock but
instead had members (Members) who were the owners of policies and
contracts issued by MSL. A policyholder's membership interest in MSL
included the right to vote in membership meetings and the right to
participate in the distribution of MSL's surplus in the event of MSL's
voluntary dissolution or liquidation.
2. MSL's core function in the MSI Group was to sell life insurance
and annuity products, while the purpose of MSCIC was to sell property
and casualty insurance. The two companies maintained a separate
existence because life insurance companies may not lawfully sell
property casualty insurance, and property and casualty insurance
companies may not sell life insurance. MSC served as the link between
the two companies. Through MSC, MSL and MSCIC shared common management,
common board members, and distributed products through the same captive
agency system. Certain policyholder members of each of the mutual
insurance companies became members of the MSC cooperative. Together,
MSL, MSCIC, and MSC \8\ (collectively, the MSI Group), developed
strategic business plans and implemented such plans as an integrated
organization. Many policyholders of MSL are also policyholders of
MSCIC.
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\8\ MSC historically served as fiscal agent for both mutual
companies, MSCIC and MSL, such that neither company had any
employees of its own. All MSI Group employees were employees of MSC
and MSC employees conducted the day-to-day operations of the
insurance companies pursuant to a management contract. MSC also
controlled governance of the companies through its appointment as
attorney in fact for policyholders. Applicants for policies with MSL
and MSCIC were asked, as part of their application, to name the
board of directors of MSC as attorney in fact for the purpose of
appointing proxies to vote at annual meetings of both companies.
Each year the MSC board of directors would designate a
representative to vote proxies at the annual meetings of MSL and
MSCIC and would thereby create a unified board of directors for the
two insurance companies. MSC has also served as general agency for
both, MSL and MSCIC.
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3. Between 1999 and later in 2002, the MSI Group entered into a
series of agreements and relationships with CLIC, a stock life
insurance company organized under the laws of Illinois, and CLIC's
affiliates. These became known as the First and Second Alliances. Under
these agreements, CLIC agreed to provide MSL with various
administrative services, reinsurance, and surplus contributions in
exchange for notes. Among other things, the agreements required MSL to
issue a Surplus Note and Guaranty Fund Certificate to CLIC in the
aggregate amount of $5,000,000. Under the terms of the Guaranty Fund
Certificate and as required by Minnesota Law, CLIC was given control of
a majority of the Board of Directors of MSL.
Background Leading to the First Alliance
4. During the late 1990s, property and casualty losses for MSCIC
exceeded projections, leading to a decrease in available surplus at
MSCIC. Given the decrease in available surplus at MSCIC, the MSI Group
considered its options to strengthen MSCIC's financial position, and
led ultimately to the negotiations of an alliance with the Country
Group.
5. The Country Group consists of a number of companies engaged in
financial and insurance services. The ultimate controlling entity of
the Country Group is the Illinois Agricultural Association, located in
Bloomington, Illinois, a not-for-profit agricultural membership
organization, more commonly known as the ``Illinois Farm Bureau.'' One
of the companies within the Country Group is CLIC. More than 98% of
CLIC's voting securities are indirectly owned (through a subsidiary) by
the Illinois Agricultural Association. The MSI Group and the Country
Group had similar histories, philosophies and agribusiness market focus
and were well known to each other. On November 30, 1999, the MSI Group
and the Country Group signed the First Alliance Agreements. The Country
Group agreed to infuse cash of $5 million into MSL and $17 million into
MSCIC in the form of surplus notes, and the MSI Group agreed to make
its captive agency distribution system available to the Country Group.
There were no changes in the governance structure or management team of
the MSI Group. The First Alliance became effective in June 2000.
Because CLIC was perceived by the MSI Group sales force as having
life insurance and annuity products superior to those offered by MSL,
and because it would have been extremely expensive for MSL to develop
comparable products, the MSL Board of Directors concluded, as a part of
the First Alliance, that it would no longer sell MSL insurance products
in any state in which CLIC products could be offered. At the same time,
CLIC agreed to reinsure to MSL 40% of the risks arising from the sale
of CLIC products through the MSI Group distribution system. This
reinsurance arrangement allowed MSL to share in 40% of the profits and
losses for those products.
Also as part of the First Alliance, a new entity, MSI Preferred
Services, Inc. (MSI Preferred), was formed. MSI Preferred is owned 60%
by the Country Group's primary property casualty insurer, Country
Mutual Insurance Company, and 40% by MSCIC. MSI Preferred serves as
general agent for the MSI Group to conduct captive agency sales,
including sales on behalf of MSL. In accordance with the First
Alliance, MSC assigned all agency contracts and appointments to MSI
Preferred.
Background Leading to the Second Alliance
6. The MSI Group continued to incur financial losses after the
First Alliance became effective. In January 2001, the A.M. Best Company
advised the MSI Group management that MSCIC's rating was in danger of
being reduced from ``B++'' to ``B+'' based upon year-end surplus
projections. The boards of directors of the MSI Group companies
concluded that this rating downgrade might force the MSI Group to exit
the property and casualty insurance
[[Page 14722]]
marketplace. The Country Group expressed willingness to infuse
additional surplus into the MSI Group, but only on the condition that
the Country Group obtain management and board control of all MSI Group
companies, including MSL.
After careful consideration of its strategic alternatives,
including the possible sale of MSL, the boards of directors of each of
the MSI Group companies agreed to the Country Group's control-related
conditions. A restructuring of the First Alliance was signed on July
26, 2001. The restructuring and change of control of MSL was approved
by the policyholder members of MSL in a special meeting of the members
held on October 23, 2001, and was approved by the Minnesota Department
of Commerce on November 2, 2001. This series of inter-related
agreements became known as the Second Alliance, which became effective
November 15, 2001.
7. Under the Second Alliance, the $5 million surplus note that CLIC
received from MSL under the First Alliance Agreement was restructured
into a $4.5 million surplus note and guaranty fund certificate of
$500,000. As permitted by Minnesota law, the guaranty fund certificates
permitted CLIC to elect a majority of the MSL Board of Directors. (CLIC
currently appoints four of MSL's directors and MSC appoints the
remaining three.) \9\
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\9\ MSC has assigned its power of attorney to elect board
members on behalf of policyholders to the respective boards of the
insurance companies.
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As part of the Second Alliance, the Country Group was also given
the future right to acquire the employees and certain assets of MSC.
The Country Group exercised these rights on September 1, 2002 pursuant
to an Assignment and Assumption Agreement and Bill of Sale. Under this
agreement, MSC transferred all rights and interests in its
relationships with MSI Group employees, including sponsorship of all
employee benefit plans, to MSI Preferred.\10\
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\10\ The assignment and assumption agreement was actually
between MSC and ``MSI Subsidiary''; MSI Subsidiary, in turn, was
merged into MSI Preferred in a simultaneous transaction dated
September 1, 2002.
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Also as part of the Second Alliance, MSL entered into a series of
new service and expense allocation agreements with CLIC and the Country
Group affiliates. MSL entered into management and expense agreements
with MSI Preferred under which MSL and MSCIC continued to share
services of MSI Group employees. MSL also entered into agreements with
CLIC and Country Trust Bank through which those entities provide
various financial, investment advisory, marketing, information,
trustee, and operational services.\11\
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\11\ MSL experienced three significant developments related to
its business operations after the Second Alliance became effective.
First, the pension business conducted by a subsidiary of MSL, PSI,
was discontinued due to a lack of profitability and its assets were
sold to an unrelated party on June 2, 2003. Second, the number of
states in which the MSI Group agency force sold MSL products
dwindled as CLIC received approval to sell insurance in an
increasing number of states. Third, effective January 1, 2003, MSL
and CLIC entered into a reinsurance agreement whereby the MSL
transferred 90% of its risk on both in force and new business to
CLIC on a modified coinsurance basis.
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Background to the Sponsored Demutualization
8. After reviewing MSL's strategic alternatives \12\ throughout
2003, the MSL Board of Directors (the MSL Board) ultimately concluded
that a sponsored demutualization \13\ represented the best course of
action for MSL's Members. There were two primary considerations in the
MSL Board's analysis. First, because MSL was not writing any
significant number of new policies, no new Members were being added.
Since the number new MSL Members would only decrease over time as
policies were paid or lapsed, the MSL Board concluded that a
demutualization would potentially benefit a larger number of Members
than would be the case in the future. Second, CLIC expressed an
interest in purchasing, which action was thought to be a logical
extension of the prior affiliation, with the benefit to CLIC being a
simplified structure and governance.
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\12\ MSL represents that the strategic alternatives considered
by the MSL Board included: (a) The sale of MSL to an unrelated
entity, (b) the merger or consolidation of MSL with other mutual
insurance companies, (c) a possible liquidation under the provisions
of Minnesota law, (d) a sponsored demutualization (with Country
purchasing the stock of MSL at fair value), or (e) maintaining the
status quo.
\13\ A sponsored demutualization occurs when a mutual insurance
company is converted to a stock company and then the stock is
immediately sold to a third party. The conversion of MSL is
considered a sponsored demutualization with the sponsor being CLIC.
Under the Plan of Conversion, which was approved by the Commissioner
on December 21, 2004, CLIC purchased all of the voting stock MSL and
became its sole shareholder as of January 1, 2005.
---------------------------------------------------------------------------
Therefore, the MSL Board believed a sponsored demutualization would
be an extension of the First Alliance and the Second Alliance between
the MSI Group and the Country Group. Given that the MSI Group entities
were already controlled by the Country Group, and given the increased
integration between the two groups, the MSL Board believed it would be
a logical progression for CLIC to consider the purchase and ownership
of MSL.
9. On August 28, 2003, the MSL Board decided to pursue the
possibility of a sponsored demutualization with CLIC. Because the MSL
Board was controlled by CLIC pursuant to the Second Alliance, the MSL
Board appointed a Special Committee of Independent Members of the Board
of Directors (the Special Committee) to represent the interests of MSL
policyholders. The Special Committee was comprised of the three MSL
directors who previously had been appointed by policyholder action and
who had not been appointed by CLIC. Prior to CLIC obtaining control of
the MSL Board, none of these three individuals had any prior
relationship with the Country Group.
10. The Special Committee was asked to review, consider, and
negotiate a possible transaction with CLIC. Because the Minnesota
Conversion Act (the Conversion Act) requires the full board of
directors of a converting mutual insurance company to adopt a plan of
conversion, the Special Committee was required to recommend (either
favorably or unfavorably) such a transaction to the MSL Board following
completion of the Special Committee's work. Once established, the
Special Committee retained its own expert actuarial, financial and
legal advisors to assist it in its review of the proposed sponsored
demutualization.
The Special Committee concluded that it was appropriate for MSL to
undertake a sponsored demutualization whereby MSL would convert from a
mutual life insurance company into a stock life insurance company (the
Conversion), and immediately following the Conversion, would issue its
entire capital stock to the sponsor of the demutualization, CLIC, in
accordance with the provisions of a Plan of Conversion and Section
60A.075 \14\ of the Minnesota Statutes.
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\14\ Section 60A.075 of the Conversion Act sets forth procedural
and substantive requirements to ensure that the Conversion will be
fair and equitable to MSL Members.
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11. As an insurance company, MSL provides a variety of insurance
products to ERISA-covered employee benefit plans and to other plans
described under the Code. MSL has marketed its products to employee
benefit plans, and had, as of December 31, 2003, 430 in force policies
and contracts held on behalf of employee pension and profit sharing
plans (including Code Section 401(k) plans) and 10 contracts providing
welfare benefit plan coverage such as group life, short and long term
disability, accidental death and dismemberment, and group health
coverage.
[[Page 14723]]
Although a wholly owned subsidiary of MSL, PSI, formerly provided
certain administrative services and record-keeping services to many of
these pension and profit sharing plans. On April 15, 2003 the assets of
PSI, including all customer contracts, were sold to Alerus Financial,
National Association, an unrelated party. Thus, neither MSL nor any
affiliated company currently remains in the business of ERISA plan
administration.
12. In its capacity as a business, MSL does not have any employees.
Instead, all employees of the MSI Group are employees of MSI Preferred.
As of September 30, 2003, MSI Preferred sponsored the following MSL
Plans that will qualify as Eligible Members under the Plan of
Conversion:
----------------------------------------------------------------------------------------------------------------
Participant Expected
Plan name Plan type totals Asset totals consideration
----------------------------------------------------------------------------------------------------------------
MSI Employees Capital Accumulation Defined Contribution 542 $33,368,551 $400
Plan and Trust. with CODA. (7/4/04) (7/4/04)
MSI Employees Defined Contribution Defined Contribution 526 29,004,089 400
Retirement Plan. (7/4/04) (7/4/04)
MSI Employees' Life Insurance Plan Life Insurance 364 0 326,979.53
Welfare Benefit (7/4/04)
Plan.
Mutual Service Agent's Group Life Insurance 73 0 275,880.67
Insurance Plan (Terminated 12/31/ Welfare Benefit (12/31/03)
03). Plan.
----------------------------------------------------------------------------------------------------------------
13. MSL believes that it has never directly provided plan
administration services to Plan policyholders and that none of its
affiliates currently provides such services to Plan policyholders.
However, MSL cannot rule out the possibility that it has provided some
services to one or more Plan policyholders. Accordingly, while MSL
believes that it is not a party in interest with respect to any such
Plans under section 3(14)(A) and (B) of the Act or the related
``derivative'' provisions of section 3(14) of the Act, it cannot rule
out the possibility that such a party in interest relationship may be
found to exist. MSL notes that on the Record Date, PSI sponsored four
employee benefit plans that utilized, at least in part, MSL policies.
Therefore, MSL is seeking an exemption in order to avoid the occurrence
of inadvertent prohibited transactions in connection with the
implementation of the Plan of Conversion. If granted, the proposed
exemption would cover the receipt of Cash or Policy Credits by all
Eligible Members that are Plans, in exchange for such Plan's existing
membership interests and rights in MSL's surplus.
The proposed exemption has been made retroactive to January 1,
2005, the Effective Date of the demutualization. It includes a
requirement that distributions to Plans pursuant to the exemption were
on terms no less favorable to the Plans than an arm's length
transaction between unrelated parties. In this regard, Eligible Members
that are Plans to which MSL is a party in interest were not treated
differently from any other Eligible Member, except that some Eligible
Members which were Plans, were entitled to receive Policy Credits
rather than Cash.
The MSL Demutualization
14. Pursuant to Chapters 300 and 60A of the Minnesota Statutes, MSL
converted to a stock company. In the event of such a demutualization,
Eligible Members were entitled to receive consideration in the form of
stock, cash, or such other consideration permitted under Minnesota
Statutes and approved by the Commissioner.
Also, in accordance with the Plan of Conversion, MSL converted from
a mutual life insurance company to a stock life insurance company and
thereafter is continuing its corporate existence without interruption
as a wholly owned subsidiary of CLIC. The corporate existence of MSL is
a continuation of MSL's corporate existence without interruption from
its original date of incorporation, and all of MSL's rights,
privileges, powers, permits and licenses and all of its duties,
liabilities and obligations will remain as they were immediately prior
to the Conversion and continue unaffected by the Conversion, except
that all membership interests have been extinguished.
15. In addition, all MSL policies in force on the Effective Date of
the Conversion will remain in force under the terms of those policies,
except that any voting rights of the members provided for under the
terms of those policies were extinguished on such Effective Date. All
other instruments in force at Conversion and not considered policies
such as certificates of coverage will likewise continue in full force
and effect and all contract rights under those instruments will remain
as they existed prior to Conversion.
Because all membership interests by Eligible Members of MSL have
been extinguished, as soon as reasonably practicable following
Conversion (but in any event no more than 75 days following the
Effective Date unless an extension of time is approved by the
Commissioner), MSL is required to (a) issue Policy Credits to Eligible
Members that are entitled to receive Policy Credits and deliver a
policy statement to each of those Eligible Members confirming the
effect of the Policy Credits on the policy's value or benefits; and (b)
distribute Cash, by check, net of any applicable withholding tax, to
Eligible Members that are to receive Cash consideration pursuant to the
proposed Plan of Conversion.\15\
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\15\ ``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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16. Immediately following the Conversion, in consideration of
CLIC's payment of the purchase price, MSL issued and delivered two
million shares of its Class A Common Stock to CLIC, representing all of
MSL's voting stock then issued and outstanding, all in accordance with
the terms and subject to the conditions contained in the Stock Purchase
Agreement between MSL and
[[Page 14724]]
CLIC. The closing date, as described in the Stock Purchase Agreement,
was the Effective Date of the Conversion as agreed upon by MSL and CLIC
subject to the Commissioner's approval.
17. The MSL Board believed the Conversion would serve the best
interests of MSL and its policyholders by (a) making MSL a member of
the Country Group; (b) enabling MSL to benefit from efficiencies
derived from direct ownership by CLIC and being a member of the Country
Group; (c) allowing for distribution of the embedded value of MSL to
policyholders in the form of Cash or Policy Credits, as described in
the proposed Plan of Conversion; and (d) distributing MSL's value to
policyholders in an equitable manner and at an appropriate time prior
to significant runoff of policies following discontinuation of the sale
of new business.
Procedural Requirements Under Minnesota Law for Demutualization
18. Section 60A.075 of the Conversion Act sets forth procedural and
substantive requirements to ensure that the Conversion would be fair
and equitable to MSL policyholders. The Conversion Act generally
provides that a mutual life insurance company may become a stock life
insurance company under a Plan of Conversion established and approved
in the manner provided by the Conversion Act. The Commissioner is
required to approve the fairness and equity of a Plan of Conversion
with respect to policy-owners of a company undergoing demutualization.
More specifically, Section 4(e) of the Conversion Act requires that the
Commissioner review the Plan of Conversion to determine whether it
complies with all provisions of law and is fair and equitable to the
mutual company and its policy owners. Additionally, the Commissioner
may order a hearing on the fairness and equity of the terms of the Plan
of Conversion. Eligible Members and other interested persons would have
a right to appear at the hearing.
Section 5(d)(1) of the Conversion Act requires that the Plan of
Conversion be approved by majority of the Eligible Members of the
mutual company who vote on it. The statute requires that notice be
given to the Eligible Members and permits voting by ballot, in person,
or by proxy. The notice of meeting and election must contain a copy of
the Plan of Conversion or a summary of such Plan.\16\
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\16\ The Conversion Act defines the class of policyholders
entitled to receive notice and to vote on the Plan of Conversion,
Eligible Members, as generally including policyholders whose
policies or contracts are in force on the Record Date, which is the
date of adoption of the Plan of Conversion or another date as
approved by the Commissioner. (MSL had requested and received
approval from the Commissioner for a Record Date of September 30,
2003.)
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Section 13 of the Conversion Act provides that, after the Plan of
Conversion has been approved by the Commissioner and the policyholders,
the reorganized company will be a continuation of the mutual company
and that the conversion will not annul or modify any of the mutual
company's existing suits, contracts, or liabilities except as provided
in the Plan of Conversion. Furthermore, all rights, franchises, and
interests of the mutual company in and to property, assets, and other
interests will be transferred to and vest in the reorganized company,
and the reorganized company will assume all obligations and liabilities
of the mutual company. However, the policyholder membership rights will
be extinguished.
Consistent with these requirements, the Plan of Conversion
generally provided for MSL to file an application with the Commissioner
to reorganize as a stock company. MSL also requested that the
Commissioner hold a public hearing on the fairness and equity of the
terms of the Plan of Conversion.
The Plan of Conversion provided for Eligible Members to be able to
comment on such Plan at the hearing, for the Eligible Members to vote
on the Plan of Conversion at a Members' meeting and for MSL to provide
notice to its Eligible Members of both the public hearing and the
Members' meeting. A final order by the Commissioner to approve an
application pursuant to the Conversion Act was subject to the
administrative appeal procedures, as described in Minnesota Statute
sections 14.63 to 14.68.
As far as the timing of MSL's Conversion was concerned, on
September 13, 2004, the MSL Board adopted the Plan of Conversion and
submitted it to the Commissioner. On November 23, 2004, the
Commissioner scheduled a public hearing. On November 24, 2004, a
special meeting of Eligible Members entitled to vote on the Plan of
Conversion occurred. On December 21, 2004, the Commissioner approved
the Plan of Conversion, and the effective date of the demutualization
was January 1, 2005.\17\
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\17\ Presently, the proceeds from the demutualization are being
held in an interest-bearing escrow account with Wells Fargo, an
unrelated party with respect to MSL, for the benefit of Plans that
are Eligible Members. The proceeds will be distributed to such Plans
once the Department grants MSL's pending exemption request.
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Distributions to Eligible Members
19. As noted above, the consideration given to Eligible Members in
exchange for extinguishing their Membership Interests was MSL's
Distributable Net Worth, such consideration was paid in the form of
Cash or Policy Credits. For this purpose, an Eligible Member generally
was the owner of one or more policies in force on the Record Date. The
amount of consideration received by each Eligible Member, whether in
the form of Cash or Policy Credits, was comprised of a fixed component
and, under some circumstances, a variable component.
Each Eligible Member received Fixed Consideration. In addition, an
Eligible Member could also receive Variable Consideration for each
policy owned by such Eligible Member on the Record Date (i.e., the
Variable Component Policy) to reflect the Eligible Member's estimated
past and future contributions to surplus, as determined by an actuarial
formula based on specific features of the policies owned by the
Eligible Member on the Actuarial Calculation Date (which under the Plan
of Conversion was set at September 30, 2003). The total amount of Cash
or Policy Credits distributed as Variable Consideration (the Aggregate
Variable Component) was allocated to Eligible Members with respect to
their Variable Component Policies as follows: (a) The Aggregate
Variable Component allocation was made by multiplying each Eligible
Member's Actuarial Contribution by the ratio of the Aggregate Variable
Component to the sum of all Actuarial Contributions of all policies;
(b) then, MSL made reasonable determinations of the dollar amount of
Actuarial Contribution, which was zero or a positive number, for each
Variable Component Policy, according to the principles and
methodologies set forth in detail in the Actuarial Contribution
Memorandum attachment to the proposed Plan of Conversion; and (c) each
Actuarial Contribution was determined on the basis of MSL's records as
of the Actuarial Calculation Date without regard to any changes in the
status of, or premiums in excess of those required on the policies that
occur subsequent to the Actuarial Calculation Date.
20. Eligible Members received consideration in the form of Cash,
except that certain Eligible Members received consideration in the form
of Policy Credits, and not Cash, to the extent consideration was
allocable to the Eligible Member based on
[[Page 14725]]
ownership of a policy of the following types: (a) A policy that was an
individual retirement annuity contract within the meaning of section
408(b) or 408A of the Code or a tax sheltered annuity contract within
the meaning of section 403(b) of the Code; (b) a policy that was an
individual annuity contract issued directly to the Plan participant
pursuant to a Plan qualified under section 401(a) or 403(a) of the
Code; or (c) a policy that was an individual life insurance policy
issued directly to the Plan participant pursuant to a plan qualified
under section 401(a) or 403(a) of the Code.
All Eligible Members that owned the types of policies described in
(a), (b), or (c) above, and all Eligible Members that were Plans that
held group policies issued by MSL participated in the demutualization
transaction on the same basis and within their class groupings as other
Eligible Members that were not Plans.
21. If any policy had matured by death or otherwise been
surrendered or terminated prior to the date on which the Policy Credits
would have been credited, Cash in the amount of the Policy Credits was
paid in lieu of the Policy Credits to the person to whom the surrender
value or other payment at termination was made under the policy or to
the estate of the person if the policy matured by death.
In the event that more than one person constituted a single owner
of a policy, consideration was distributed jointly to such persons. If
an Eligible Member who was an owner of more than one policy was
entitled to receive consideration both in the form of Policy Credits
and in the form of Cash, the Fixed Consideration was payable only with
respect to one of the policies for which such Eligible Member was
entitled to receive cash. In the event an Eligible Member was the owner
of two or more policies, all of which would be credited Policy Credits,
then the Fixed Consideration was payable only with respect to the
policy with the earliest issue date.
Payment of Cash was made by check, net of any applicable
withholding tax. If the Policy Credit was applicable to a policy in the
course of annuity payments, the Policy Credit was added to the next
practicable benefit payment. If the Policy Credit was in the form of
additional insurance or dividends with interest, as appropriate, under
a policy that was a life insurance policy, the amount of the Policy
Credit was determined by applying the amount of consideration in a
manner that was consistent with the application of dividends towards
additional insurance or dividends with interest, as appropriate.
22. Decisions on voting whether to approve the Plan of Conversion
and on making an election as to the form of consideration received or
as to any matter in connection with such Plan was made by one or more
Plan fiduciaries which were independent of MSL. In this regard, the
Chairman of the Board of Directors of MSI Preferred appointed a
fiduciary committee for the MSI Employees, Life Insurance Plan and the
Mutual Service Agent's Group Insurance Plan (together, the MSL Welfare
Plans) to exercise such Plans' rights in connection with the
Conversion.\18\ The committees for the MSL Welfare Plans and the
Administrative Committees for the MSL Pension Plans have each retained
Consulting Fiduciaries, Inc. (CFI) to act as Independent Fiduciary for
all four of the MSL Plans in connection with the implementation of the
Plan of Conversion. CFI exercised full and exclusive discretionary
authority on behalf of each of the MSL Plans to vote for or against the
implementation of the Plan of Conversion. Neither MSL nor its
affiliates exercised discretion or provided ``investment advice,''
within the meaning of 29 CFR 2510.3-21(c), with respect to any
determination by the Independent Fiduciary to vote for or against the
Plan of Conversion.
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\18\ The members of the committee for the MSI Welfare Plans were
the same three individuals who comprised the membership of the
Administrative Committees for the MSI Employees Capital Accumulation
Plan and the MSI Employees Defined Contribution Retirement Plan
(together, the MSL Pension Plans).
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CFI represents that it was qualified to act as an independent
fiduciary in connection with the transaction. CFI states that it is an
Illinois corporation which has been providing independent fiduciary
services exclusively for over ten years. CFI explains that it has
previously served as an independent fiduciary to plans with respect to
an earlier demutualization process for an unrelated insurance company.
CFI explains that it is independent of MSL and MSI and has no business,
ownership or control relationship, nor is it otherwise affiliated with
either MSI or MSL. CFI also states that it derives less than 3% of its
annual income from MSI and that it receives no income from MSL.
CFI explains that it was retained to consider, on behalf of the MSL
Plans, whether to approve the transaction and how the Plans should vote
their interest at the Special Meeting of Members of MSL which occurred
on November 24, 2004. Additionally, CFI states that it reviewed with
MSI the various issues related to the allocation among eligible
participants of any Cash proceeds received by the MSL Plans. In a
letter to the Department dated October 29, 2004, CFI describes the
process it had undertaken to determine whether the demutualization was
fair and in the interests of the MSL Plans and their participants and
beneficiaries.
CFI represents that the transaction would provide that the
consideration to be paid to Eligible Members would be in the form of
Cash, except for certain Eligible Members whose policies had a tax-
favored status that could be jeopardized by the receipt of Cash, in
which case, they would receive Policy Credits. CFI notes that Eligible
Members would not be given a choice of whether to receive Cash or
Policy Credits, and in no event, would Eligible Members receive shares
of MSL stock. CFI further notes that the consideration that would be
paid to Eligible Members would consist of a fixed component and a
variable component. According to CFI, the fixed component would be
determined by the Board of Directors of MSL and would be paid to
Eligible Members for giving up their membership interest and their
voting rights. The variable component would be paid to certain Eligible
Members based on a formula taking into account the estimated past and
future contributions by such Eligible Members, to MSL's surplus.
23. CFI states that Willamette Management Associates of Arlington,
VA (Willamette) was retained on behalf of the MSL Plans to review the
financial consideration being offered to Eligible Members by MSL and to
render a financial fairness opinion with respect to the effect of the
transaction on the Plans. CFI explains that Willamette reviewed and
issued an opinion prior to CFI's submitting the vote on behalf of the
Plans. Pending Willamette's review and opinion, CFI states that it
preliminarily reviewed various documents related to the transaction
including, but not limited to, the following: (a) The Plan of
Conversion; (b) the Notice of Special Meeting of Members; (c) the
Notice of Public Hearing Before the Commissioner; (d) a Summary of the
MSL Conversion; (e) financial information of MSL; (f) the exemption
request; and (g) legal, actuarial and financial opinions regarding
MSL's Conversion.
24. In addition to the documents reviewed, CFI states that it had
discussions with various officers of MSI and with certain of the
advisers to MSI and MSL regarding the history of the companies, the
current situation, the
[[Page 14726]]
prospects for the future and the events leading to the consideration
and structuring of the transaction. CFI represents that it
preliminarily concluded that the transaction was structured in a manner
similar to other prior demutualizations. In this regard, CFI explains
that the transaction was also subject to the approval of the
Commissioner.
Furthermore, CFI states that it preliminarily determined that the
concept of the transaction was fair and in the interest of the Plans
and their participants and beneficiaries. Based on Willamette's
favorable financial fairness opinion, CFI stated that it voted in favor
of the transaction on November 24, 2004. Following the completion of
the vote, CFI engaged in discussions with MSI regarding the issues
related to the allocation of consideration among the eligible
participants in the MSL Plans.
CFI states that as an Independent Fiduciary it (a) voted on whether
to approve or not to approve the demutualization; (b) elected between
consideration in the form of Cash or Policy Credits on behalf of such
Plans; (c) reviewed and approved MSL's allocation of Cash or Policy
Credits received for the benefit of the participants and beneficiaries
of the MSL Plans; (d) would provide the Department with a complete and
detailed final report as it relates to the MSL Plans prior to the
granting of the exemption; and (e) would take all actions that were
necessary and appropriate to safeguard the interests of the MSL Plans
and their participants and beneficiaries.
25. In summary, it is represented that the transaction satisfied or
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Plan of Conversion was subject to approval, review and
supervision by the Commissioner and was implemented in accordance with
procedural and substantive safeguards that are imposed under the laws
of the State of Minnesota.
(b) The Commissioner reviewed the terms of the options that were
provided to Eligible Members of MSL as part of such Commissioner's
review of the Plan of Conversion, and approved the Plan of Conversion
following a determination that such Plan of Conversion was fair and
equitable to all Eligible Members (including Eligible Members that were
Plans).
(c) Each Eligible Member had an opportunity to vote at a special
meeting to approve the Plan of Conversion after full written disclosure
was given to the Eligible Member by MSL.
(d) Any determination to receive Cash or Policy Credits by an
Eligible Member which was a Plan, pursuant to the terms of the Plan of
Conversion, was made by one or more Plan fiduciaries that were
independent of MSL; and neither MSL nor its affiliates exercises any
discretion or provides investment advice, with the meaning of 29 CFR
2510.3-21(c), with respect to such decisions.
(e) After each Eligible Member was allocated an amount of Fixed
Consideration equivalent to approximately $400, such Eligible Member
was considered to receive an amount of Variable Consideration for each
policy owned by the Eligible Member on the Record Date to reflect the
Eligible Member's estimated past and future contributions to surplus,
as determined by an actuarial formula (approved by the Commissioner)
based on specific features of the policies owned by the Eligible Member
on the Actuarial Calculation Date.
(f) In the case of a MSL Plan, the Independent Fiduciary:
(1) Voted on whether to approve or not to approve the
demutualization;
(2) Elected between consideration in the form of Cash or Policy
Credits on behalf of such MSL Plans;
(3) Reviewed and approved MSL's allocation of Cash or Policy
Credits received for the benefit of the participants and beneficiaries
of the MSL Plans;
(4) Will provide the Department with a complete and detailed final
report as it related to the MSL Plans prior to the granting of the
exemption; and
(5) Took or will take all actions that were necessary and
appropriate to safeguard the interests of the MSL Plans and their
participants and beneficiaries.
(g) All Eligible Members that were Plans participated in the
transaction on the same basis as all Eligible Members that were not
Plans.
(h) No Eligible Member paid any brokerage commissions or fees in
connection with the receipt of Policy Credits.
(i) All of MSL's policyholder obligations remained in force and
were not affected by the Plan of Conversion.
(j) The terms of the transactions were at least as favorable to the
Plans as an arm's length transaction with an unrelated party.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested
persons within 14 days of the publication of the notice of pendency in
the Federal Register. The notice will include a copy of the notice of
proposed exemption, as published in the Federal Register, as well as a
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2),
which shall inform interested persons of their right to comment.
Comments with respect to the proposed exemption are due 44 days after
the date of publication of the proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Arjumand A. Ansari of the
Department at (202) 693-8566. (This is not a toll-free number.) Liberty
Media International, Inc. (LMI) Located in Englewood, CO, [Application
No. D-11277].
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of
sections 406(a), 406(b)(1) and (b)(2), and 407(a) of the Act shall not
apply,\19\ effective July 26, 2004, to (1) the acquisition by the
Liberty Cablevision of Puerto Rico 401(k) Savings Plan (the Plan) of
certain stock rights (the Rights) pursuant to a stock rights offering
(the Offering) by LMI, the Plan sponsor and a party in interest with
respect to the Plan; (2) the holding of the Rights by the Plan during
the subscription period of the Offering; and (3) the disposition or
exercise of the Rights by the Plan.
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\19\ It is represented that because the fiduciaries for the Plan
have not made an election under section 1022(i)(2) of the Act,
whereby the Plan would be treated as a trust created and organized
in the United States for purposes of tax qualification under section
401(a) of the Code, jurisdiction under Title II of the Act does not
apply. Therefore, LMI is not requesting, nor is the Department
providing, exemptive relief under the provisions of Title II of the
Act. The Department is, however, providing exemptive relief under
Title I of the Act.
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This proposed exemption is conditioned upon the following
requirements:
(a) The Rights were acquired by the Plan pursuant to Plan
provisions for individually-directed investment of participant
accounts;
(b) The Plan's receipt of the Rights occurred in connection with
the Rights Offering made available to all shareholders of LMI common
stock;
(c) All decisions regarding the holding and disposition of the
Rights by the Plan were made in accordance with Plan provisions for
individually-directed investment of participant accounts by the
individual participants whose accounts in the Plan received Rights in
the Offering, and if no instructions were received, the Rights were
sold;
[[Page 14727]]
(d) The Plan's acquisition of the Rights resulted from an
independent act of LMI as a corporate entity, and all holders of the
Rights, including the Plan, were treated in the same manner with
respect to the acquisition; and
(e) The Plan received the same proportionate number of the Rights
as other owners of LMI Series A common stock (the Series A Stock).
Effective Date: If granted, this proposed exemption will be effective
as of July 26, 2004.
Summary of Facts and Representations
1. LMI, located in Englewood, Colorado, is a publicly-traded
company with majority and minority interests in international
distribution and programming companies. LMI's stock is traded on the
Nasdaq National Market under the symbol ``LBTYA.'' Among LMI's
principal assets is Liberty Media International Holdings, LLC (LMIH), a
wholly owned subsidiary, which, in turn, wholly owns Liberty
Cablevision of Puerto Rico, Ltd. (LCPR). LCPR is located in Luquillo,
Puerto Rico. LCPR provides cable television, long distance telephone,
and Internet access services to customers.
2. LMI maintains the Plan for the benefit of LCPR employees. The
Plan is a defined contribution plan that complies with the requirements
of sections 1165(a) and (e) of the Puerto Rico Internal Revenue Code of
1994, as amended.\20\ As of July 26, 2004, the Plan had approximately
241 participants and total assets of $2,315,009. Also as of July 26,
2004, the Plan held approximately 9,428 shares of LMI-issued Series A
Stock valued at $298,671 on such date. The Series A Stock comprised
approximately thirteen percent (13%) of the total Plan assets and it
represented less than 1/10th of 1% of the total outstanding issue of
Series A Stock, which consisted of 139,915,585 shares.
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\20\ It is represented that the Puerto Rico Tax Code provides
``qualification'' rules for retirement plans that cover employees
who reside in Puerto Rico. The qualification rules are similar, but
not identical to, the requirements of section 401(a) of the Code. In
order to permit permit pre-tax contributions by employees, and to
allow deductions of contributions by the employer, Puerto Rico law
also requires that the Plan qualify under the applicable sections of
the Puerto Rico Tax Code.
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Eurobank, a banking corporation organized under the laws of the
Commonwealth of Puerto Rico, is the Plan's trustee (Trustee). The
Trustee holds legal title to the Plan's assets. Fidelity Investments
Institutional Operations Company, Inc. (Fidelity) of Boston,
Massachusetts, is the Plan's administrator. The Plan administrative
committee (the Plan Administrative Committee) is the fiduciary
responsible for Plan matters. The Plan Administrative Committee is
comprised of Messrs. David Leonard, Bernard Dvorak, and Jose Alegria.
Messrs. Leonard and Dvorak are LMI officers. Mr. Alegria is LCPR's
general manager. At the time of the Offering, none of these individuals
were on LMI's Board of Directors.
3. The Plan permits participants to contribute a portion of their
respective annual compensation to the Plan as pre-tax salary reduction
contributions and as after-tax contributions. LMI then makes a matching
contribution to the Plan. Participant salary reduction contributions
are immediately 100% vested, while LMI's matching contributions vest
according to a three-year vesting schedule, which is based on the years
of service each participant has completed.\21\
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\21\ Series A Stock acquired by a Plan participant through the
exercise of the Rights was vested based on the vested status of the
Series A Stock on which the Right was granted. For example, Series A
Stock acquired through the exercise of the Rights and held in a
participant's employee contributions account became 100% vested.
Series A Stock acquired through the exercise of the Rights and held
in a participant's employer matching contributions account (which
could be 33%, 66%, or 100% vested, depending on the participant's
years of service) was vested in the same percentage as the employer
matching contribution account.
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The Plan provides for participants to direct investments of their
own contributions into one of 18 investment categories, including the
Liberty Media International Stock Fund (the LMI Stock Fund). LMI
matching contributions are always invested in the LMI Stock Fund if the
account is not 100% vested. If the participant's LMI matching
contributions account is 100% vested, the participant may direct the
investment of the entire account into any of the investment options
available under the Plan.
4. On July 26, 2004, LMI announced a special rights offering (i.e.,
the Offering) which expired on August 23, 2004 (the Expiration Date).
The Rights Offering period was determined solely by LMI. Holders of
record of Series A Stock as of July 26, 2004 (the Record Date), each
received 0.20 of a transferable subscription Right for each share of
Series A Stock held. Such Rights were traded on NASDAQ. Each whole
Right entitled the holder to purchase one share of Series A Stock at a
subscription price of $25 per share (the Subscription Price). LMI's
Board of Directors determined the Subscription Price. The Offering also
gave LMI shareholders the right to purchase additional shares of Series
A Stock up to the number of shares that were not purchased by the other
shareholders (the Over Subscription Privilege).
5. Because the Plan was the holder of record of Series A Stock, LMI
represents that the granting of a Right to the Plan by LMI was the
grant of an ``employer security'' under section 407(d)(1) of the
Act.\22\ However, LMI explains that the Rights were not ``qualifying
employer securities'' under section 407(d)(5) of the Act.\23\
Therefore, LMI indicates that its granting of the Rights to the Plan
and the subsequent exercise of the Rights by the Plan participants,
would violate sections 406(a), 406(b)(1), and 406(b)(2) of the Act.
Therefore, LMI requests an administrative exemption from the Department
for such transactions. If granted, the exemption would be effective as
of July 26, 2004.\24\
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\22\ An ``employer security'' is defined under section 407(d)(1)
of the Act as a security issued by an employer of employees covered
by the Plan, or by an affiliate of such employer.
\23\ Section 407(d)(5) of the Act defines the term ``qualifying
employer security'' as an employer security which is (a) stock, (b)
a marketable obligation, or (c) an interest in a publicly traded
partnership, but only if such partnership is an existing partnership
as defined in the Code.
\24\ To avoid engaging in a prohibited transaction, the Plan
Administrative Committee considered refusing to accept the Rights.
However, since participation in the Offering was structured to allow
participants to purchase shares of Series A Stock at a discount from
market price, the Plan Administrative Committee concluded that a
refusal to accept the Rights could constitute a breach of fiduciary
duty under the Act.
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6. As part of the Rights Offering process, the Plan established two
temporary funds to administer the Rights, the ``Rights Holding Fund''
and the ``Liberty Media Receivable Fund.'' The Rights Holding Fund was
established to hold the Rights when they were issued. Rights were then
credited to participants' accounts based on their respective balances
in the LMI Stock Fund on July 26, 2004. The Liberty Media Receivable
Fund, following the exercise of Rights as directed by the Plan
participants, reflected the approximate value of the LMI Stock due from
the subscription agent.
7. Under the terms of the Plan, the Trustee had the option of
either ``passing-through'' its right to vote to the Plan participants
or taking action on the Series A Stock on behalf of such participants.
However, the Plan Administrative Committee elected to have each
participant determine whether to exercise or sell the Rights
attributable to the shares of the Series A Stock allocated to the
participant's Plan account. The elections applied to both the Series A
Stock held in the participant's account that were attributable to the
participant's own pre-
[[Page 14728]]
tax and after-tax contributions and to matching employer contributions
(including vested and nonvested matching contributions).
The passing-through of the election to exercise or sell the Rights
was determined by the Plan Administrative Committee to be in the best
interests of the Plan participants. This was because in order for a
participant to exercise the Rights to acquire additional shares of
Series A Stock, other assets in the Plan and in the participant's
account, had to be liquidated. Therefore, by passing through this
exercise election to each Plan participant, the participant could make
an independent decision on whether to liquidate the assets in his or
her Plan account to purchase additional shares of Series A Stock at a
discount.
8. To facilitate the pass through of the election, the Plan
prepared and provided to participants detailed explanations of the
participant's alternatives with respect to the Rights. In this regard,
the Plan prepared and furnished Questions & Answers to Plan
participants. Among other things, the Questions & Answers explained the
Rights Offering and the participant's option to exercise or sell the
Rights attributable to the Series A Stock allocated to such
participant's Plan account. In addition, participants received the
Rights Offering Instructions, which explained the steps a participant
would take to exercise or sell the Rights. Further, participants were
provided a prospectus describing the Rights issued by LMI.
9. Fidelity required a considerable amount of administrative time
to receive the Rights from LMI, to determine the Rights allocable to
each participant based on the quantity of Series A Stock held in the
participant's account, and then to allocate the Rights to the
participant in the Rights Holding Fund. Fidelity was eventually able to
commence taking exercise or sell directions from the participants on
August 2, 2004.
10. All LMI shareholders, including the Trustee, could exercise or
sell the Rights through the close of business on the Expiration Date,
which was implemented solely by LMI. To meet this deadline, Fidelity
was required to collect all of the participants' elections, liquidate
sufficient account assets of the participants who elected to exercise
their Rights, and then provide the exercise instructions along with the
exercise funds to the subscription agent, EquiServe Trust Company, N.A.
(EquiServe), of Canton, Massachusetts, for LMI by the Expiration Date.
Plan participants were also required to have their exercise or sell
elections to Fidelity by the close of business on August 17, 2004 (the
Election Close-Out Date) to give Fidelity sufficient time to liquidate
other assets so that cash would be available for participants to
exercise their Rights.
11. Under the Oversubscription Privilege, LMI shareholders could
subscribe to purchase additional shares of Series A Stock up to the
number of shares that were not purchased by the other shareholders.
However, the Plan Administrative Committee determined that the
Oversubscription Privilege would result in a number of prohibited
transactions and fiduciary breaches for which retroactive exemptive
relief from the Department might not be obtainable. This was because in
order to subscribe for the Oversubscription Privilege, the Trustee
would have been required to liquidate Plan assets in order to remit
cash to LMI in anticipation of the possibility of purchasing additional
Series A Stock. Then, the liquidated Plan assets would have been held
in an interest-bearing account and commingled with LMI's general
assets. In addition, the interest would have been paid to LMI.
Furthermore, it is represented that the liquidated assets might not
have been used to purchase additional Series A Stock because the
Oversubscription Privilege was conditioned on the Plan exercising all
the issued subscription Rights. Thus, in the instance where the Plan
did not exercise all its issued subscription Rights, the
Oversubscription Privilege could not be exercised.\25\
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\25\ It is represented that LMI stated in the Prospectus for the
Rights Offering that the Oversubscription Privilege could be
exercised only if the shareholder exercised basic subscription
Rights in full. Because the Trustee is the shareholder of the Plan's
shares of Series A Shares, the Trustee would have had to exercise
every Right issued on every share of Series A Stock held by the Plan
in order to take advantage of the Oversubscription Privilege.
Because this did not occur, the Oversubscription Privilege was not
available to the Plan.
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12. Each Plan participant had the option to exercise any percentage
of the Rights granted on such participant's Series A Stock allocated to
the participant's Plan account. By speaking to a Fidelity
representative at any time prior to 4 p.m. Eastern Daylight Time, a
Plan participant could elect to exercise a Right on the Election Close-
Out Date. Participants had the opportunity prior to the Election Close-
Out Date to revoke or change instructions to exercise by (a) electing a
new percentage; (b) placing an order to sell; or (c) a combination of
both.
The dollar amount required to exercise the Rights was exchanged
from other investments in the participant's account into the Receivable
Fund. The required dollar amount equaled the percentage of Rights
exercised (as elected by the participant) multiplied by the number of
Rights credited to the participant's account and multiplied by the
exercise price for the Rights Offering. The dollar amount was exchanged
from the other investment categories in which the account was invested
on a proportional basis by source. The Liberty Media Stock Fund and the
LMI Stock Fund were not included unless sufficient funds did not exist
in the other investment categories under the participant's account. For
those individuals with insufficient funds to permit exercise of the
entire elected amount, Fidelity exercised as many rights as the account
balance permitted.
13. On or about August 20, 2004, the Rights to be exercised and the
necessary funds were submitted to EquiServe for the purchase of Series
A Stock. The participants' balances in the Rights Holding Fund were
reduced by the number of Rights exercised on a participant's behalf.
Fidelity then sold all remaining Rights on the open market between
August 18, 2004 and August 23, 2004, at which time the Rights expired.
Upon receipt of the new Series A Stock, the Liberty Media Receivable
Fund was closed and the newly-received shares were transferred into the
LMI Stock Fund and allocated to the participants' Plan accounts.
For any Rights sold by the Plan, a commission of 2.9 cents per
Right was charged to the Plan account from which the Right was sold.
The commission was disclosed to participants, in the materials provided
explaining the Rights Offering. The commission was not paid to LMI but
to the broker-dealer, National Financial Services (NFS) of New York
City, New York, for the sale transaction. NFS is an affiliate of
Fidelity and is wholly owned by Fidelity Global Brokerage Group, Inc.
The Plan Administrative Committee determined, after reasonable
consideration of the alternatives, that the use of NFS was in the best
interests of the Plan for the following reasons: \26\ (a) Brokerage
services required to effect the sales transaction were considered
necessary services for the operation of the Plan; (b) the reputation of
NFS as a reputable broker; (c) the already established procedures
between Fidelity and NFS for the prompt execution of the sale
transactions; (d) the ability of NFS
[[Page 14729]]
to accept the engagement upon very short notice (the short notice
provided by the issuer of the Rights); (e) the reasonable price charged
for the brokerage services when compared with other unrelated brokers;
and (f) the short-term nature of the arrangement. Although Fidelity is
affiliated with NFS, it is represented that Fidelity did not use any
discretion to select NFS as broker for the Rights. Moreover, it is
represented that the participants paid commissions in the sale of their
Rights in the same manner as any other shareholder paid commissions in
the sale of their rights.
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\26\ The Department expresses no opinion herein on whether the
selection of NFS meets the statutory conditions contained in section
408(b)(2) of the Act.
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14. Those participants who elected to exercise only a portion of
their Rights later could elect to exercise additional Rights if
sufficient time existed prior to the Election Close-Out Date. The
Election Close-Out Date was established to permit sufficient time to
liquidate the other assets in an orderly manner so that the necessary
cash would be available to exercise the Rights before the Rights
offering Expiration Date (August 23, 2004). Unexercised Rights as of 4
p.m. Eastern Time, August 17, 2004, were offered for sale on the open
market by Fidelity from August 18, 2004, through August 23, 2004.
Rights that remained unsold at the close of the market on August 23,
2004, expired.
A participant who elected to sell, rather than exercise the Rights
allocated to his or her Plan account, was required to (a) contact a
Fidelity representative; and (b) specify the percentage (in whole
amounts) of the Rights he or she desired to sell.
15. It is represented that the Rights Offering and the resulting
transactions were protective, in the best interests of, and beneficial
to the Plan and its participants and beneficiaries because participants
in the Plan were treated in a similar manner as other LMI shareholders
who received the Rights, with the sole exception that the Plan
participants were not entitled to participate in the Oversubscription
Privilege. Additionally, no expenses were incurred by the Plan from the
Rights Offering, and full disclosure of the Rights Offering was made in
the public documents filed with the Securities and Exchange Commission.
With respect to the Plan participants, it is represented that all
participants were notified in advance of the procedures for instructing
Fidelity of the participant's desires for exercise or sale under the
Rights offering, and all instructions given by the involved
participants to Fidelity were properly executed. Further, all actions
by Fidelity and the Trustee with respect to the Rights Offering were
made pursuant to express instructions, except when the involved
participant failed to act or acted in violation of the published
procedures. Under such circumstances, the Rights were placed on the
open market for sale and any unsold rights were allowed to expire
unexercised. It is represented that the instructions for the
disposition of the Rights upon the failure of the involved participant
to act or to give valid instructions were fully disclosed in the
procedural instructions given to the involved participants.
Furthermore, it is represented that the instructions were consistent
with the nature of participant-directed investments under a plan.
16. In summary, it is represented that the transactions have
satisfied the statutory criteria for an exemption under section 408(a)
of the Act because:
(a) The Rights were acquired by the Plan pursuant to Plan
provisions for individually-directed investment of participant
accounts;
(b) The Plan's receipt of the Rights occurred in connection with
the Rights Offering made available to all shareholders of Series A
Stock;
(c) All decisions regarding the holding and disposition of the
Rights by the Plan were made in accordance with Plan provisions for
individually-directed investment of participant accounts by the
individual participant whose account in the Plan received Rights in the
Offering, and if no instructions were received the Rights were sold;
(d) The Plan's acquisition of the Rights resulted from an
independent act of LMI as a corporate entity, and all holders of the
Rights, including the Plan, were treated in the same manner with
respect to the acquisition; and
(e) The Plan received the same proportionate number of the Rights
as other owners of Series A Stock.
Notice to Interested Persons
Notice of proposed exemption will be provided to all interested
persons by first class mail within 4 days of publication of the notice
of pendency in the Federal Register. Such notice shall include a copy
of the notice of pendency of the exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to 29 CFR
2570.43(b)(2), which will inform interested persons of their right to
comment on the proposed exemption and/or to request a hearing. Comments
and hearing requests are due within 34 days of the date of publication
of the proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the
Department, telephone number (202) 693-8553. (This is not a toll-free
number.) Riggs Bank N.A., Washington, DC; and the PNC Financial
Services Group, Inc. (PNC), Pittsburgh, Pennsylvania (together, the
Applicants), [Application No. D-11310].
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 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Riggs Bank N.A.
If the exemption is granted, Riggs Bank N.A. (``Riggs Bank'') shall
not be precluded from functioning as a ``qualified professional asset
manager'' pursuant to Prohibited Transaction Exemption 84-14 (49 FR
9494, March 13, 1984) (``PTE 84-14'') beginning on the date of the
acquisition of Riggs National Corporation, the parent of Riggs Bank, by
PNC, solely because of a failure to satisfy section I(g) of PTE 84-14
as a result of the conviction of Riggs Bank for the felony described in
the January 27, 2005 felony information (the ``Information'') entered
in the U.S. District Court for the District of Columbia, provided that:
(a) This exemption is not applicable if Riggs becomes affiliated
with any person or entity convicted of any of the crimes described in
section I(g) of PTE 84-14, unless such person or entity already has
been granted an exemption to continue functioning as a QPAM pursuant to
PTE 84-14;
(b) This exemption is not applicable if Riggs is convicted of any
of the crimes described in section I(g) of PTE 84-14, other than the
specific felony charged in the Information;
(c) An independent auditor, who has appropriate technical training
or experience and proficiency with Title I of ERISA's fiduciary
responsibility provisions, shall conduct an audit of Riggs Bank's ERISA
custody and fiduciary asset management functions. This audit will be
commenced not later than June, 2005. It will be completed and a report
setting forth the procedures conducted and the results obtained will be
sent to the Department as soon as possible, but in no event later than
September 30, 2005;
(d) The audit described above will cover the following areas for
the period commencing in March, 1999 and ending with the date of the
closing of the Riggs-PNC transaction (the Time Period): reconciliations
(to determine that reconciliations and settlements are performed
accurately and timely, and outstanding items are monitored and
[[Page 14730]]
cleared in a timely manner); unitizations (to determine that daily
processes, including trade requests, valuation and reconciliation of
unitized assets are authorized and properly performed, are consistent
with liquidity requirements and to ensure that unitized assets
evaluations are valid); conversions (to determine that adequate
controls are in place and working effectively to ensure that
conversions are completed accurately, in a timely manner, and in
accordance with the client's contract); fees (to determine that
controls over the fee assessment and collection process are adequately
designed and operating accurately and effectively); annual and monthly
statements (to determine that statements are prepared accurately and
distributed to clients independently and within the required frequency
and time frame); training (to determine that account administrators and
administrative assistants are adequately trained, including with
respect to the requirements of ERISA); system authorization (to
determine whether there are controls in place to ensure access to
systems is authorized, approved and limited based on employees'
particular duties and responsibilities); new accounts (to determine
controls in place to ensure new accounts receive appropriate approvals
and are accurately set up for future required reviews and other account
activities); the adequacy of the written policies and procedures
adopted by Riggs to ensure compliance with the terms of the QPAM
exemption (other than paragraph 1(g) of PTE 84-14), and the
requirements of Title I of ERISA (including ERISA's prohibited
transaction provisions and applicable statutory and administrative
exemptions); and compliance (through a test of a representative sample
of transactions of client plans during the Time Period) with: (i) The
written policies and procedures that it has adopted and (ii) the
objective requirements of Title I of ERISA and PTE 84-14 (other than
paragraph 1(g) of PTE 84-14);
(e) Any irregularities identified as a result of the audit will be
promptly corrected; and
(f) On the closing of the acquisition transaction, PNC will apply
the same internal control and audit policies and procedures applied and
enforced with respect to its pre-existing ERISA fiduciary asset
management functions to the ERISA custody and fiduciary asset
management functions formerly associated with Riggs Bank.
Section II. PNC
If the exemption is granted, PNC and its affiliates shall not be
precluded from functioning as a ``qualified professional asset
manager'' pursuant to PTE 84-14 beginning on the date of the
acquisition of Riggs National Corporation, the parent of Riggs Bank, by
PNC, solely because of a failure to satisfy section I(g) of PTE 84-14
as a result of the conviction of Riggs Bank for the felony described in
the Information entered in the U.S. District Court for the District of
Columbia, provided that:
(a) This exemption is not applicable if PNC or any affiliate
becomes affiliated with any person or entity convicted of any of the
crimes described in section I(g) of PTE 84-14, unless such person or
entity already has been granted an exemption under PTE 84-14; and
(b) This exemption is not applicable if PNC or any affiliate is
convicted of any of the crimes described in section I(g) of PTE 84-14,
other than the conviction of Riggs Bank for the specific felony charged
in the Information.
Section III. Definitions
(a) For purposes of this exemption, the term ``Riggs'' means and
includes Riggs Bank and any entity that was affiliated with Riggs Bank,
including but not limited to its corporate parent Riggs National
Corporation, prior to the date of acquisition of Riggs National
Corporation by PNC.
(b) For purposes of this exemption, the term ``PNC'' includes PNC
Financial Services Group, Inc. and any entity that was affiliated with
PNC Financial Services Group, Inc. prior to the date of acquisition of
Riggs National Corporation by PNC, and any future affiliates, other
than Riggs Bank, as defined in subsection (a).
(c) The term ``affiliate'' of a person means--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person,
(2) Any director of, relative of, or partner in, any such person,
(3) Any corporation, partnership, trust or unincorporated
enterprise of which such person is an officer, director, or a 5 percent
or more partner or owner, and,
(4) Any employee or officer of the person who--
(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the wages of such person) or,
(B) has direct or indirect authority, responsibility or control
regarding the custody, management or disposition of plan assets.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Corporate Probation Period'' means the five-year
period of corporate probation provided for in the plea agreement
entered into between Riggs Bank, the United States Attorney for the
District of Columbia and the United States Department of Justice and
filed with the United States District Court for the District of
Columbia on January 27, 2005; provided that if Riggs Bank or its
corporate parent Riggs National Corporation is sold to a party
unaffiliated with it as of the date of the plea agreement, whether by
sale of stock, merger, consolidation, sale of a significant portion of
its assets, or other form of business combination, or otherwise
undergoes a direct or indirect change of control within the five-year
corporate probation period, the corporate probation period shall
terminate upon the closing of any such transaction or the occurrence of
any such change of control.
Summary of Facts and Representations
1. Riggs Bank is a national bank located in Washington, DC. The
Applicants represent that the clientele served by Riggs Bank includes
employee benefit plans subject to the Act. Riggs Bank maintains that,
given the size and number of the plans which Riggs Bank represents, the
number of financial service providers engaged by such plans, the
breadth of the definition of ``party in interest'' under the Act, and
the array of services offered by Riggs Bank, it would not be uncommon
for Riggs Bank to propose a transaction involving a party in interest
with respect to a plan for which Riggs Bank is acting in a fiduciary
capacity. Riggs Bank represents that such transactions are necessary to
offer plan clients adequate investment diversification opportunities,
and that such opportunities will be missed if Riggs is not permitted to
function as a QPAM pursuant to PTE 84-14.
2. The Applicants represent that Riggs National Corporation, the
corporate parent of Riggs Bank, currently has an agreement with
Pittsburgh-based PNC that provides for Riggs National Corporation and
Riggs Bank to be acquired by PNC. PNC is more than ten times larger
than Riggs Bank, and is one of the largest financial services holding
companies in the United States. As of June 30, 2004, PNC had total
assets of approximately $73.1 billion and had 775 branches in six
states, with a total deposit base of more than $50 billion.
[[Page 14731]]
As further discussed below, Riggs Bank represents that, absent an
individual exemption, any acquiring entity would be barred from
functioning as a QPAM pursuant to PTE 84-14, and that, accordingly, the
provision of a QPAM exemption would facilitate the consummation of a
change of control transaction.
3. On January 27, 2005, the United States Attorney for the District
of Columbia filed the felony information (the Information) in the
United States District Court for the District of Columbia describing
violations of 31 U.S.C. 5322(b) & 5318(g) (``the Title 31 Felony'').
The Information charges Riggs Bank with failing to report suspicious
banking transactions. That same day, Riggs Bank entered a plea of
guilty to the charge in the Information pursuant to a written plea
agreement with the United States Attorney for the District of Columbia
and the Department of Justice (the ``Plea Agreement''). In the Plea
Agreement, Riggs Bank agreed to pay a fine of $16 million and agreed to
the Corporate Probation Period.
4. The conduct that is the subject of the Information and the Plea
Agreement involved compliance with Title 31 Bank Secrecy Act reporting
requirements. Specifically, the Plea Agreement sets forth that Riggs
Bank failed to file required reports with government authorities when
certain of its customers, including foreign government officials such
as Augusto Pinochet of Chile and senior officials in the government of
the Republic of Equatorial Guinea, engaged in suspicious banking
transactions involving the movement of funds between and among various
accounts and banks.
5. Riggs Bank represents that the Title 31 Felony did not relate in
any way to the conduct of any investment adviser or fiduciary of an
employee benefit plan. Riggs Bank maintains, however, that although
none of the unlawful conduct involved investment management activities
of Riggs Bank or its subsidiaries, or any plans covered by the Act, the
Title 31 Felony could preclude Riggs from serving as a ``qualified
professional asset manager'' (``QPAM''), due to the provisions of
sections I(g) and V(d) of PTE 84-14. Section I(g) of PTE 84-14
precludes a person who otherwise qualifies as a QPAM from serving as a
QPAM if such person or an affiliate thereof has within the ten years
immediately preceding the transaction been either convicted or released
from imprisonment, whichever is later, as a result of certain specified
criminal activity. Because the Title 31 Felony involved a crime
described in PTE 84-14, the Applicants represent that Riggs may be
barred from qualifying as a QPAM.
6. Accordingly, the Applicants request an exemption to enable Riggs
and its affiliates to function as QPAMs despite Riggs Bank's failure to
satisfy section I(g) of PTE 84-14 as a result of the judgment of
conviction to be entered against Riggs Bank on the charges set forth in
the Information. The proposed exemption is also requested on behalf of
such entities that may become affiliated with Riggs Bank, including,
but not limited to, PNC and its affiliates. The transactions covered by
the proposed exemption would include the full range of transactions
that can be executed by investment managers who qualify as QPAMs
pursuant to PTE 84-14 and satisfy the conditions contained therein. If
granted, the exemption will enable Riggs to qualify as a QPAM by
satisfying all of the conditions of PTE 84-14, except the condition
stated in section I(g) of PTE 84-14.
7. Riggs Bank represents that the Title 31 Felony does not create
any concern that it will endanger employee benefit plans for which
Riggs Bank or its subsidiaries propose to serve as a QPAM. Riggs Bank
represents that none of the conduct that is set forth in the Plea
Agreement involved any aspect of the investment management or
investment advisory functions of Riggs Bank or its subsidiaries.
Moreover, the individuals known to have been directly involved in the
transactions set forth in the Plea Agreement, the managers of the
divisions and subsidiaries where these individuals worked, and the
managers of Riggs Bank's compliance staff during the relevant period,
are no longer employed by Riggs Bank. Riggs Bank further represents
that the Embassy Banking and International Private Banking divisions of
Riggs Bank, the London Branch of Riggs Bank, and Riggs Bank's Edge Act
subsidiary, Riggs International Banking Corporation, where the conduct
that is set forth in the Plea Agreement transpired, have been closed or
are in the process of being sold or closed, and that these operations
were both operationally and physically separate from the investment
management and advisory functions of Riggs Bank and its subsidiaries.
Furthermore, Riggs Bank represents that it is committed to a strong
legal compliance program. To address the Bank Secrecy Act compliance
issues highlighted by the Information and prior regulatory enforcement
actions, Riggs Bank has invested more than 50 million dollars in
technological and system upgrades as well as the wholesale replacement
and upgrade of its compliance personnel and systems. As the Plea
Agreement reflects, these investments by Riggs Bank bore directly on
the discovery of certain conduct set forth in the Plea Agreement, and
certain conduct set forth in the Plea Agreement was first uncovered by
internal investigations undertaken by Riggs Bank.
8. Riggs Bank has agreed that an independent auditor, who has
appropriate technical training or experience and proficiency with
ERISA's fiduciary responsibility provisions, shall conduct an audit of
Riggs Bank's ERISA fiduciary asset management functions. This audit
will be commenced not later than June 2005. It will be completed and a
report setting forth the procedures conducted and the results obtained
will be sent to the Department as soon as possible, but in no event
later than September 30, 2005.
9. The audit described above will cover the following areas for the
Time Period: reconciliations (to determine that reconciliations and
settlements are performed accurate and timely, and outstanding items
are monitored and cleared in a timely manner); unitizations (to
determine that daily processes, including trade requests, valuation and
reconciliation of unitized assets are authorized and properly
performed, are consistent with liquidity requirements and to ensure
that unitized assets evaluations are valid); conversions (to determine
that adequate controls are in place and working effectively to ensure
that conversions are completed accurately, in a timely manner, and in
accordance with the client's contract); fees (to determine that
controls over the fee assessment and collection process are adequately
designed and operating accurately and effectively); annual & monthly
Statements (to determine that statements are prepared accurately and
distributed to clients independently and within the required frequency
and time frame); training (to determine that account administrators and
administrative assistants are adequately trained, including with
respect to the requirements of ERISA); system authorization (to
determine whether there are controls in place to ensure access to
systems is authorized, approved and limited based on employees'
particular duties and responsibilities); new accounts (to determine
controls in place to ensure new accounts receive appropriate approvals
and are accurately set up for future required reviews and other account
activities); the adequacy of the written policies and procedures
adopted by Riggs to ensure compliance with the
[[Page 14732]]
terms of the QPAM exemption (other than paragraph 1(g) of PTE 84-14),
and the requirements of Title I of ERISA (including ERISA's prohibited
transaction provisions and applicable statutory and administrative
exemptions), and compliance (through a test of a representative sample
of transactions of client plans during the Time Period) with: (i) the
written policies and procedures that it has adopted and (ii) the
objective requirements of Title I of ERISA and PTE 84-14 (other than
paragraph 1(g) of PTE 84-14). Any irregularities will be promptly
corrected.
10. On the closing of the acquisition transaction PNC will apply
the same internal control and audit policies and procedures applied and
enforced with respect to its pre-existing ERISA fiduciary asset
management functions to the ERISA fiduciary asset management functions
formerly associated with Riggs Bank.
11. In summary, the Applicants represent that the criteria of
section 408(a) of the Act are satisfied for the following reasons: (a)
The Title 31 Felony involved areas of business unrelated to employee
benefit plans; (b) Riggs Bank has committed to a legal compliance
program featuring written policies and procedures to prevent future
illegal activity; (c) an independent audit requirement will further
protect plans and their plan participants; (d) Riggs Bank's substantial
investment in technological and system upgrades, as well as the
wholesale replacement and upgrade of its compliance personnel and
systems; and (e) the exemption will permit the bank(s) to engage in a
broader variety of investments and services on behalf of client
employee benefit plans which demand diverse investment opportunities.
Notice to Interested Persons
With respect to notification of interested persons, Riggs Bank will
distribute this notice of proposed exemption by first class mail to an
independent plan fiduciary for all ERISA pension plans for which Riggs
Bank and its subsidiaries provide fiduciary services, including trustee
services and/or the provision of investment advice. All notifications
will be mailed within three business days after publication of the
proposed exemption in the Federal Register. Comments and requests for a
hearing must be received by the Department within 28 days of the date
of publication of this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 693-8546. (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 18th day of March, 2005.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 05-5744 Filed 3-22-05; 8:45 am]
BILLING CODE 4510-29-P