Proposed Exemptions; MONY Life Insurance Company
[Notices] [12/16/1998]
Proposed Exemptions; MONY Life Insurance Company
[12/16/1998]
Volume 63, Number 241, Page 69314-69325-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10661, et al.]
Proposed Exemptions; MONY Life Insurance Company
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
20210. Attention: Application No. ____, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,
Washington, D.C. 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 (43 FR 47713, October 17, 1978) 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.
MONY Life Insurance Company (MONY), Located in New York, NY
[Application No. D-10661]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).<SUP>1</SUP>
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\1\ For purposes of this exemption, reference to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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Section I.--Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply, effective November 16, 1998, to the (1) receipt
of common stock of the MONY Group, Inc. (the Holding Company), a
subsidiary of MONY, or (2) the receipt of cash or policy credits, by or
on behalf of any eligible policyholder (the Eligible Policyholder) of
MONY which is an employee benefit plan (the Plan), other than an
Eligible Policyholder which is a Plan maintained by MONY or an
affiliate for its employees, in exchange for such Eligible
Policyholder's membership interest in MONY, in accordance with the
terms of a plan of reorganization (the Plan of Reorganization) adopted
by MONY and implemented pursuant to section 7312 of the New York
Insurance Law.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II. General Conditions
(a) The Plan of Reorganization is implemented in accordance with
procedural and substantive safeguards that are imposed under New York
Insurance Law and is subject to review and supervision by the
Superintendent of Insurance of the State of New York (the
Superintendent).
(b) The Superintendent reviews the terms of the options that are
provided to Eligible Policyholders of MONY as part of such
Superintendent's review of the Plan of Reorganization, and the
Superintendent only approves the Plan of Reorganization following a
determination that such Plan of Reorganization is fair and equitable to
all Eligible Policyholders and is not detrimental to the public.
[[Page 69315]]
(c) Each Eligible Policyholder has an opportunity to vote to
approve the Plan of Reorganization after full written disclosure is
given to the Eligible Policyholder by MONY.
(d) Any election by an Eligible Policyholder that is a Plan to
receive Holding Company stock, cash or policy credits, pursuant to the
terms of the Plan of Reorganization is made by one or more independent
fiduciaries of such Plan and neither MONY nor any of its affiliates
exercises any discretion or provides investment advice with respect to
such election.
(e) After each Eligible Policyholder entitled to receive stock is
allocated at least 7 shares of Holding Company stock, additional
consideration is allocated to Eligible Policyholders who own
participating policies based on actuarial formulas that take into
account each participating policy's contribution to the surplus of MONY
which formulas have been approved by the Superintendent.
(f) All Eligible Policyholders that are Plans participate in the
transactions on the same basis within their class groupings as other
Eligible Policyholders that are not Plans.
(g) No Eligible Policyholder pays any brokerage commissions or fees
in connection with their receipt of Holding Company stock or in
connection with the implementation of the commission-free sales and
purchase programs.
(h) All of MONY's policyholder obligations remain in force and are
not affected by the Plan of Reorganization.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``MONY'' means ``MONY Life Insurance Company'' and any
affiliate of MONY as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of MONY includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with MONY. (For purposes of this paragraph, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``Eligible Policyholder'' means a policyholder who is
eligible to vote and to receive consideration under MONY's Plan of
Reorganization. Such Eligible Policyholder is a policyholder of the
mutual insurer on the date the Plan of Reorganization is adopted by the
Board of Trustees of MONY and on the effective date of the
reorganization.
(d) The term ``policy credit'' means an increase in the
accumulation account value <SUP>2</SUP> (to which no surrender or
similar charges are applied) in the general account or an increase in a
dividend accumulation on a policy.
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\2\ In general, a policy's accumulation account value is
expressed in dollar terms and reflects contributions and interest
credited under the policy, less expenses and withdrawals.
Accumulation values may be applied for the purchase of annuity
benefits, or depending on the provisions of the contract, withdrawn
by the policyholder in a lump sum or installments. Under MONY's Plan
of Demutualization, where a policy eligible for distributions under
such Plan has an accumulation value, the policy's accumulation value
will be increased by an amount equal to the distribution the
policyholder is entitled to under the Plan.
Effective date: If granted, this proposed exemption will be
effective as of November 16, 1998, the date of MONY's Plan of
Reorganization.
Summary of Facts and Representations
1. MONY, which was formerly structured under the laws of the State
of New York as a mutual life insurance company called ``The Mutual Life
Insurance Company of New York,'' is one of the oldest insurance
companies in the United States, having been organized in 1842. In 1867,
MONY became the first mutual company to declare annual policyholder
dividends. Its principal place of business is located at 1740 Broadway,
New York, New York.
MONY is licensed to conduct insurance business in all 50 states
including the District of Columbia. As of December 31, 1997, MONY had
total assets of $16.6 billion, total liabilities of $15.7 billion
(including liabilities for policyholder benefits of $9.3 billion) and
surplus of about $835 million.
MONY's principal products include life insurance, annuities
(including tax deferred annuities described in section 403(b) of the
Code (TDAs) and individual retirement annuities (IRAs) described in
section 408(b) of the Code) and pension products. With its affiliates
and subsidiaries, MONY provides fiduciary and other services to Plan
policyholders which are covered under the Act and the Code. Such
services may include plan administration, investment management,
securities brokerage and related services. As a result of providing
these services to Plan policyholders, MONY and its affiliates would
become parties in interest with respect to the Plans.
2. Because it was formerly organized as a mutual life insurance
company, MONY had no authorized, issued or outstanding stock. Instead,
policyholders were both customers and owners of the company.
Specifically, the life insurance, endowment, annuity and certain other
insurance and pension contracts issued by MONY combined both insurance
coverage and proprietary rights, i.e., membership rights. In this
regard, MONY policyholders were entitled to vote on the conversion of
the company from a mutual life insurance company to a stock company. In
addition, some owners of MONY insurance contracts had rights to the
equity or surplus of the company in certain circumstances and some
policyholders had rights to share in the divisible surplus as annually
determined by MONY (policyholder dividends). MONY's Board of Trustees
annually determined the divisible surplus of the company that would be
distributed as policyholder dividends.
3. MONY represents that stock life companies have many advantages
over mutual companies. Unlike stock life companies, mutual life
insurance companies do not have ready access to outside capital
resources because they may not enhance their capital base by issuing
equity securities to the public or institutional investors. Therefore,
access to equity, or for that matter, debt capital markets is
significantly limited. In addition, MONY notes that since mutual life
insurance companies may not use stock for acquisitions or for executive
compensation, they have less flexibility in corporate structure.
Because these restrictions have hampered the growth of mutual life
insurance companies, MONY explains that the total market share of
mutual life insurance companies has declined significantly in the past
twenty years.
For these reasons, MONY proposed to reorganize into a stock life
insurance company to enhance its long-term strength and allow it to
obtain the equity and debt capital it would need in the competitive
markets in which it and its subsidiaries operate. As part of its Plan
of Reorganization, MONY will distribute to Eligible Policyholders 100
percent of the value of the company in the form of stock, cash or
policy credits in exchange for their membership interests. It is
anticipated that all of MONY's policyholders will benefit from a
stronger balance sheet and the likelihood of a higher credit rating.
Therefore, MONY requests an individual exemption from the
Department that would cover the receipt of Holding Company stock, cash
or policy credits by Eligible Policyholders that are Plans in exchange
for their existing membership interests in
[[Page 69316]]
MONY.<SUP>3</SUP> MONY is not requesting an exemption for distributions
of Holding Company stock for the Plans it and its affiliates maintain
for their own employees because it believes such stock would constitute
``qualifying employer securities'' within the meaning of section
407(d)(5) of the Act and that section 408(e) of the Act would apply to
such distributions.<SUP>4</SUP> If granted, the exemption will be
effective as of November 16, 1998, which is the date of MONY's Plan of
Reorganization.
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\3\ MONY estimates that approximately 30,000 of its
policyholders are Plans whose contracts are supported by several
hundred million dollars in assets.
\4\ The Department expresses no opinion herein on whether the
Holding Company stock will constitute qualifying employer securities
and whether such distributions will satisfy the terms and conditions
of section 408(e) of the Act.
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4. To become a stock insurance company, MONY proposed to reorganize
under section 7312 of the New York Insurance Law. In this regard,
MONY's Board of Trustees adopted a Plan of Reorganization on August 14,
1998 under which MONY would, subject to the approval of its
policyholders and the Superintendent, be organized as a stock life
insurance company subsidiary of a holding company (i.e., the Holding
Company). The stock of the Holding Company would then be distributed to
the policyholders.
Section 7312 establishes a rigorous approval process for the
reorganization of a life insurance company. The demutualization must be
initiated by the board of trustees of the insurance company which must
approve the reorganization plan by a vote of at least three-fourths of
the entire board. The board of trustees must also make an express
finding that the plan is ``fair and equitable'' to all affected
policyholders.
Once approved by the board of trustees, the reorganization plan
must be submitted to the Superintendent for review and approval. To
become effective, the Superintendent must determine that the
reorganization plan meets the requirements imposed by section 7312,
including the requirements that the plan be fair and equitable to the
policyholders, not be detrimental to the public and following the
reorganization, the insurer must have an amount of surplus which the
Superintendent deems to be reasonably necessary for its future
solvency.
To assist the Superintendent in performing his or her duties,
section 7312(h)(1) permits the Superintendent to appoint independent
consultants. Specifically, section 7312(h)(2) requires the
Superintendent to appoint an independent actuary to advise him or her
on matters relating to the reorganization. The actuary will provide a
memorandum describing his review. In the case of its Plan of
Reorganization, MONY has hired the actuarial firm of Tilinghast Towers-
Perrin (TT-P) to conduct an actuarial review and the investment banking
firm of Chase Securities, Inc. as investment banking consultant.
Under New York Insurance Law, the Superintendent is also required
to hold a public hearing on the plan of reorganization at which time
policyholders and other interested persons are invited to express their
views on the plan. The purpose of the public hearing is to determine
whether the reorganization plan is fair and equitable to policyholders
and is not detrimental to the public. During the hearing, interested
persons may comment on the fairness of the terms of the plan. Notice of
the hearing, a copy of the plan, a summary of the plan and other
materials approved by the Superintendent must be provided to each
policyholder of the insurance company whose policy or contract is in
force on the date of adoption of the plan of reorganization. The notice
must also be published in three newspapers of general circulation.
Once the reorganization plan has been approved by the insurer's
board of trustees and after the public hearing, the Superintendent is
required to approve such plan if he or she finds that (a) the plan does
not violate New York Insurance Law; (b) the plan is fair and equitable
to all policyholders and is not detrimental to the public; and (c)
after giving effect to the reorganization, the reorganized insurer will
have an amount of capital and surplus the Superintendent deems to be
reasonably necessary for its future solvency. The Superintendent must
also determine that the reorganization plan does not fail to meet the
following requirements of section 7312(c). In other words, (a) the plan
must demonstrate a purpose and specific reasons for the proposed
reorganization; (b) the plan must be fair and equitable to the
policyholders; (c) the plan must provide for the enhancement of the
operations of the reorganized insurer; and (d) the plan must not
substantially lessen competition in any line of insurance business. A
decision by the Superintendent to approve a plan of reorganization is
subject to judicial review in the New York courts.
The policyholders of the mutual life insurance company must also
approve the plan of reorganization. Each policyholder is entitled to
one vote and the plan must be approved by a vote of at least two-thirds
of all votes cast by policyholders entitled to vote.
5. MONY completed the development of its Plan of Reorganization and
received approval from its Board of Trustees of the proposed conversion
on August 14, 1998. On October 19, 1998, the New York State Insurance
Department (the New York Insurance Department) held a public hearing
with respect to MONY's Plan of Reorganization. On November 2, 1998, the
vote by MONY policyholders approving the Plan was completed. Formal
approval of the Plan by the New York Insurance Department occurred on
November 10, 1998.
6. MONY has established a subsidiary (i.e., the Holding Company)
whose stock it exclusively owns. On November 16, 1998, the effective
date of the Plan of Reorganization, MONY, itself, issued common stock
to the Holding Company. In addition, MONY surrendered to the Holding
Company and the Holding Company cancelled all of the Holding Company
common stock held by MONY. MONY then became a subsidiary of the Holding
Company.
As a result of the reorganization, MONY became, by operation of New
York Insurance Law, a stock life insurance company. MONY's charter and
by-laws were extinguished in accordance with New York Insurance Law.
Further, MONY's name was changed from ``The Mutual Life Insurance
Company of New York'' to ``MONY Life Insurance Company.'' However, all
of MONY's insurance policies would remain in force and all
policyholders would be entitled to receive all of the benefits under
their policies and contracts to which they would have been entitled if
the Plan of Reorganization had not been adopted.
7. MONY's Plan of Reorganization provides for Eligible
Policyholders to receive consideration in exchange for the surrender of
their membership interests as soon as practicable after the
reorganization date. Eligible Policyholders are those policyholders
whose MONY policies were both in force on the date of adoption of the
Plan of Reorganization by MONY's Board of Trustees and were still in
force on the effective date of the Plan.
Under the Plan of Reorganization, certain Eligible Policyholders
will receive common stock of the Holding Company as consideration for
their membership interest in the mutual insurance company. Said
interest will be extinguished as a result of the reorganization (Stock
Eligible Policyholders).
[[Page 69317]]
Aside from requiring the Holding Company to issue shares of Holding
Company stock to Stock Eligible Policyholders, the Holding Company was
permitted to sell shares of such stock, for cash, in an initial public
offering (the IPO) on the date of the reorganization. The Holding
Company also arranged for listing the Holding Company stock on the New
York Stock Exchange (NYSE). Such stock is currently traded on the NYSE.
Also under MONY's Plan of Reorganization, certain Eligible
Policyholders will receive cash or policy credits in lieu of Holding
Company stock. In this regard, if there were an IPO, Eligible
Policyholders who affirmatively indicated a preference to receive cash
instead of Holding Company stock, and who were allocated 75 shares or
less, as determined by MONY's Board of Trustees and approved by the
Superintendent prior to the reorganization, would receive cash instead
of Holding Company stock.<SUP>5</SUP> Assuming there were no IPO, such
Eligible Policyholders would receive Holding Company stock, regardless
of having expressed an interest for cash.
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\5\ With respect to these policyholders, MONY represents that it
will not provide ``investment advice'' on the form of consideration
elected.
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In addition, Eligible Policyholders whose mailing address is
outside the United States or Canada will receive cash unless the Plan
of Reorganization requires them to receive policy credits. Eligible
Policyholders who hold TDA or IRA contracts will receive policy credits
in the form of enhanced policy values in exchange for their membership
interests.<SUP>6</SUP> Such Eligible Policyholders are generally not
able to hold stock under applicable tax laws. Further, individuals, who
are covered by Plans that are qualified under sections 401(a) or 403(a)
of the Code, and who hold life insurance or annuity contracts will
receive policy credits. All other Eligible Policyholders, who are not
entitled to receive Holding Company stock, will receive cash in
exchange for their membership interests.<SUP>7</SUP>
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\6\ However, TDA or IRA policyholders who are in ``payout
status'' will receive shares of Holding Company Stock instead of
policy credits.
\7\ Consistent with sections 7312(a)(2), 7312(e) and 4210 of New
York Insurance Law, the Plan of Reorganization generally provides
that the policyholder eligible to participate in the distribution of
stock, cash or policy credits resulting from the Plan of
Reorganization is ``the person whose name appears * * * on the
insurer's records as owner'' of the policy. MONY further represents
that an insurance or annuity policy that provides benefits under an
employee benefit plan, typically designates the employer that
sponsors the plan, or a trustee acting on behalf of the plan, as the
owner of the policy. In regard to insurance or annuity policies that
designate the employer or trustee as owner of the policy, MONY
represents that it is required under the foregoing provisions of New
York Insurance Law and the Plan of Reorganization to make
distributions resulting from such Plan to the employer or trustee as
owner of the policy, except as provided below.
Notwithstanding the foregoing, MONY's Plan of Reorganization
provides a special rule applicable to an insurance policy issued to
a trust established by MONY. This rule applies whether or not the
trust, or any arrangement established by any employer participating
in the trust, constitutes an employee benefit plan subject to the
Act. Under this special rule, the holder of each individual
``certificate'' issued in connection with the insurance policy is
treated as the policyholder and owner for all purposes under the
Plan of Reorganization, including voting rights and the distribution
of consideration. The trustee of any such trust established by MONY
will not be considered a policyholder or owner and will not be
eligible to vote or receive consideration.
In general, it is the Department's view that, if an insurance
policy (including an annuity contract) is purchased with assets of
an employee benefit plan, including participant contributions, and
if there exist any participants covered under the plan (as defined
at 29 CFR 2510.3-3) at the time when MONY incurs the obligation to
distribute Holding Company stock, cash or policy credits, then such
consideration would constitute an asset of such plan. Under these
circumstances, the appropriate plan fiduciaries must take all
necessary steps to safeguard the assets of the plan in order to
avoid engaging in a violation of the fiduciary responsibility
provisions of the Act.
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The cash or policy credits distributed to Eligible Policyholders,
who are not entitled to receive Holding Company stock, will have a
value equal to the stock such policyholders would otherwise have
received based on the price per share of the Holding Company stock in
the IPO or, if there were no IPO, a number equal to a percentage of the
book value of the Holding Company stock on November 16, 1998, the
effective date of the Plan of Reorganization as determined by MONY's
actuarial consultant, PricewaterhouseCoopers, LLP, (PwC) and approved
by the Superintendent, in consultation with its actuary, TT-
P.<SUP>8</SUP> In total, MONY expects to distribute approximately $1
billion in value to Eligible Policyholders. Said amount represents the
entire value of MONY's enterprise. MONY proposes to distribute the
consideration to Eligible Policyholders on December 24, 1998.
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\8\ MONY wishes to clarify that the Superintendent was empowered
to approve the Plan of Reorganization and, in connection with such
Plan, the methodology utilized to determine the book value of the
Holding Company. However, the Superintendent is not specifically
authorized to review and approve the actual calculation of the book
value of the Holding Company at the time the distribution occurs.
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8. The Holding Company stock will be allocated to Stock Eligible
Policyholders as follows: (a) each Stock Eligible Policyholder will
receive at least 7 shares; and (b) the remainder of the shares will be
allocated to Stock Eligible Policyholders who own participating
policies based on the estimated contributions to surplus made by each
Eligible Policyholder. <SUP>9</SUP> As stated above, the allocation
methodology must be fair and equitable. Therefore, MONY has retained
PwC to assist it in developing an equitable allocation methodology, and
the Superintendent has retained TT-P to evaluate the allocation
methodology. Further, no Stock Eligible Policyholder will pay any
brokerage commissions or other transaction costs in connection with
such policyholder's receipt of stock.
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\9\ MONY notes that both the fixed and variable components of an
insurance policy will be provided in exchange for the policyholder's
membership interests.
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9. The Plan of Reorganization states that amounts to be distributed
to Eligible Policyholders that are Plans will be held in an escrow or
similar arrangement in the event that the Department does not provide
exemptive relief prior to the date of the reorganization. Under the
escrow arrangement, Plan policyholders will not receive their
distribution until such time as the exemption is granted, but no later
than the third anniversary of the effective date of the reorganization.
The escrow arrangement is subject to the terms and conditions of the
New York Insurance Department. Although it is currently contemplated
that the New York Insurance Department may require MONY to adopt the
escrow arrangement, MONY notes that this arrangement may be determined
to be unnecessary if the proposed exemption specifies the date of
reorganization as the effective date of the exemption.
10. In addition, the Plan of Reorganization provides for the
establishment of a commission-free sales program whereby Stock Eligible
Policyholders who receive between 25 and 99 shares of Holding Company
stock will be given the opportunity to sell their Holding Company stock
on the open market at least 60 days prior to the commencement date of
the program. Further, the Plan of Reorganization provides for a
commission-free purchase program whereby Stock Eligible Policyholders
who receive 99 or fewer shares of Holding Eligible Company stock will
be permitted to purchase the number of shares necessary to bring their
respective total number of shares up to 100. Stock Eligible
Policyholders who participate in the commission-free sales and purchase
programs will do so without the payment of any brokerage commissions or
similar fees. Moreover, MONY and its affiliates will not provide
``investment advice'' as described in section 3(21) of the Act with
regard to
[[Page 69318]]
the program. The commission-free sales and purchase programs will
commence on the first business day after the nine month anniversary of
the effective date of the reorganization and will continue for three
months. The programs may be extended with the approval of the
Superintendent if the Board of Directors of MONY determines such
extension would be appropriate and in the best interest of MONY and its
stockholders.
11. Although policyholder membership interests in MONY were
extinguished as a result of the reorganization, MONY's insurance
policies will remain in force. Eligible Policyholders will be entitled
to receive all benefits under their policies to which they would have
been entitled if the Plan of Reorganization had not been adopted. In
effect, no actual exchange of contracts will take place. The
contractural terms and benefits of MONY's life insurance, endowment,
annuity, pension plan, and other insurance contracts, including the
face values, insurance in force, borrowing terms, amount or pattern of
death benefit, premium pattern, interest rate or rates guaranteed on
issuance of the contract, and the guaranteed mortality and expense
charges, will remain unchanged.
12. As part of its long-term strategic plan to convert to a stock
life insurance company, MONY, the Holding Company and a group of
investment funds (the Investors) \10\ affiliated with Goldman, Sachs &
Co. (Goldman Sachs) have entered into an investment agreement (the
Investment Agreement). Under the Investment Agreement, MONY issued $115
million of 15 year, 9.5 percent surplus notes (the Surplus Notes) to
the Investors on December 30, 1997. The Surplus Notes are direct and
unsecured obligations of MONY. In accordance with section 1307 of the
New York Insurance Law, each payment of principal and interest on the
Surplus Notes may only be made with the prior approval of the New York
Insurance Department. The Surplus Notes are subordinate to all existing
and future indebtedness, policy claims and other creditors of MONY.
Proceeds from the Surplus Notes issuance are being added to MONY's
capital base.
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\10\ The Investors consist of GS Mezzanine Partners, L.P.; GS
Mezzanine Partners Offshore, L.P.; Stone Street Fund 1997, L.P.; and
Bridge Street Fund 1997, L.P. At the time of the investment, it is
represented that one member of MONY's Board of Trustees was a
limited partner in Goldman Sachs. However, no other affiliation
between MONY and the other Investors existed at the time of the
Investment Agreement.
In addition, the Investors have specifically represented to MONY
that their investment in the aforementioned limited partnerships
will either not involve plan assets or will not constitute a
prohibited transaction. In this regard, section 3.2(d) of the
Investment Agreement provides that--
Each Investor represents that either (a) it is not (i) an
employee benefit plan (as defined in section 3(3) of ERISA) which is
subject to the provisions of Title I of ERISA, (ii) a plan described
in section 4975(e)(1) of the Code or, (iii) an entity whose
underlying assets are deemed to be assets of a plan described in (i)
or (ii) above by reason of such plan's investment in the entity, or
(b) the Investor's purchase and holding of [the Surplus] Notes will
be exempt under a prohibited transaction class exemption issued by
the U.S. Department of Labor.
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Also under the Investment Agreement, MONY sold warrants (the
Warrants) providing the Investors with the opportunity to purchase a
minority interest of 7 percent or less of the Holding Company stock
upon MONY's conversion to a stock company. The Warrants were sold to
the Investors on December 30, 1997 at an aggregate purchase price of
$10 million. The exercise price for the Warrants will be the IPO share
price.
Further, the Investment Agreement provides that following the
reorganization, MONY has an option to draw upon an additional $100
million from the Investors through the issuance of non-voting
convertible preferred stock. Although MONY does not currently expect
that it will exercise the option, the contingent capital commitment
would allow it to have additional capital access, particularly in the
event it does not complete the IPO.
Finally, under the Investment Agreement, the Investors have been
granted board representation rights. Under the Agreement, MONY and the
Holding Company have agreed to use their best efforts to cause one of
the persons proposed by the Investors to be elected to its board. The
Investors' right to board representation will terminate when the
Investors no longer own Holding Company stock and/or the right to
acquire such stock (through the ownership of Warrants and/or
convertible preferred stock) equal to 5 percent of the voting power of
the Holding Company stock.
It is represented that Goldman Sachs's investment will add
significantly to MONY's financial strength and in no way affect MONY's
policy commitments or other obligations.
13. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The Plan of Reorganization, which is being implemented pursuant
to stringent procedural and substantive safeguards imposed under New
York law and supervised by the Superintendent, will not require any
ongoing involvement by the Department.
(b) One or more independent Plan fiduciaries had an opportunity to
determine whether to vote to approve the terms of the Plan of
Reorganization and was solely responsible for all such decisions.
(c) The proposed exemption will allow Eligible Policyholders that
are Plans to acquire Holding Company stock, cash or policy credits in
exchange for their membership interests in MONY and neither MONY nor
its affiliates will exercise any discretion or provide investment
advice with respect to such acquisition.
(d) No Eligible Policyholder will pay any brokerage commissions or
fees in connection with such Eligible Policyholder's receipt of Holding
Company stock or with respect to the implementation of the commission-
free sales and purchase programs.
(e) As a result of the Plan of Reorganization, all Eligible
Policyholders will receive approximately $1 billion from MONY which
represents MONY's full equity value and have the opportunity to
participate in MONY's future earnings.
(f) Each Eligible Policyholder that is a Plan had an opportunity to
comment on the Plan of Reorganization and to vote to approve such Plan
of Reorganization after receiving full and complete disclosure of its
terms.
(g) The Superintendent made an independent determination that the
Plan of Reorganization was in the interest of all MONY policyholders
including Plans.
(h) All of MONY's policyholder obligations will remain in force and
will not be affected by the Plan of Reorganization.
Notice to Interested Persons
MONY will provide notice of the proposed exemption to Eligible
Policyholders which are Plans within 30 days of the publication of the
notice of pendency in the Federal Register. Such notice will be
provided to interested persons by first class mail and will include a
copy of the notice of proposed exemption as published in the Federal
Register as well as a supplemental statement, as required pursuant to
20 CFR 2570.43(b)(2) which shall inform interested persons of their
right to comment on the proposed exemption. Comments with respect to
the notice of proposed exemption are due within 60 days after the date
of publication of this pendency notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
[[Page 69319]]
Individual Retirement Accounts (the IRAs) for Sharilyn Brune,
Richard C. Glowacki, Carl B. Mockensturm, Arthur T. Parrish, W.
Alan Robertson, David A. Snavely and Duane Stranahan, Jr.
(collectively, the IRA Participants); Located in Holland, OH
[Application Nos. D-10636-D-10642, respectively)
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,
32847, 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, shall not apply,
effective December 1, 1998 to (1) the cash sale by the IRAs \11\ to TTC
Holdings, Inc. (TTC), the parent of The Trust Company of Toledo, N.A.
(TTCOT), the trustee of the IRAs and a disqualified person, of certain
preferred stock (the Preferred Stock) issued by TTC; and (2) the
arrangement for the subsequent purchase by the IRA Participants in
their individual capacities, from TTC, pursuant to an agreement with
TTC, of an equal number of shares of common stock (the Common Stock)
issued by TTC, provided the following conditions are met:
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\11\ Pursuant to 29 CFR 2510.3-2(d), the IRAs are not within the
jurisdiction of 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.
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(a) The terms and conditions of the sale and purchase transactions
were at least as favorable to each IRA as the terms obtainable in an
arm's length transaction with an unrelated party.
(b) The sale by the IRAs of the Preferred Stock and the purchase by
the IRA Participants of the Common Stock, in their individual
capacities, were one-time transactions for cash which occurred on the
same business day;
(c) Each IRA received from TTC, as the sales price for the
Preferred Stock, cash consideration reflecting the fair market value of
such stock as determined by a qualified, independent appraiser;
(d) Each IRA Participant purchased, in his or her individual
capacity, shares of the Common Stock which were equal in number to the
shares of Preferred Stock sold by TTC;
(e) No IRA was required to pay any commissions, fees or other
expenses in connection with each sale transaction; and
(f) An independent fiduciary (the Independent Fiduciary) determined
that the transactions described herein were in the best interest and
protective of the IRAs at the time of the transactions; supervised and
monitored such transactions on their behalf; assured that the
conditions of the proposed exemption were met; and took whatever
actions were necessary and proper to protect the interests of the IRAs,
including reviewing amounts paid by TTC for the Preferred Stock.
Effective date: If granted, this proposed exemption will be
effective as of December 1, 1998.
Summary of Facts and Representations
1. TTC of 6135 Trust Drive, Holland, Ohio was incorporated in April
1990 as an Ohio ``for profit'' corporation. TTC is the holding company
of TTCOT, a nondeposit trust company. TTCOT, also located in Holland,
Ohio, is a wholly owned subsidiary of TTC.
2. TTCOT is a bank as that term is defined in section 202(a)(2) of
the Investment Advisers Act of 1940, as amended (the Advisers Act).\12\
TTCOT has been approved by the Office of the Comptroller of the
Currency to operate as a trust company. For the past 8 years, it has
engaged in the business of a freestanding trust-only business. TTCOT
provides a range of trust, investment management and custodial services
for employee benefit trusts and various personal trusts throughout
northwestern Ohio and southwestern Michigan. However, TTCOT does not
have the power to accept deposits, make loans or provide other services
characteristic of a commercial bank. TTCOT is regulated by the Office
of the Comptroller of the Currency. As a member of the Federal Reserve
System, TTCOT is also subject to the regulations of the Federal Reserve
Board. The trust powers of TTCOT are limited to the laws of the State
of Ohio.
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\12\ The Advisers Act defines the term ``bank'' to include ``(A)
a banking institution organized under the laws of the United States,
(B) a member bank of the Federal Reserve System, (C) any other
banking institution or trust company, whether incorporated or not,
doing business under the laws of any State or of the United States,
a substantial portion of the business of which consists of receiving
deposits or exercising fiduciary powers similar to those permitted
to national banks under the authority of the Comptroller of the
Currency, and which is supervised and examined by State or Federal
authority having supervision over banks, and which is not operated
for the purpose of evading the provisions of this subchapter, and
(D) a receiver, conservator, or other liquidating agent of any
institution or firm included in clauses (A), (B), or (C) of this
paragraph.''
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3. The IRAs are individual retirement accounts established under
section 408(a) of the Code.\13\ At present, TTCOT serves as a directed
trustee for the IRAs which are further described as follows:
---------------------------------------------------------------------------
\13\ Section 408(a) of the Code defines the term ``individual
retirement account'' as a trust created or organized in the United
States for the exclusive benefit of an individual or his
beneficiaries but only if the written governing instrument creating
the trust meets the following requirements: (a) except in the case
of a rollover contribution described in subsection (d)(3) in Code
sections 402(c), 403(a)(4) or 403(b)(8), no contribution will be
accepted unless it is in cash and contribution will be accepted
unless it is in cash and contributions will not be accepted for the
taxable year in excess of $2,000 on behalf of the individual; (b)
the trustee is a bank or such other person who demonstrates to the
satisfaction of the Secretary [of the Treasury] that the manner in
which such other person will administer the trust will be consistent
with the requirements of this section; (c) no part of the trust
funds will be invested in life insurance contracts; (d) the interest
of an individual in the balance in his account is nonforfeitable;
(e) the assets of the trust will not be commingled with other
property except in a common trust fund or common investment fund;
and (f) under regulations prescribed by the Secretary, rules similar
to the rules of section 401(a)(9) and the incidental death benefit
requirements of section 401(a) shall apply to the distribution of
the entire interest of an individual for whose benefit the trust is
maintained.
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(a) The Sharilyn Brune IRA. This IRA was originally established by
Sharilyn Z. Brune with The Ohio Company. However, on October 30, 1997,
TTCOT was appointed as the successor, directed trustee of the IRA. Ms.
Brune, the only participant in the IRA, is not an officer, director,
principal or employee of either TTC or TTCOT. As of August 26, 1998,
Ms. Brune's IRA had total assets having a fair market value of
$112,808.
(b) The Richard Glowacki IRA. This IRA was originally established
by Richard C. Glowacki with the former Society Bank and Trust (Society
Bank), which is currently known as KeyBank. However, on June 29, 1992,
TTCOT was appointed as the successor, directed trustee of the IRA. Mr.
Glowacki, the only participant in the IRA, is not an officer, director,
principal or employee of either TTC or TTCOT. As of July 31, 1998, Mr.
Glowacki's IRA had total assets having a fair market value of
$1,274,017.
(c) The Carl B. Mockensturm IRA. This IRA was originally created by
Carl B. Mockensturm with the former Shearson Lehman Bros., which is
currently known as Lehman Bros. However, on April 1, 1997, TTCOT was
appointed as the successor, directed trustee of the IRA. Mr.
Mockensturm, the only participant in the IRA, is not an officer,
director, principal or employee of either TTC or TTCOT. As of July 31,
1998, Mr. Mockensturm's IRA had total assets having a fair market value
of $535,766.
(d) The Arthur T. Parrish IRA. This IRA was originally established
by Arthur T. Parrish and Scudder Investment. However, on January 3,
1991, TTCOT was appointed as the
[[Page 69320]]
successor, directed trustee of the IRA. Mr. Parrish, the only
participant in the IRA, is not an officer, director, principal or
employee of either TTC or TTCOT. As of July 31, 1998, Mr. Parrish's IRA
had total assets having a fair market value of $438,924.
(e) The W. Alan Robertson IRA. This IRA was originally created by
W. Alan Robertson and the former Society Bank. However, on October 4,
1997, TTCOT was appointed as the successor, directed trustee of the
IRA. Mr. Robertson, the only participant in the IRA, is not an officer,
director, principal or employee of either TTC or TTCOT. As of July 31,
1998, Mr. Robertson's IRA had total assets having a fair market value
of $383,997.
(f) The David A. Snavely IRA. This IRA was originally created by
David A. Snavely and The Ohio Company. However, on October 4, 1997,
TTCOT was appointed as the successor, directed trustee of the IRA. Mr.
Snavely, the only participant in the IRA, is not an officer, director,
principal or employee of either TTC or TTCOT. As of July 31, 1998, Mr.
Snavely's IRA had total assets having a fair market value of $244,229.
(g) The Duane Stranahan, Jr. IRA. This IRA was originally created
by Duane Stranahan, Jr. and the former Society Bank. However, on
January 25, 1991, TTCOT was appointed as the successor, directed
trustee of the IRA. Mr. Stranahan, the only participant in the IRA, is
the Chairman of the Board and a director TTCOT. As of July 31, 1998,
Mr. Stranahan's IRA had total assets having a fair market value of
$412,661.
4. TTC was formerly capitalized with two classes of stock--one
class of common stock (i.e., the Common Stock) and one class of
preferred stock (i.e., the Preferred Stock). Both classes of stock had
equal voting rights and were without par value. There were 3,531 shares
of Common Stock outstanding which were divided evenly among Theodore T.
Hahn, Julie B. Higgins and David Snavely, the founders, principals and
partners of TTC.
The Preferred Stock was initially issued in units of 200 shares,
each in combination with a $10,000, 9 percent debenture (the Debenture)
subordinated to the secured debt of TTC. The Debenture has a maturity
date of December 31, 2000.<SUP>14</SUP> The Preferred Stock and the
Debentures were both constituent parts of a single offering unit which
could not be severed by the purchaser. The price for each unit was
$30,000. Of this amount, $20,000 was allocated to the Preferred Stock
and $10,000 to the Debenture. Thus, the total subscription price was $3
million.
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\14\ The original Debenture debt represents a ten year note
totaling $1 million that was issued in October 1990. Interest has
accrued on the unpaid principal amount of the note from the date of
issuance at the rate of 9 percent per annum based upon the actual
number of days elapsed. Interest was initially paid commencing
January 1, 1991 and semiannually on each July 1 and January 1,
thereafter.
The principal amount of the Debentures has been payable in five,
equal, consecutive, annual installments (20 percent of the original
principal amount of each Debenture), each due on December 31, 1996
through 2000, unless prepaid. In other words, the terms of the
Debentures have provided for installment repayments of debt of
$200,000 each, beginning on December 31, 1996. As noted, the
scheduled $200,000 installment was made in December 1996. A
scheduled $200,000 installment and a $200,000 prepayment were made
in December 1997 and a scheduled $200,000 installment and a final
prepayment will be paid by December 31, 1998.
The terms of the Debentures also permit any portion of the
unpaid principal balance to be prepaid at any time, provided,
however, that the prepayments are concurrently made on a pro rata
basis to all holders. Prepayments credited to the unpaid principal
amount of the Debentures will be used to reduce the amount thereof
due and payable at the next succeeding payment date.
---------------------------------------------------------------------------
There were 20,000 shares of Preferred Stock that were issued and
outstanding. These shares were held by approximately 65 shareholders.
Among the shareholders were 19 employee benefit plans and IRAs holding
a total of 4,400 shares of Preferred Stock or 18.7 percent of the
23,531 aggregate shares of Preferred and Common Stock that were issued
and outstanding.
The Preferred Stock gave each shareholder a $100 per share
liquidation preference but it did not pay any dividends. Each share of
Preferred Stock was convertible into one share of Common Stock at the
option of the shareholder. In addition, the Preferred Stock entitled
the holder to voting privileges that were identical to those given to
shareholders of the Common Stock.
5. Through a Confidential Offering Memorandum dated May 31, 1990
(the principal terms of which are described above in Representation 4),
each IRA Participant was given the opportunity, by the founders of TTC,
to acquire shares of Preferred Stock and Debentures in a direct,
limited private placement at the time of the initial offering. In this
regard, each IRA Participant could direct their respective IRA to
purchase shares of Preferred Stock and a Debenture. Based on the
financial projections provided in the Confidential Offering Memorandum,
it was TTCOT's belief that the investors might recognize the
opportunity for equity appreciation through such an investment.
Therefore, on October 8, 1990, each IRA acquired shares of the
Preferred Stock from TTC along with the Debentures. The IRAs paid cash
for the Preferred Stock and the attendant Debentures in the following
amounts:
----------------------------------------------------------------------------------------------------------------
Percentage of
IRA's assets
Shares of Amount paid represented by
IRA preferred for preferred Amount paid preferred
stock acquired stock for debentures stock and
debentures
(percent)
----------------------------------------------------------------------------------------------------------------
Brune........................................... 200 $20,000 $10,000 75
Glowacki........................................ 200 20,000 10,000 9
Mockensturm..................................... 200 20,000 10,000 15
Parrish......................................... 200 20,000 10,000 17
Robertson....................................... 200 20,000 10,000 30
Snavely......................................... 200 20,000 10,000 45
Stranahan....................................... 800 80,000 40,000 90
----------------------------------------------------------------------------------------------------------------
[[Page 69321]]
The IRAs incurred no fees or commissions in connection with the
acquisition transaction. However, at the time of the acquisition, Mr.
David Snavely was the President of TTCOT and Mr. Duane Stranahan was a
director of TTC.<SUP>15</SUP>
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\15\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions with respect to the exclusive benefit rule under
section 401(a) of the Code. (See Rev. Rul. 73-532, 1973-2 C.B. 128.)
The Department further notes that section 408(a) of the Code, which
describes the tax qualification provisions for IRAs, mandates that
the trust be created for the exclusive benefit of an individual or
his or her beneficiaries. However, the Department is not expressing
an opinion herein on whether violations of section 408(a) have taken
place with respect to the purchase and retention of TTC Preferred
Stock and the Debentures by certain of the IRA Participants.
Further, the Department notes that although TTC owns 100 percent
of the outstanding stock of TTCOT, under section 4975(e)(2)(H) of
the Code, TTC would not be considered a disqualified person with
respect to the IRAs because TTCOT, a fiduciary as well as a service
provider to the IRAs, is not a ``person'' described in subparagraph
(C), (D), (E) or (G) of that section. To the extent that TTC is not
a disqualified person with respect to the IRAs, the purchase of the
Preferred Stock and the Debentures at the direction of the IRA
Participants would not involve a transaction described in section
4975(c)(1)(A) or (B) of the Code. While TTC may not be a
disqualified person with respect to the IRAs, the purchase and
holding of the Preferred Stock and the Debentures by certain IRA
Participants may raise questions under section 4975(c)(1)(D) and (E)
of the Code depending on the degree (if any) of the IRA
Participant's interest in the transaction. Section 4975(c)(1)(D) and
(E) of the Code prohibits the use by or for the benefit of a
disqualified person of the assets of a plan and prohibits a
fiduciary from dealing with the assets of a plan in his own interest
or for his own account. Mr. Snavely, as an officer of TTCOT, and Mr.
Stranahan, as a director of TTC, may have had interests in the
acquisition transaction which affected their best judgment as
fiduciaries of their IRAs. In such circumstances, the transactions
may have violated section 4975 (c)(1)(D) and (E) of the Code. See
ERISA Advisory Opinion 90-20A (June 15, 1990). Accordingly, to the
extent there were violations of section 4975(c)(1)(D) and (E) of the
Code with respect to the purchase and holding of the Preferred Stock
and the Debentures by the IRAs of Messrs. Snavely and Stranahan, the
Department is not extending exemptive relief with respect to such
transactions.
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6. While owning the Preferred Stock, each IRA Participant became a
minority shareholder of TTC. However, no IRA Participant owned shares
of Preferred Stock in an individual capacity. In addition, none of the
IRAs acquired additional shares of Preferred Stock or Debentures nor
did they incur any servicing fees in connection with their holding of
these investments.
Also during its time of ownership by the IRAs, the value of the
Preferred Stock increased from $100 per share in 1990 to $291.70 per
share as of December 31, 1997. As for the Debentures, which are being
redeemed in annual installments of $200,000, the outstanding principal
amount was $400,000 as of March 31, 1998.
7. TTC recently obtained authority from its shareholders to amend,
by total restatement, its Amended and Restated Articles of
Incorporation. The primary purpose for the adoption of the Amended and
Restated Articles of Incorporation is to enable TTC to change its
corporate tax status, in accordance with section 1362 of the
Code,<SUP>16</SUP> from a ``Subchapter-C corporation'' to a
``Subchapter-S corporation'' for the taxable years commencing January
1, 1999. The amendment would also provide for the full conversion of
the Preferred Stock into Common Stock. In addition, the Board of
Directors of TTC has determined that it would be valid to assume that
TTC would continue to generate significant pre-tax income and that by
eliminating its ``Subchapter-C corporation'' tax status, TTC could
substantially increase its return to its shareholders.
---------------------------------------------------------------------------
\16\ Section 1362 of the Code contains provisions which allow a
small business corporation to elect and terminate Subchapter-S
corporate status.
---------------------------------------------------------------------------
8. As a result of TTC's proposal to change its corporate tax
status, an entity such as an employee pension benefit plan would be
considered an ``eligible shareholder'' (i.e., an entity identified in
the Code as being eligible to own and hold shares in a Subchapter-S
corporation). However, an entity such as an IRA would be considered an
ineligible shareholder (i.e., an entity identified in the Code as being
ineligible to own and hold shares in a Subchapter-S corporation).
Therefore, on or about May 4, 1998, TTC sent documentation to all of
its shareholders including the IRA Participants of the above referenced
IRAs. Specifically, TTCOT indicated that it wished to redeem, by
cancellation and at the current market value,<SUP>17</SUP> all shares
of the Preferred Stock currently held by the ineligible shareholders,
including the IRAs, as well as eligible shareholders who might suffer
adverse tax consequences from continued ownership of shares in a
Subchapter-S corporation. The Board of Directors and the management of
TTC believed that the shares of stock would continue to appreciate in
value as well as allow each shareholder to receive a distributable
share of the income of TTC.
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\17\ These shareholders would include the following employee
benefit plans for which exemptive relief has also been requested
from the Department: (D-10630) Genito-Urinary Surgeons, Inc. Profit
Sharing Plan; (D-10631) Michael J. Rosenberg Money Purchase Pension
Plan; (D-10632) Robert Savage Qualified Retirement Plan; (D-10633)
Toledo Clinic Inc. Employees 401(k) Profit Sharing Plan; (D-10634)
Hart Associates, Inc. Profit Sharing Plan; and (D-10635) Midwest
Fluid Power Company Savings & Profit Sharing Plan.
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In addition to the sale transaction, TTC provided a mechanism
whereby each ineligible shareholder could designate a related party who
would purchase, simultaneously with or immediately after the sale, the
number of shares of Common Stock equal to the number of shares of
Preferred Stock sold by the designating former shareholder. The
purchase transaction would be a cash transaction at the same price per
share as that paid by TTC to the IRA as the sales price for the
Preferred Stock.
Accordingly, TTCOT requests an administrative exemption from the
Department to permit, effective December 1, 1998, the sale by the
subject IRAs of their respective shares of Preferred Stock to TTC for a
cash price that was based upon the fair market value of such stock. The
proposed exemption would also permit, effective December 1, 1998, the
purchase, by the IRA Participants, in their individual capacities, of
shares of Common Stock from TTC. Neither the IRAs nor the IRA
Participants were required to pay any commissions, fees or incur any
other expenses in connection with the sale and purchase transactions.
As noted above, the Debentures will be repaid in full before December
31, 1998 and, therefore, are not subject to this exemption.
9. The sales price for the Preferred Stock was determined based
upon a written valuation of the shares dated May 6, 1998 and prepared
by Austin Financial Services, Inc. (AFSI), a qualified, independent
consulting firm with substantial experience in the financial services
industry. AFSI, a Toledo, Ohio-based investment banking firm, was
retained by TTC to value TTC and determine the fair market value of the
outstanding shares of Common Stock from a fully-diluted standpoint. The
valuation, which was performed by Dr. Douglas V. Austin, President and
CEO of AFSI and Mr. Steven A. Bires, Vice President of AFSI, also
included an appraisal of the Preferred Stock.
In conducting its valuation of TTC, AFSI reviewed relevant
financial information of TTC in order to derive its opinion of the fair
market value of the Common and Preferred Stock. In its evaluation, AFSI
considered a number of valuation methodologies for valuing closely-held
companies but it ultimately selected the discounted cash flow and
capitalization of earnings approaches. After an appropriate weighting
of these approaches, AFSI placed the fair market value of TTC at
$7,263,035 or 324.82 percent of TTC's total equity. This equated to a
fair market value of $308.66
[[Page 69322]]
per share on the total 23,351 shares of outstanding Preferred and
Common Stock as of March 31, 1998 (or an aggregate value of $61,732
each for the Brune, Glowacki, Mockensturm, Parrish, Robertson and
Snavely IRAs and $246,928 for the Stranahan IRA).<SUP>18</SUP> The
appraisal was updated prior to the consummation of the sale and
purchase transactions.
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\18\ AFSI notes that a minority discount could have been applied
to the sales price for the Preferred Stock since the proposed
transactions do not involve controlling interests in such stock.
However, based on instructions from TTC, the sales price has been
computed without taking into consideration a minority discount to
ensure that each IRA will receive a higher fair market value for the
Preferred Stock.
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10. Each of the IRA Participants made a determination that the
subject transactions would be in the interests of their IRAs. Upon
arriving at this conclusion, TTC made a decision to retain, at the
expense of TTCOT, the law firm of Callister Nebeker & McCullough (CNM)
of Salt Lake City, Utah, to serve as the Independent Fiduciary with
respect to the sale and purchase transactions. Specifically, the
Independent Fiduciary was appointed to review and opine on the prudence
and terms of the subject transactions, supervise and monitor such
transactions on behalf of the IRAs, assure that the conditions of the
proposed exemption were met, and take whatever actions were necessary
and proper to enforce and protect the interests of the IRAs, including
reviewing amounts paid by TTC for the Preferred Stock. The duties of
the Independent Fiduciary were to be performed by Messrs. Jeffrey N.
Clayton and W. Waldan Lloyd, both of whom are attorneys with the CNM.
The Independent Fiduciary represented that CNM has, from time to
time, acted as an independent fiduciary for employee benefit plans
subject to the provisions of the Act. The Independent Fiduciary noted
that CNM has an employee benefits section which routinely advises plan
fiduciaries regarding compliance with fiduciary standards under the Act
and that members of CNM have substantial experience in this area. The
Independent Fiduciary also represented that neither CNM, nor Messrs.
Clayton and Lloyd had any relationship with any of the IRAs, TTC or
TTCOT. Further, the Independent Fiduciary stated that it understood and
accepted the duties, responsibilities and liabilities in acting as a
fiduciary with respect to the subject IRAs.
The Independent Fiduciary was authorized to approve the disposal of
the Preferred Stock, including the authority to determine whether or
not the IRAs should be permitted to enter into the transactions and to
negotiate the terms of such transactions on behalf of the IRAs. When
rendering services to the subject IRAs, the Independent Fiduciary
stated that it would rely on data supplied by TTCOT and the IRAs.
However, the Independent Fiduciary was permitted to hire experts,
consultants and other advisors and assistants.
Based upon its assumptions, a review of listed documents and
certain limitations, the Independent Fiduciary believed that the sale
and purchase transactions were in the best interest of the IRAs and the
IRA Participants because (a) the Preferred Stock lacked liquidity since
it was not traded on the open market; (b) the sales price for the
Preferred Stock would give the IRAs cash that could be reinvested in
more liquid investments; and (c) the subject IRAs would be compelled to
liquidate their shares of Preferred Stock in order to comply with the
prohibitions on Subchapter-S corporation stock ownership if TTC and
TTCOT change their corporate tax status. Therefore, the Independent
Fiduciary believed the price to be received by the IRAs for their
shares of TTC Preferred Stock would constitute ``adequate
consideration'' within the meaning of section 3(18) of the Act.
12. The Independent Fiduciary appointed Houlihan Valuation Advisors
(HVA), an independent appraisal firm maintaining offices in Salt Lake
City, Utah, to provide an opinion as to the fairness (the Fairness
Opinion) of the sale transaction from a financial point of view.
Because the IRAs were to receive ``adequate consideration'' for their
shares of Preferred Stock, the sole purpose of the Fairness Opinion was
to determine whether the proposed acquisition price would constitute
adequate consideration for the IRAs. HVA's Fairness Opinion, which was
dated June 16, 1998, was prepared by Mr. David Dorton, CFA, ASA. Mr.
Dorton is a member of HVA.
While noting that the Preferred Stock had a $100 per share
liquidation preference, HVA stated that the fair market value of TTC
was significantly higher than its liquidation value. Therefore, HVA
believed the liquidation preference was virtually meaningless. Thus,
for purposes of its analysis, HVA deemed the Preferred Stock to be
equivalent to the Common Stock due to its convertibility features,
identical voting privileges and non-payment of dividends.
In preparing the Fairness Opinion, HVA stated that it reviewed a
number of documents, including but not limited to, (a) TTC's audited
financial statements for the years ended December 31, 1992 through
1997; (b) AFSI's appraisal report; (c) various information furnished by
TTC pertaining to the company, its operational structure, shareholder
listings, compensation paid to key personnel, etc.; (d) a summary of
transactions involving the Preferred Stock; and (e) operating
projections for TTC. After reviewing these documents, HVA represented
that it undertook generally recognized financial analysis and valuation
procedures to ascertain the financial condition of TTC as well as to
estimate the fair market value of the Preferred Stock to be sold to
TTC. To this end, HVA explained that it utilized four valuation
methodologies: (a) book value (including liquidation value), (b)
transaction value, (c) market value (derived from market value ratios
of publicly-traded ``comparable'' firms); and (d) income value (based
on the present value of future benefits.
Based upon its analysis, HVA concluded that the proposed sale
transaction would be fair to the IRAs and that the IRAs would be
receiving adequate consideration for the Preferred Stock. HVA also
reserved the right to supplement or withdraw the Fairness Opinion prior
to the closing of the sale transaction if material changes occurred
which might impact on the value of TTC or the value of the Preferred
Stock. Further, HVA proposed to update the Fairness Opinion prior to
the sale and purchase transactions.
13. In summary, it is represented that the transactions satisfied
the statutory criteria for an exemption under section 4975(c)(2) of the
Code because: (a) the terms and conditions of the sale and purchase
transactions were at least as favorable to each IRA as the terms
obtainable in an arm's length transaction with an unrelated party; (b)
the sale by the IRAs of the Preferred Stock and the purchase by the IRA
Participants of the Common Stock were one-time transactions for cash
which occurred on the same business day; (c) each IRA received from
TTC, as the sale price for the Preferred Stock, cash consideration
reflecting the fair market value of such stock as determined by a
qualified, independent appraiser; (d) each IRA Participant purchased,
in his or her individual capacity, shares of the Common Stock which
were equal in number to the shares of Preferred Stock sold by TTC; (e)
no IRA was required to pay any commissions, fees or other expenses in
connection with each sale transaction; and (f) the transactions
described herein were approved by an
[[Page 69323]]
Independent Fiduciary which determined that the transactions described
herein were in the best interest and protective of the IRAs at the time
of the transactions; supervised and monitored such transactions on
their behalf; assured that the conditions of the proposed exemption
were met; and took whatever actions were necessary and proper to
protect the interests of the IRAs, including reviewing amounts paid by
TTC for the Preferred Stock.
Notice to Interested Persons
Because Sharilyn Brune, Richard C. Glowacki, Carl B. Mockensturm,
Arthur T. Parrish, W. Alan Robertson, David A. Snavely and Duane
Stranahan, Jr. are the sole participants of their respective IRAs, it
has been determined that there is no need to distribute the notice of
proposed exemption to interested persons. Therefore, comments and
request for a public hearing are due 30 days from the date of
publication of this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department at
(202)219-8881. (This is not a toll-free number.)
Individual Retirement Accounts (the IRAs) for Robert C. Hummel,
Garth L. Gibson, Hugh B. Force, Lynn Morgan Ruyle, Robb A. Ruyle,
Ellen K. Davidson and Michael Davidson (Collectively; the
Participants); Located respectively in Greeley, Colorado; Montrose,
Colorado; Fort Collins, Colorado; Montrose, Colorado; Montrose,
Colorado; Green River, Wyoming; and Green River, Wyoming
[Application Nos. D-10683, D-10684, D-10685, D-10686, D-10687, D-10697
and D-10698]
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 C.F.R. Part 2570, Subpart B (55 FR 32836,
32847, 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, shall not apply to
the cash sales (the Sales) of certain shares of closely-held common
stock of First Mountain Company (the Stock) by the IRAs <SUP>19</SUP>
to the Participants, disqualified persons with respect to the IRAs,
provided that the following conditions are met:
---------------------------------------------------------------------------
\19\ Because each IRA has only one Participant, there is no
jurisdiction under 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
---------------------------------------------------------------------------
1. The terms and conditions of the Sales are at least as favorable
to each IRA as those obtainable in an arm's-length transaction with an
unrelated party;
2. The Sale of the Stock by each IRA is a one-time transaction for
cash;
3. Each IRA receives the fair market of the Stock, as established
by a qualified, independent appraiser, at the time of the Sale; and
4. The IRAs do not pay any commissions, costs or other expenses in
connection with the Sales.
Effective date: The proposed exemption, if granted, will be
effective as of December 15, 1998.
Summary of Facts and Representations
1. The IRAs are individual retirement accounts, as described in
Section 408(a) of the Code. The IRAs are self-directed. Among the
assets of each IRA were shares of the common Stock of First Mountain
Company (the Company),<SUP>20</SUP> a one-bank holding company
domiciled in the State of Colorado and registered with the Board of
Governors of the Federal Reserve System. The only asset of the Company
is Montrosebank (the Bank), located in Montrose, Colorado. As of
November 1998, the Company was a Subchapter ``C'' corporation. However,
the Company plans to change its status and be taxed as a Subchapter
``S'' corporation under the Code effective January 1, 1999.
---------------------------------------------------------------------------
\20\ The applicant represents that the Company has only common
Stock, and no preferred Stock.
---------------------------------------------------------------------------
The applicant describes the Participants, the IRAs, and their
former holdings in the Stock as follows:
(a) The IRA of Robert C. Hummel currently holds assets of
approximately $624,520, which include 8,000 shares of the Stock. The
IRA of Robert C. Hummel acquired shares of the Stock on May 24, 1995 at
a price of $10 per share, for a total investment of $80,000.
(b) The IRA of Garth L. Gibson, the Secretary and the President of
the Bank and a member of the Board of Directors of the Company and the
Bank, currently holds assets of approximately $58,866.60, which include
3,940 shares of the Stock. The IRA of Garth L. Gibson acquired shares
of the Stock on May 24, 1995 at a price of $10 per share, for a total
investment of $39,400.
(c) The IRA of Hugh B. Force currently holds assets of
approximately $31,012.44, which include 1,626 shares of the Stock. The
IRA of Hugh B. Force acquired the shares of the Stock on May 24, 1995
at a price of $10 per share, for a total investment of $16,260.
(d) The IRA of Lynn Morgan Ruyle currently holds assets of
approximately $77,016.11, which include 5,155 shares of the Stock. The
IRA of Lynn Morgan Ruyle acquired 4,740 shares of the Stock on May 24,
1995 at a price of $10 per share. Subsequently, this IRA acquired 415
additional shares of the Stock on May 2, 1997, also at a price of $10
per share, for a total investment of $51,550.
(e) The IRA of Robb A. Ruyle, a member of the Board of Directors of
the Company and the Bank, currently holds assets of approximately
$57,190.73, which include 3,828 shares of the Stock. The IRA of Robb A.
Ruyle acquired 3,120 shares of the Stock on May 24, 1995 at a price of
$10 per share. Subsequently, this IRA acquired 708 additional shares of
the Stock on May 2, 1997, also at a price of $10 per share, for a total
investment of $38,280.
(f) The IRA of Ellen K. Davidson, currently holds assets of
approximately $19,356.84, which include 1,286 shares of the Stock. The
IRA of Ellen K. Davidson acquired the shares of the Stock on May 24,
1995 at a price of $10 per share, for a total investment of $12,860.
(g) The IRA of Michael Davidson currently holds assets of
approximately $22,400.36, which include 1,494 shares of the Stock. The
IRA of Michael Davidson acquired the shares of the Stock on May 24,
1995 at a price of $10 per share, for a total investment of $14,940.
The applicant also represents that Union Colony Bank is the
custodian for all of the IRAs, except for the Robb A. Ruyle and Lynne
Morgan Ruyle IRAs. The custodian for the Ruyle IRAs is Edward Jones &
Company, a national brokerage firm.
2. The applicant requests an exemption for the Sale of the Stock by
each individual IRA to its respective Participant. As noted above,
business and income tax considerations have recently caused the Company
to elect to be taxed as a Subchapter ``S'' corporation pursuant to the
Code, effective January 1, 1999. However, section 1361 of the Code only
permits eligible shareholders to hold stock in a Subchapter ``S''
corporation. Because the IRAs are not eligible shareholders for
purposes of the Code, the Participants wish to purchase the Stock from
their IRAs. It is represented that each IRA acquired shares of the
Stock for investment purposes and that each IRA made a profit on its
original investment. The applicant states that the IRAs acquired the
Stock directly from the issuer (i.e., the Company). The applicant also
states that the Stock held collectively by the IRAs did not
[[Page 69324]]
represent a significant portion of the outstanding shares of the Stock
(see Table in Paragraph 3 below).
Four of the seven IRAs (i.e., the IRAs of Garth L. Gibson, Lynn
Morgan Ruyle, Robb A. Ruyle, and Ellen K. Davidson) have 99.99% of
their total assets invested in the Stock. <SUP>21</SUP> In addition,
the IRAs of Michael Davidson and of Hugh B. Force have 99.64% and
78.33% of their total assets, respectively, invested in the Stock. The
IRA of Robert C. Hummel has only 19.14% of its total assets invested in
the Stock.
---------------------------------------------------------------------------
\ 21\ The Department notes that the Internal Revenue Service has
taken the position that a lack of diversification of investments may
raise questions in regard to the exclusive benefit rule under
section 401(a) of the Code. See, e.g.. Rev. Rul. 73-532, 1973-2 C.B.
128. The Department further notes that section 408(a) of the Code,
which describes the tax qualification provisions for the IRAs,
mandates that the trust be created for the exclusive benefit of an
individual or his beneficiaries. However, the Department is
expressing no opinion in this proposed exemption regarding whether
violations of the Code have taken place with respect to the purchase
and subsequent holding of the Stock by the IRAs.
Further, to the extent that the Company (or the other sellers)
were not disqualified persons with respect to the IRAs under section
4975(e)(2) of the Code, the purchase of the Stock would not have
constituted a prohibited transaction under section 4975(c)(1)(A) of
the Code. However, the purchase and holding of the Stock by the IRAs
whose Participants are officers and directors of the Company and/or
the Bank raises questions under section 4975(c)(1)(D) and (E) of the
Code depending on the degree (if any) of the IRA Participant's
interest in the transaction. Section 4975(c)(1)(D) and (E) of the
Code prohibits the use by or for the benefit of a disqualified
person of the income or assets of a plan and prohibits a fiduciary
from dealing with the income or assets of a plan in his own interest
or for his own account. Those IRA Participants who are officers and/
or directors of the Company or the Bank, may have had interests in
the transactions which affected their best judgement as fiduciaries
of their IRAs. In such circumstances, the transactions may have
violated section 4975(c)(1)(D) and (E) of the Code. See Advisory
Opinion 90-20A (June 15, 1990). Accordingly, to the extent there
were violations of section 4975(c)(1)(D) and (E) of the Code with
respect to the purchases and holdings of the Stock by the IRAs, the
Department is extending no relief for these transactions.
---------------------------------------------------------------------------
3. The applicant further represents that no IRA held a majority
interest in the Company at any time. The following table sets forth
each IRA's percentage ownership in the Company at the time of the Sale.
------------------------------------------------------------------------
Percent of
IRA Stock held
------------------------------------------------------------------------
Robert C. Hummel........................................ 4.46
Garth L. Gibson......................................... 2.20
Hugh B. Force........................................... 0.91
Lynn Morgan Ruyle....................................... 2.87
Robb A. Ruyle........................................... 2.14
Ellen K. Davidson....................................... 0.70
Michael Davidson........................................ 0.83
------------------------------------------------------------------------
Certain of the Participants hold shares of the Stock in their
individual capacities. Specifically, Michael Davidson and Ellen K.
Davidson hold 3,220 shares of the Stock as joint tenants. Hugh B. Force
holds 3,374 shares of the Stock in his individual capacity. Garth L.
Gibson and Cynthia A. Gibson hold 6,641 shares of the Stock as joint
tenants. In addition, Robb A. Ruyle and Lynne Morgan Ruyle hold 3,017
shares of Company Stock as joint tenants. However, the applicant states
that purchasing the Stock from their respective IRAs will not make any
of the Participants a majority shareholder in the Company.
4. The Stock was appraised on October 9, 1998 by Van Dorn & Bossi
Certified Public Accountants (the Appraisal), an independent, qualified
appraiser located in Broomfield and Boulder, Colorado. In determining
the fair market value of the Stock, the Appraisal relied on information
regarding the valuation of two other banks in Colorado with closely-
held stocks. The Appraisal valued all outstanding shares of the Stock
held by the IRAs, considering factors such as the lack of marketability
for the Stock and the valuation of shares which represented less than a
controlling interest in the Company. The Company has a total of 179,240
shares of the Stock outstanding at the time of the Sale. The shares of
the Stock owned by the Participants through their IRAs represent
approximately 14.13% of the total outstanding shares of the Company.
The Appraisal stated that the aggregate shares of the Stock owned by
the IRAs is so small when compared to the total outstanding shares of
the Company, that no controlling interest would be gained by any
potential purchaser of the shares of the Stock. Thus, the Appraisal
stated that a discount of 35% for the lack of control is appropriate,
and applied that discount when valuing the shares of Stock involved in
the subject transactions.
The Appraisal concluded that the fair market value of the Stock
would be $14.94 per share at the time of the Sale. Therefore, the
aggregate value of the shares of the Stock to be sold by the IRAs to
the Participants was determined to be $378,415. Specifically, each IRA
will receive the following amount at the Sale:
------------------------------------------------------------------------
Number of Rec'd at
IRA Shares Sale
------------------------------------------------------------------------
Robert C. Hummel.............................. 8,000 $119,520
Garth L. Gibson............................... 3,940 58,863.60
Hugh B. Force................................. 1,626 24,292.44
Lynn Morgan Ruyle............................. 5,155 77,015.70
Robb A. Ruyle................................. 3,828 57,190.32
Ellen K. Davidson............................. 1,286 19,212.84
Michael Davidson.............................. 1,494 22,320.36
------------------------------------------------------------------------
5. The applicant represents that the transactions are
administratively feasible because each Sale will be a one-time
transaction for cash. The transactions are also in the best interest of
the IRAs because each IRA will dispose itself of all of its shares of
the Stock at a price which equals the Stock's fair market value at the
time of the Sale. As a result, greater diversification of the IRAs'
assets will be achieved by reinvesting the proceeds of the Sales in
other assets. Furthermore, it is represented that the transactions are
protective of the rights of the Participants and beneficiaries of the
IRAs because each IRA will receive the fair market value of the Stock
owned by the IRA, as determined by a qualified, independent appraiser.
Finally, the IRAs will not incur any commissions, costs, or other
expenses as a result of each Sale.
6. In summary, the applicant represents that the transactions will
satisfy the statutory criteria of section 4975(c)(2) of the Code
because:
A. The terms and conditions of the Sales are at least as favorable
to each IRA as those terms which are obtainable in an arm's-length
transaction with an unrelated party;
B. The Sale of the Stock by each IRA will be a one-time transaction
for cash;
C. Each IRA will receive the fair market value of the Stock, as
established by a qualified, independent appraiser; and
D. The IRAs will not pay any commissions, costs or other expenses
in connection with the Sales.
Notice to Interested Persons
Because the Participants are the sole participants of their
respective IRAs, it has been determined that there is no need to
distribute the notice of proposed exemption to interested persons.
Comments and requests for a hearing are due 30 days from the date of
publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department
at (202) 219-8883. (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
[[Page 69325]]
408(a) of the Act and/or section 4975(c)(2) of the Code does not
relieve a fiduciary or other party in interest of 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 11th day of December, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-33261 Filed 12-15-98; 8:45 am]
BILLING CODE 4510-29-P
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