Proposed Exemptions; Comerica Bank and Its Affiliates
(Collectively, Comerica)
[05/04/2004]
Volume 69, Number 86, Page 24670-24683
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11008, et al.]
Proposed Exemptions; Comerica Bank and Its Affiliates
(Collectively, Comerica)
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.
[[Page 24671]]
Comerica Bank and Its Affiliates (Collectively, Comerica) Located in
Detroit, Michigan
[Application Nos. D-11008 through D-11012]
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, in accordance with the procedures set forth in 29 CFR Part 2570,
Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Proposed Exemption for the Acquisition, Holding and
Disposition of Comerica Incorporated Stock
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(D), 406(b)(1) and 406(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)(D) and (E) of the Code, shall not apply to the
acquisition, holding and disposition of Comerica Incorporated Stock by
Index and Model-Driven Funds managed by Comerica, provided that the
following conditions and the general conditions in Section II are met:
(a) The acquisition or disposition of Comerica Incorporated Stock
is for the sole purpose of maintaining strict quantitative conformity
with the relevant index upon which the Index or Model-Driven Fund is
based, and does not involve any agreement, arrangement or understanding
regarding the design or operation of the Fund acquiring the Comerica
Incorporated Stock which is intended to benefit Comerica or any party
in which Comerica may have an interest.
(b) Whenever Comerica Incorporated Stock is initially added to an
index on which an Index or Model-Driven Fund is based, or initially
added to the portfolio of an Index or Model-Driven Fund, all
acquisitions of Comerica Incorporated Stock necessary to bring the
Fund's holdings of such Stock either to its capitalization-weighting or
other specified composition in the relevant index, as determined by the
independent organization maintaining such index, or to its correct
weighting as determined by the model which has been used to transform
the index (a ``Buy-up'' defined in Section III(e)), occur in the manner
described in either (1) or (2) below:
(1) If,
(A) The aggregate required purchase of Comerica Incorporated Stock
is less than one (1) percent of the total trading volume in Comerica
Incorporated Stock during the previous ten (10) trading days, and
(B) The required purchase can be completed within ten (10) trading
days with each day's purchase limited to no more than ten (10) percent
of the aggregate required purchase,
Then all purchases would be made by placing market-on-close orders
either with a broker-dealer independent of Comerica which is registered
under the '34 Act or through an automated trading system operated by a
broker-dealer independent of Comerica which is registered under the '34
Act and which provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of the broker-dealer; or
(2) If the conditions under (1) cannot be met, then:
(A) Purchases are from, or through, only one broker or dealer on a
single trading day;
(B) Based on the best available information, purchases are not the
opening transaction for the trading day;
(C) Purchases are not effected in the last half hour before the
scheduled close of the trading day;
(D) Purchases are at a price that is not higher than the lowest
current independent offer quotation, determined on the basis of
reasonable inquiry from non-affiliated brokers;
(E) Aggregate daily purchases do not exceed 15 percent of the
average daily trading volume for the security, as determined by the
greater of either (i) the trading volume for the security occurring on
the applicable exchange and automated trading system on the date of the
transaction, or (ii) an aggregate average daily trading volume for the
security occurring on the applicable exchange and automated trading
system for the previous five (5) business days, both based on the best
information reasonably available at the time of the transaction;
(F) All purchases and sales of Comerica Incorporated Stock occur
either (i) on a recognized securities exchange (as defined in Section
III(k) below), (ii) through an automated trading system (as defined in
Section III(j) below) operated by a broker-dealer independent of
Comerica that is either registered under the '34 Act, and thereby
subject to regulation by the SEC, which provides a mechanism for
customer orders to be matched on an anonymous basis without the
participation of a broker-dealer, or (iii) through an automated trading
system (as defined in Section III(j) below) that is operated by a
recognized securities exchange (as defined in Section III(k) below),
pursuant to the applicable securities laws, and provides a mechanism
for customer orders to be matched on an anonymous basis without the
participation of a broker-dealer; and
(G) If the necessary number of shares of Comerica Incorporated
Stock cannot be acquired within 10 business days from the date of the
event which causes the particular Fund to require Comerica Incorporated
Stock, Comerica appoints a fiduciary which is independent of Comerica
to design acquisition procedures and monitor Comerica's compliance with
such procedures.
(c) Subsequent to a Buy-up necessary to bring a Fund's holdings of
Comerica Incorporated Stock to its specified weighting in the index or
model pursuant to the restrictions described in paragraph (b) above,
all aggregate daily purchases of Comerica Incorporated Stock by the
Funds do not exceed on any particular day the greater of:
(1) 15 percent of the average daily trading volume for the Comerica
Incorporated Stock occurring on the applicable exchange and automated
trading system (as defined below) for the previous five (5) business
days, or
(2) 15 percent of the trading volume for Comerica Incorporated
Stock occurring on the applicable exchange and automated trading system
(as defined below) on the date of the transaction, as determined by the
best available information for the trades that occurred on such date.
(d) All transactions in Comerica Incorporated Stock not otherwise
described in paragraph (b) above are either: (i) entered into on a
principal basis in a direct, arms-length transaction with a broker-
dealer, in the ordinary course of its business, where such broker-
dealer is independent of Comerica and is registered under the '34 Act,
and thereby subject to regulation by the SEC, (ii) effected on an
automated trading system (as defined in Section III(j) below) operated
by a broker-dealer independent of Comerica that is subject to
regulation by the SEC, or an automated trading system operated by a
recognized securities exchange (as defined in Section III(k) below)
which, in either case, provides a mechanism for customer orders to be
matched on an anonymous basis without the participation of a broker-
dealer, or (iii) effected through a recognized securities exchange (as
defined in Section III(k) below) so long as the broker is acting on an
agency basis.
(e) No transactions by a Fund involve purchases from, or sales to,
Comerica (including officers, directors, or employees thereof), or any
party in interest that is a fiduciary with discretion to invest plan
assets into the Fund (unless the transaction by the
[[Page 24672]]
Fund with such party in interest would otherwise be subject to an
exemption).
(f) No more than five (5) percent of the total amount of Comerica
Incorporated Stock that is issued and outstanding at any time is held
in the aggregate by Index and Model-Driven Funds managed by Comerica.
(g) Comerica Incorporated Stock constitutes no more than five (5)
percent of any independent third party index on which the investments
of an Index or Model-Driven Fund are based.
(h) A plan fiduciary independent of Comerica authorizes the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds Comerica Incorporated Stock, pursuant to the
procedures described herein, other than in the case of a plan sponsored
by Comerica for the benefit of its employees (a Comerica Plan).
(i) A fiduciary independent of Comerica directs the voting of the
Comerica Incorporated Stock held by an Index or Model-Driven Fund on
any matter in which shareholders of Comerica Incorporated Stock are
required or permitted to vote.
(j) No more than ten (10) percent of the assets of any Fund that
acquires and holds Comerica Incorporated Stock is comprised of assets
of any Comerica Plan(s) for which Comerica exercises investment
discretion.
Section II--General Conditions
(a) Comerica maintains or causes to be maintained for a period of
six years from the date of the transaction the records necessary to
enable the persons described in paragraph (b) of this Section to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Comerica, the
records are lost or destroyed prior to the end of the six-year period,
and (2) no party in interest other than Comerica shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act
or to the taxes imposed by section 4975(a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are unconditionally
available at their customary location for examination during normal
business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of
the plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer to any plan participating in an Index
or Model-Driven Fund or any duly authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Index or Model-Driven Fund, or a representative of such participant or
beneficiary.
(2) None of the persons described in subparagraphs (B) through (D)
of this paragraph (b) shall be authorized to examine trade secrets of
Comerica or commercial or financial information which is considered
confidential.
Section III--Definitions
(a) The term ``Index Fund'' means any investment fund, account or
portfolio sponsored, maintained, trusteed, or managed by Comerica, in
which one or more investors invest, and--
(1) Which is designed to track the rate of return, risk profile and
other characteristics of an independently maintained securities Index,
as described in Section III(c) below, by either (i) replicating the
same combination of securities which compose such Index or (ii)
sampling the securities which compose such Index based on objective
criteria and data;
(2) For which Comerica does not use its discretion, or data within
its control, to affect the identity or amount of securities to be
purchased or sold;
(3) That contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and,
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund which is intended to
benefit Comerica or any party in which Comerica may have an interest.
(b) The term ``Model-Driven Fund'' means any investment fund,
account or portfolio sponsored, maintained, trusteed, or managed by
Comerica, in which one or more investors invest, and--
(1) Which is composed of securities the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of Comerica, to transform an independently
maintained Index, as described in Section III(c) below;
(2) Which contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(3) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund or the utilization of any
specific objective criteria which is intended to benefit Comerica or
any party in which Comerica may have an interest.
(c) The term ``Index'' means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries, but only if--
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients,
(B) A publisher of financial news or information, or
(C) A public stock exchange or association of securities dealers;
and,
(2) The index is created and maintained by an organization
independent of Comerica; and,
(3) The index is a generally accepted standardized index of
securities which is not specifically tailored for the use of Comerica.
(d) The term ``opening date'' means the date on which investments
in or withdrawals from an Index or Model-Driven Fund may be made.
(e) The term ``Buy-up'' means an acquisition of Comerica
Incorporated Stock by an Index or Model-Driven Fund in connection with
the initial addition of such Stock to an independently maintained index
upon which the Fund is based or the initial investment of a Fund in
such Stock.
(f) The term ``Comerica'' refers to Comerica Bank and its
Affiliates, as defined below in paragraph (g).
(g) The term ``Affiliate'' means, with respect to Comerica Bank, an
entity which, directly or indirectly, through one or more
intermediaries, is controlled by Comerica Incorporated.
(h) An ``affiliate'' of Comerica Incorporated includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
the person;
(2) Any officer, director, employee or relative of such person, or
partner of any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(i) The term ``control'' means the power to exercise a controlling
[[Page 24673]]
influence over the management or policies of a person other than an
individual.
(j) The term ``automated trading system'' means an electronic
trading system that functions in a manner intended to simulate a
securities exchange by electronically matching orders on an agency
basis from multiple buyers and sellers, such as an ``alternative
trading system'' within the meaning of the SEC's Reg. ATS [17 CFR Part
242.300], as such definition may be amended from time to time, or an
``automated quotation system'' as described in Section 3(a)(51)(A)(ii)
of the '34 Act [15 USC 78c(a)(51)(A)(ii)].
(k) The term ``recognized securities exchange'' means a U.S.
securities exchange that is registered as a ``national securities
exchange'' under Section 6 of the '34 Act (15 U.S.C. 78f), or a
designated offshore securities market, as defined in Regulation S of
the SEC [17 CFR Part 230.902(b)], as such definition may be amended
from time to time, which performs with respect to securities the
functions commonly performed by a stock exchange within the meaning of
definitions under the applicable securities laws (e.g., 17 CFR Part
240.3b-16).
Summary of Facts and Representations
1. Comerica Bank is a banking corporation chartered under the laws
of Michigan. It is a wholly-owned subsidiary of Comerica Incorporated,
which is a bank holding company regulated by and registered under the
Bank Holding Company Act of 1956 as amended. Comerica Bank & Trust,
National Association, is a federally chartered banking association. It
is also a wholly-owned subsidiary of Comerica Incorporated. Comerica
Bank has been granted trust powers by the Michigan Division of
Financial Institutions which regulates Comerica Bank pursuant to
Michigan law. As to fiduciary matters, the Michigan Division of
Financial Institutions requires Michigan chartered banks to comply with
the regulations promulgated by the United States Comptroller of the
Currency. Comerica Bank is also regulated by the Federal Reserve Board.
Comerica Bank & Trust, National Association has been granted trust
powers by the Comptroller of the Currency under section 92a of the
National Bank Act. World Asset Management (WAM) is an investment
advisor registered under the Investment Advisers Act of 1940. WAM is a
Delaware limited liability company of which the controlling partners
are Comerica Bank affiliates. The ``Applicants'' for the exemption
proposed herein are Comerica Bank, Comerica Bank & Trust, National
Association, WAM, and those other affiliates of Comerica Bank that act
or may act in the future as fiduciaries to ERISA-covered plans.
2. The Applicants represent that they act as a trustee, a custodian
of assets or an investment manager for various employee pension and
welfare benefit plans which are subject to regulation under ERISA. In
their fiduciary capacities, the Applicants have complete discretionary
powers with respect to some plans, and as to other plans, they invest
assets as directed by independent investment fiduciaries, the plan
sponsors or individual plan participants.
3. Effective September 1, 1999, WAM became an investment manager
for a group of employee benefit pension plans for which Comerica Bank
previously acted as trustee. Under Comerica Bank's trusteeship, the
plans' assets were invested in a Model-Driven Fund (i.e., the WAM
Model-Driven Fund) which depended upon certain indices which included
Comerica Incorporated Stock. The plans' sponsor, acting in an
independent fiduciary capacity, periodically directed Comerica Bank to
acquire and dispose of Comerica Incorporated Stock as dictated by the
computer model upon which the Model-Driven Fund was based.\1\ WAM was
appointed as an investment manager for the purpose of continuing to
operate the Model-Driven Fund.
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\1\ The Applicants are not requesting a retroactive exemption
for the past acquisition, holding and disposition of any Comerica
Incorporated Stock by the WAM Model-Driven Fund. In this regard, the
Department is not providing any opinion in this proposed exemption
as to whether such transactions were in violation of any of the
fiduciary provisions contained in Part 4 of Title I of the Act.
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4. The Applicants organize and maintain collective investment funds
for the pooled investment of assets of ERISA-regulated plans over which
Comerica Bank has fiduciary powers. The collective funds are managed
pursuant to specific investment objectives set forth in the declaration
of trust for each fund. As prescribed by regulations of the Comptroller
of the Currency, Comerica retains the fiduciary responsibility for the
investment of the assets of their collective investment funds. The
Applicants represent that by diversifying investments within collective
funds, the investment risk to individual customer accounts is reduced
while enabling the collective funds to pursue investment objectives
which might otherwise be possible or prudent only for larger accounts.
While Comerica retains the fiduciary responsibility for investing the
assets of its collective investment funds, all of the funds invested
according to indices (i.e., Index and Model-Driven Funds) are currently
managed on a day-to-day basis under contracts between Comerica and WAM.
5. Before investing the assets of an ERISA-covered employee benefit
plan in its collective funds, Comerica represents that it complies with
the requirements for the exemption of such transactions from the
prohibitions of section 406(a) and (b) of the Act as provided in
section 408(b)(8) of the Act.\2\ Inter alia, Comerica represents that
it requires either that the controlling employee benefit plan document
permits the plan's assets to be invested in the particular collective
investment funds or secures the written permission of an independent
investment fiduciary to such plan for the collective fund investment.
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\2\ In this proposed exemption, the Department expresses no
opinion as to whether any activities of Comerica regarding its
collective funds have satisfied the conditions of section 408(b)(8)
of the Act.
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6. The Applicants request that the Index and Model-Driven Funds be
permitted to invest in Comerica Incorporated Stock if such Stock is
included among the securities listed in the index utilized by the Fund.
The Applicants represent that Comerica Incorporated Stock is currently
included in the S&P 500 Index, the Wilshire 5000 Total Return Index,
the Russell 3000 Index, and the Russell 1000 Index. Comerica has
identified at least eight Index Funds it sponsors which would, if the
exemption proposed herein is granted, acquire and hold Comerica
Incorporated Stock. Those Index Funds are the Comerica 500 Index Fund
(An Employee Benefit Stock Fund), Comerica Large Cap Value Index Fund
(An Employee Benefit Fund), Comerica Large Cap Index Fund (A Tax Exempt
Organizations Fund), Comerica 500 Index Fund (PEP)(An Employee Benefit
Stock Fund), Trowel Trades S&P 500 Index Fund, Comerica Managed Asset
Allocation Fund (An Employee Benefit Fund), and the Comerica Managed
Asset Allocation Fund (A Tax Exempt Organizations Fund). At present,
Comerica has excluded Comerica Incorporated Stock from the portfolios
of those Index Funds holding ``plan assets'' subject to ERISA, even
though such stock is included in the independently maintained indices
upon which such Funds are based. The exclusion of Comerica Incorporated
Stock prevents Comerica's Index Funds from accurately tracking the
investment return published by the independent
[[Page 24674]]
organizations which maintain the indices.
7. The Applicants state that the exemption proposed herein is
necessary to allow Funds holding ``plan assets'' to purchase and hold
Comerica Incorporated Stock in order to replicate the capitalization-
weighted or other specified composition of Comerica Incorporated Stock
in an independently maintained third party index used by an Index Fund
or to achieve the desired transformation of an index used to create a
portfolio for a Model-Driven Fund.
In addition, the Applicants represent that there will be instances,
once this proposed exemption is granted, when Comerica Incorporated
Stock will be added to an index on which a Fund is based or will be
added to the portfolio of a Fund which seeks to track an index that
includes such stock. These instances will be referred to herein as a
``Buy-up.'' In such instances, acquisitions of Comerica Incorporated
Stock will be necessary to bring the Fund's holdings of such stock
either to its capitalization-weighted or other specified composition in
the index, as determined by the independent organization maintaining
such index, or to achieve the desired weighting for such stock as
determined by the computer model which has been used to transform the
index. If the Index or Model-Driven Fund holds ``plan assets,'' the
Applicants represent that all acquisitions of Comerica Incorporated
Stock will comply with the Buy-up conditions of this proposed
exemption. These conditions are described in either (1) or (2) below,
as applicable:
(1) If,
(A) The aggregate required purchase of Comerica ncorporated
Stock is less than one (1) percent of the total trading volume in
Comerica Incorporated Stock during the previous ten trading days,
and
(B) The required purchase can be completed within ten (10)
trading days with each day's purchase limited to no more than ten
(10) percent of the aggregate required purchase,
Then all purchases would be made by placing market-on-close orders
either with a broker-dealer independent of Comerica which is registered
under the Securities Act of 1934 or through an automated trading system
operated by a broker-dealer independent of Comerica which is registered
under the Securities Act of 1934 and which provides a mechanism for
customer orders to be matched on an anonymous basis without the
participation of the broker-dealer; or
(2) If the conditions in (1) above cannot be met, then:
(A) Purchases are from, or through, only one broker or dealer on
a single trading day;
(B) Based on the best available information, purchases are not
the opening transaction for the trading day;
(C) Purchases are not effected in the last half hour before the
scheduled close of the trading day;
(D) Purchases are at a price that is not higher than the lowest
current independent offer quotation, determined on the basis of
reasonable inquiry from non-affiliated brokers;
(E) Aggregate daily purchases do not exceed 15 percent of the
average daily trading volume for the security, as determined by the
greater of either (i) the trading volume for the security occurring
on the applicable exchange and automated trading system on the date
of the transaction, or (ii) an aggregate average daily trading
volume for the security occurring on the applicable exchange and
automated trading system for the previous five (5) business days,
both based on the best information reasonably available at the time
of the transaction;
(F) All purchases and sales of Comerica Incorporated Stock occur
either (i) on a recognized securities exchange as defined in Section
III(k) above, (ii) through an automated trading system (as defined
in Section III(j) above) operated by a broker-dealer independent of
Comerica that is registered under the '34 Act, and thereby subject
to regulation by the SEC, which provides a mechanism for customer
orders to be matched on an anonymous basis without the participation
of a broker-dealer, or (iii) through an automated trading system (as
defined in Section III(j) above) that is operated by a recognized
securities exchange (as defined in Section III(k) above) pursuant to
the applicable securities laws, and provides a mechanism for
customer orders to be matched on an anonymous basis without the
participation of a broker-dealer; and
(G) If the necessary number of shares of Comerica Incorporated
Stock cannot be acquired within 10 business days from the date of
the event which causes the particular Fund to require Comerica
Incorporated Stock, Comerica appoints a fiduciary which is
independent of Comerica to design acquisition procedures and monitor
Comerica's compliance with such procedures.
The Applicants represent that if an independent fiduciary were
required to be appointed under ``(2)(G)'' above, the independent
fiduciary and its principals will be completely independent from
Comerica and its Affiliates and will be experienced in developing and
operating investment strategies for individual and collective
investment vehicles that track third-party indices. Furthermore, the
independent fiduciary will not act as the broker for any purchases or
sales of Comerica Incorporated Stock and will not receive any
commissions as a result of the initial acquisition program.
The independent fiduciary will have as its primary goal the
development of trading procedures that minimize the market impact of
purchases made pursuant to the initial acquisition program by the
Funds. The Applicants would expect that, under the trading procedures
established by the independent fiduciary, the trading activities will
be conducted in a low-profile, mechanical, non-discretionary manner and
would involve a number of small purchases over the course of each day,
randomly timed. The Applicants further expect that such a program will
allow them to acquire the necessary shares of Comerica Incorporated
Stock for the Funds with minimum impact on the market and in a manner
that will be in the best interests of any employee benefit plans that
participate in such Funds.
The independent fiduciary will also be required to monitor the
Applicants' compliance with the trading program and procedures
developed for the initial acquisition of Comerica Incorporated Stock.
During the course of any initial acquisition program, the independent
fiduciary will be required to review the activities weekly to determine
compliance with the trading procedures and notify Comerica or WAM, as
the case may be, should any non-compliance be detected. Should the
trading procedures need modifications due to unforeseen events or
consequences, the independent fiduciary will be required to consult
with Comerica or WAM, as the case may be, and must approve in advance
any alteration of the trading procedures.
8. The Applicants state that subsequent to acquisitions necessary
to bring a Fund's holdings of Comerica Incorporated Stock to its
specified weighting in the index or model pursuant to the restrictions
described above, all aggregate daily purchases or sales of Comerica
Incorporated Stock by the Funds will not exceed on any particular day
the greater of: (i) 15% of the trading volume for Comerica Incorporated
Stock on the exchange on which the stock is primarily traded and
automated trading systems on the day of the transaction; or (ii) 15% of
an aggregate average daily trading volume for the Comerica Incorporated
Stock occurring on the exchange on which the stock is primarily traded
and automated trading systems for the previous five business days,
based upon the best information reasonably available at the time of the
transaction.
The Applicants state that all transactions in Comerica Incorporated
Stock subsequent to acquisitions necessary to bring a Fund's holdings
of
[[Page 24675]]
Comerica Incorporated Stock to its specified weighting in the index or
model will be conducted in one of the following three manners: (i) On a
principal basis in a direct, arms-length transaction with a broker-
dealer in the ordinary course of its business, which broker-dealer is
not affiliated with Comerica and which is registered under the '34 Act;
(ii) effected on an automated trading system (as that term is defined
in Section III(j) above) operated either by a broker-dealer not
affiliated with Comerica and which is regulated by the SEC or by a
recognized securities exchange and which matches customer orders on an
anonymous basis; or (iii) effected through a recognized securities
exchange with the broker acting on an agency basis.
The Applicants represent that no transactions in Comerica
Incorporated Stock will involve purchases from or sales to Comerica or
any affiliate (including officers, directors and employees of Comerica
Bank or its affiliates, as defined in Section III(g) above), or any
party in interest with respect to a plan which has discretion to invest
plan assets into an Index or Model-Driven Fund.
9. The Applicants represent further that no more than five (5)
percent of the total amount of Comerica Incorporated Stock issued and
outstanding at any time will be held in the aggregate by the Index and
Model-Driven Funds. For all acquisitions and holdings of Comerica
Incorporated Stock by such Funds, the Applicants represent that they
will ensure that Comerica Incorporated Stock does not constitute more
than five (5) percent of the value of any independent third-party index
on which the investments of an Index or Model-Driven Fund are based. In
this regard, the weight currently assigned to Comerica Incorporated
Stock in the S&P 500 Index is only approximately 0.0703% and 0.137% of
the value subcategory. The Applicants have not identified any indices
in which Comerica Incorporated Stock exceeds 5% of the index.
10. The Applicants state that a fiduciary independent of Comerica
Bank and its affiliates will direct the voting of the Comerica
Incorporated Stock held by an Index or Model-Driven Fund on any matter
in which shareholders of Comerica Incorporated are required or
permitted to vote. In all instances, the independent fiduciary chosen
to vote Comerica Incorporated Stock for the Funds will be a consulting
firm specializing in corporate governance issues and proxy voting on
behalf of institutional investors with large equity portfolios. The
fiduciary will develop and follow standard guidelines and procedures
for the voting of proxies by institutional fiduciaries. Comerica will
provide the independent fiduciary with all necessary information
regarding the Funds that hold Comerica Incorporated Stock, the amount
of Comerica Incorporated Stock held by the Funds on the record date for
shareholder meetings of Comerica Incorporated, and all proxy and
consent materials with respect to Comerica Incorporated Stock. The
independent fiduciary will maintain records with respect to its
activities as an independent fiduciary on behalf of the Funds,
including the number of shares of Comerica Incorporated Stock voted,
the manner in which they were voted, and the rationale for the vote if
the vote was not consistent with the independent fiduciary's procedures
and current voting guidelines in effect at the time of the vote. The
independent fiduciary will be required to acknowledge that it will be
acting as a fiduciary with respect to the plans which invest in the
Funds which own Comerica Incorporated Stock, when voting such stock.
The Applicants will engage Institutional Shareholder Services to act as
the independent fiduciary to vote the Comerica Incorporated Stock.
11. Comerica represents that it may exercise some discretion in
allocating and reallocating a plan's assets among various collective
investment funds, including Funds which may hold Comerica Incorporated
Stock. These allocations are based on a plan's investment objectives,
risk profile and market conditions. Comerica represents that in such
cases a plan fiduciary independent of Comerica and its affiliates will
authorize the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds Comerica Incorporated Stock,
other than in the case of a Comerica Plan. Comerica makes the following
representations with respect to the purchase, directly or indirectly,
of Comerica Incorporated Stock by such plans:
(a) Comerica represents that any prohibited transactions which
might occur as a result of the discretionary allocation and
reallocation of plan assets among collective investment funds will be
exempt from the prohibitions of section 406 of the Act by reason of
section 408(b)(8).
(b) Before Comerica Incorporated Stock is first purchased by a
Fund, the appropriate independent fiduciary for each plan which is
currently invested or could be invested in such Fund will be furnished
an explanation and a simple form to return to Comerica for the purpose
of indicating either approval or disapproval of investments in the
Index or Model-Driven Fund including Comerica Incorporated Stock,
together with a postage-paid return envelope. If the form is not
returned to Comerica, Comerica may obtain a verbal response by
telephone. If a verbal response is obtained by telephone, Comerica will
confirm the fiduciary's decision in writing with five (5) business
days. In the event no response is obtained from a plan fiduciary, the
assets of the plan will not be invested in any Index Fund which invests
in Comerica Incorporated Stock and any plan assets currently invested
in such Fund at that time would be withdrawn.
(c) Each new management agreement with such a plan will contain
language specifically approving or disapproving the investment in any
Fund which holds or might hold Comerica Incorporated Stock. The
fiduciary for each such plan will be informed that the existing
management agreement could be modified in the same way. However, if the
fiduciary does not specifically approve language in the agreement
allowing the investment of plan assets in Funds which hold or might
hold Comerica Incorporated Stock, then no such investment will be made
by Comerica.
(d) Each such plan will be informed on a quarterly basis of any
investment in, or withdrawal from, any Fund holding Comerica
Incorporated Stock. The plan would be granted the election to override
Comerica's discretionary decision to invest in, or withdraw from, such
Funds. If the plan overrides Comerica's decision to invest in, or
withdraw from, the Funds, then Comerica will carry out the plan's
election as soon as possible after being notified of such election.
12. Comerica represents that the Comerica Incorporated Retirement
Plan (the Comerica Retirement Plan) is trusteed by Comerica Bank. It
has assets currently invested in three Comerica collective funds, the
Comerica 500 Index Fund, the Comerica 500 Index Fund (PEP) and the
Comerica Large Cap Value Index Fund. If the requested exemption is
granted, these funds will be permitted to purchase Comerica
Incorporated Stock, and as a consequence the Comerica Retirement Plan
will invest in Comerica Incorporated Stock.\3\
---------------------------------------------------------------------------
\3\ The Applicants are not requesting any relief from sections
406 and 407(a) of the Act in connection with the acquisition and the
holding of Comerica Incorporated Stock by any employee benefit plans
established and maintained by Comerica for its own employees which
invest in the Applicants' Index Funds. In this regard, such
transactions may be covered by the statutory exemption under section
408(e) of the Act, if the conditions of that exemption are met.
However, the Department is not providing an opinion in this proposed
exemption as to whether the conditions of section 408(e) of the Act
are met.
---------------------------------------------------------------------------
[[Page 24676]]
13. In summary, the Applicants represent that such transactions
will meet the criteria of section 408(a) of the Act for the following
reasons:
(a) Each Index or Model-Driven Fund involved will be based on an
Index, as defined in Section III(c) above;
(b) The acquisition, holding and disposition of Comerica
Incorporated Stock will be for the sole purpose of maintaining strict
quantitative conformity with the relevant Index upon which the Index or
Model-Driven Fund is based, and will not involve any agreement,
arrangement or understanding regarding the design or operation of the
Fund acquiring the Comerica Incorporated Stock which is intended to
benefit Comerica or any party in which Comerica may have an interest;
(c) Whenever Comerica Incorporated Stock is initially added to an
index on which a Fund is based, or initially added to the portfolio of
a Fund (i.e., a ``Buy-up''), all acquisitions of Comerica Incorporated
Stock necessary to bring the Fund's holdings of such stock either to
its capitalization weighted or other specified composition in the
relevant index, as determined by the independent organization
maintaining such index, or to its correct weighting as determined by
the computer model which has been used to transform the index, will be
restricted by conditions which are designed to prevent possible market
price manipulations;
(d) Subsequent to acquisitions necessary to bring a Fund's holdings
of Comerica Incorporated Stock to its specified weighting in the index
or model, pursuant to the restrictions noted in paragraph (c) above,
all aggregate daily purchases of Comerica Incorporated Stock by the
Funds will not exceed, on any particular day, the greater of: 15% of
the average daily trading volume for such stock occurring on the
applicable exchange or automated trading system for the previous five
trading days, or 15% of the trading volume for such stock on the date
of the transaction, as determined by the best available information for
the trades that occurred on such date;
(e) All transactions in Comerica Incorporated Stock, other than
acquisitions of such stock in a Buy-up described in paragraph (c)
above, will be either: (i) Entered into on a principal basis with a
broker-dealer, in the ordinary course of its business, where such
broker-dealer is independent of Comerica and is registered under the
'34 Act, and thereby subject to regulation by the SEC, (ii) effected on
an automated trading system operating by a broker-dealer subject to
regulation by the SEC, or by a recognized securities exchange which, in
either case, provides a mechanism for customer orders to be matched on
an anonymous basis without the participation of a broker-dealer, or
(iii) effected through a recognized securities exchange (as defined
herein) so long as the broker is acting on an agency basis;
(f) No transactions by a Fund will involve purchases from or sales
to Comerica (including officers, directors, or employees thereof), or
any party in interest that is a fiduciary with discretion to invest
plan assets into the Fund;
(g) No more than five (5) percent of the total amount of Comerica
Incorporated Stock, that is issued and outstanding at any time, will be
held in the aggregate by Index and Model-Driven Funds managed by
Comerica or its Affiliates;
(h) Comerica Incorporated Stock will constitute no more than five
(5) percent of any independent third party index on which the
investments of an Index or Model-Driven Fund are based;
(i) A plan fiduciary independent of Comerica will authorize the
investment of such plan's assets in an Index or Model-Driven Fund which
purchases and/or holds Comerica Incorporated Stock pursuant to the
procedures described herein, including those which relate to portfolio
management services provided to certain plans;
(j) A fiduciary independent of Comerica will direct the voting of
the Comerica Incorporated Stock held by an Index or Model-Driven Fund
on any matter in which shareholders of Comerica Incorporated Stock are
required or permitted to vote; and
(k) No more than ten (10) percent of the assets of any Fund that
acquires and holds Comerica Incorporated Stock will be comprised of
assets of any Comerica Plan(s) for which Comerica exercises investment
discretion.
Notice to Interested Persons: Notice of the proposed exemption will
be mailed by first class mail to all interested persons, including the
appropriate fiduciaries for employee benefits plans currently invested
in the Funds. The notice will contain a copy of the proposed exemption
as published in the Federal Register and an explanation of the rights
of interested parties to comment on or request a hearing regarding the
proposed exemption. All notices should be sent to interested persons
within 15 days of the publication of his proposed exemption in the
Federal Register. Any written comments and/or requests for a hearing
must be received by the Department from interested persons with 45 days
of the publication of this proposed exemption in the Federal Register.
In addition, Comerica shall provide a copy of the proposed
exemption and, if granted, a copy of the final exemption upon request
to all ERISA-covered plans that invest in Index or Model-Driven Fund
that will include Comerica Incorporated Stock in its portfolio after
the date the final exemption is published 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.)
Les Olson Company, Inc. Profit Sharing Plan (the Plan) Located in Salt
Lake City, Utah
[Application Nos. D-11225]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (i) The proposed series of loans (the Loans),
originated within a 5-year period, by the Plan to REVCO Leasing
Company, LLC (Revco), a party in interest with respect to the Plan; and
(ii) a guarantee of the Loans (the Guarantee) by Les Olson Company,
Inc. (the Employer), a party in interest with respect to the Plan,
provided that the following conditions are met:
(a) The total amount of the outstanding Loans under this proposed
exemption and PTE 2000-03 do not, in the aggregate, exceed 20 percent
(20%) of the Plan's total assets at any time during the transactions;
(b) Each Loan entered into by the Plan is made pursuant to the
terms and conditions of a loan agreement (the Loan Agreement) executed
by the parties and signed on behalf of the Plan by the Plan's duly-
appointed independent, qualified fiduciary (the I/F);
(c) All terms and conditions of the Loans are at least as favorable
to the Plan as those the Plan could obtain in
[[Page 24677]]
an arms-length transaction with an unrelated third party;
(d) Each Loan is: (i) For a maximum term of five (5)years pursuant
to terms and conditions of the Loan Agreement; (ii) fully amortized and
payable in equal monthly installments of principal and interest; (iii)
used exclusively by Revco to purchase office equipment (the Equipment)
from the Employer, which Revco will lease to the Employer's customers
(in the ordinary course of its business); and (iv) secured by duly
perfected security interests in the new and used Equipment, and by
certain leases of Equipment (Equipment Leases) where such Equipment
Leases are assigned and pledged as collateral for the Loans, which is
at all times equal to 200% of the outstanding principal balance of such
Loan;
(e) New Equipment is valued for collateralization purposes at 80
percent (80%) of the invoice price paid by Revco to purchase such
Equipment less taxes and transportation expenses. Used Equipment and
any Equipment Lease pledged as collateral for the Loans is valued by an
independent, qualified appraiser;
(f) Prior to the approval of each Loan, the I/F determines, on
behalf of the Plan, that each Loan is prudent and in the best interests
of the Plan, and protective of the Plan and its participants and
beneficiaries;
(g) The I/F conducts a review of all terms and conditions of the
exemption, if granted, and the Loans, including: (i) The applicable
interest rate; (ii) the sufficiency of the collateral pledged for each
Loan; (iii) the financial condition of the Employer, in connection with
the Guarantee, on at least a quarterly basis; and (iv) compliance with
the 20% limitation for the Plan's maximum total Loan amount prior to
approving each disbursement under the Loan Agreement; and
(h) The I/F takes whatever action is necessary to protect the
Plan's interests, throughout the duration of the exemption, with
respect to any Loan entered into under the exemption, if granted.
Temporary Nature of Exemption, If Granted
The exemption, if granted, will be temporary and will expire five
(5) years from the date of publication in the Federal Register of the
final grant of this proposed exemption. Subsequent to the expiration of
the exemption, if granted, the Plan may hold any Loans originated
during this 5-year period until the Loans are repaid or otherwise
terminated.
Summary of Facts and Representations
1. The Plan was established in 1979. As of December 31, 2002, the
Plan had approximately 120 participants and beneficiaries and total
assets of $8,602,918. The Plan is trusteed by Thomas P. Olson, James R.
Olson and L. Ray Olson (the Olsons), who are owners and officers of the
Employer. The Olsons also own approximately 45% of the outstanding
interests in Revco.
2. The Employer is a closely-held corporation organized under the
laws of the State of Utah. The Employer is engaged in the sale, leasing
and maintenance of copiers, fax machines and digital and analog
dictation equipment. The shareholders of the Employer are all members
of the Olson family.
The Employer has facilities in the major metropolitan areas of
Utah, which are Salt Lake City, Ogden, Provo and St. George. The
Employer is in the business of purchasing office equipment and leasing
such equipment to its customers. The Employer generally has not used
outside financing in its operations and has supported itself from the
revenues it generates.
In the year 2000, the Department granted a prohibited transaction
exemption (see PTE 2000-03, at 65 FR 4854, February 1, 2000) for a
series of loans (the Olson Loans), originated within a five-year
period, by the Plan as well as the Les Olson Company, Inc. Money
Purchase Plan (the M/P Plan; \4\ collectively, the Plans) to the
Employer.
---------------------------------------------------------------------------
\4\ The applicant represents that the M/P Plan was merged with
the Plan, as of December 31, 2000.
---------------------------------------------------------------------------
The applicant represents that three (3) Olson Loans were made
pursuant to the terms and conditions of PTE 2000-03. The dates and
amounts of the Olson Loans, as well as their separate balances as of
September 30, 2003, were as follows:
----------------------------------------------------------------------------------------------------------------
Dates & loan amounts originated under PTE
2000-03 Loan balances on 9/30/03
----------------------------------------------------------------------------------------------------------------
1/31/2000 $500,000........................... $156,471.28.
3/23/2001 $500,000........................... 193,362.40.
12/15/2002 $500,000.......................... 426,981.91.
Total loans under PTE 2000-03 $1,500,000..... Total outstanding debt $776,815.59.
----------------------------------------------------------------------------------------------------------------
The applicant states that the terms and conditions of PTE 2000-03 have
been met.
3. Revco was established by the owners of the Employer to
facilitate the leasing aspect of its office equipment business. Revco
purchases various types of office equipment (i.e., the Equipment) from
the Employer and leases such Equipment (i.e., the Equipment Leases) to
the Employer's customers. Currently, Revco finances its acquisitions of
the Equipment with internally generated funds and a line of credit
established with Zions First National Bank, located in Salt Lake City,
Utah (the Bank). As of September 30, 2003, Revco's line of credit with
the Bank was $661,587. At that time, Revco had 1,514 active leases
totaling approximately $19,918,000. As of December 31, 2002, the value
of the Equipment Leases was approximately $16,406,000. Revco conducts
no business other than the purchase and lease of Equipment for the
Employer.
4. The applicant proposes that the Plan make a series of Loans to
Revco over a period of 5 years. The proceeds from the Loans will be
used by Revco to purchase new Equipment from the Employer.
Each Loan will be collateralized by a promissory note and security
agreement, duly perfected and properly recorded under applicable state
law, which will provide that the Plan has a first lien on the
Equipment. In addition, the Loan may be collateralized by Equipment
Leases, if necessary to adequately secure such Loans. At all times, the
fair market value of the property used as collateral for the Loans will
be at least equal to 200% of the outstanding balance of such Loans. For
this purpose, new Equipment will be valued at 80% of the invoice price,
less taxes and transportation expenses. In addition, used Equipment and
Equipment Leases that are pledged as collateral for the Loans will be
valued in each case by an independent, qualified appraiser. The Loans
will be guaranteed by the Employer.
5. Mr. Jack S. Emery (Mr. Emery) will serve as the independent,
qualified appraiser for the Equipment used to secure Loan transactions
described herein.
[[Page 24678]]
The applicant states that Mr. Emery is a qualified appraiser of
office equipment who has over 20 years of experience in the business of
leasing office equipment. In this regard, Mr. Emery was one of the
founders of the Matrix Funding Corporation (Matrix). Matrix was a major
office equipment leasing business from 1978 until 1998. In 1998, Matrix
was sold and consolidated with 12 other leasing companies to form
Unicapital, an office equipment leasing company.
Mr. Emery will appraise all of the Equipment used as collateral for
the Loans on an annual basis. Mr. Emery states that he has valued
numerous pieces of office equipment that are similar to, or the same
as, the Equipment that will be used as collateral for the Loans. Mr.
Emery represents that he is familiar with the useful life of this type
of equipment, the rate at which it depreciates, and the market factors
that may affect its value. In conducting appraisals of the Equipment,
Mr. Emery will take into consideration all the relevant factors
relating to the valuation of the Equipment and the market-place for
such Equipment. In the event Equipment Leases are used as collateral
for the Loans, Mr. Emery represents that he has the requisite expertise
to value such Equipment Leases using commercially accepted
methodologies.
Mr. Emery states that the Loans are cross-collateralized under the
Loan Agreement. Under cross-collateralization, each Loan will have
sufficient, separate collateral to maintain the required loan-to-value
ratio. In the event of a default, the Plan will use any and all of the
Equipment or Equipment Leases used as collateral to satisfy the
outstanding debt. Mr. Emery states that a default under any Loan will
be viewed as a default under all outstanding loans. Thus, the cross-
collateralization feature for the Loans will provide the Plan with
adequate security in the event of default.
Mr. Emery will verify that appropriate steps are taken to perfect
the Plan's security interest in each piece of Equipment used as
collateral. Mr. Emery represents that in order to perfect a security
interest in the Equipment or Equipment Leases, an appropriate financing
statement will be filed with the UCC Division of the Department of
Commerce for the State of Utah.
6. The Employer will also guarantee each of the Loans (i.e., the
Guarantee). The Guarantee shall be governed and construed in accordance
with the laws of the State of Utah. In this regard, Mr. Emery will
monitor the condition of Loans on an ongoing basis. Mr. Emery will
review, at least quarterly, the financial condition of the Employer and
Revco. Mr. Emery states that the Guarantee will provide a ready source
of repayment for the Plan on each of the Loans, in the event Revco
defaults on its obligations. Mr. Emery represents that Revco has a
significant portfolio of Equipment Leases that will enable it to repay
the Loans. In addition, under the Guarantee, the Employer will be
primarily liable for repayment of the Loans, and will pay any
indebtedness on demand. The Employer, as the guarantor, will pay all
collection costs, including reasonable attorneys fees and legal
expenses, incurred by the Plan, as the lender, in enforcing the
Guarantee. The Guarantee will remain in effect until all Loans have
been repaid.
7. The maximum length of any Loan will be five (5) years, under the
terms and conditions of the Loan Agreement. The interest rate on the
Loans will be equal to the prime rate as of the date of closing, as
quoted under ``Money Rates'' in the Wall Street Journal (WSJ Prime)
plus two percentage points, and will be adjusted quarterly.
Additionally, the interest rate of any Loan will be set at a higher
rate if such higher rate represents the prevailing market rate for
similar loans, as determined by Mr. Emery as the Plan's independent
fiduciary, as discussed further below. In no event will any Loan bear
an interest rate lower than the WSJ Prime plus two percentage points.
Each Loan will be paid in equal monthly installments of principal and
interest, with outstanding principal amortized over the remainder of
the Loan Agreement's five (5) year term.
The outstanding balance of the Loans will never exceed 20% of the
fair market value of the Plan's total assets.
8. Mr. Emery will serve as the independent fiduciary for the Plan
(i.e., the I/F) with respect to the Loans, pursuant to the terms and
conditions of a written independent fiduciary agreement (the I/F
Agreement).
Mr. Emery represents that he is qualified to act as an independent,
qualified fiduciary with respect to the Loans, and that he understands
his duties and responsibilities under the Act. In this regard, Mr.
Emery states that he is currently serving as the I/F for the Plan for
the Olson Loans made pursuant to PTE 2000-03. However, if this
exemption is granted, Mr. Emery will also serve as the I/F for the
Loans between Revco and the Plan. Mr. Emery maintains that his
responsibilities under PTE 2000-03 and this exemption, if granted, are
complementary. The security for the Loans involve the same type of
equipment and essentially the same borrower as the Olson Loans. In
addition, the Olson Loans and the Loans to Revco will have separate
Loan Agreements that are substantially the same.
Mr. Emery states that while Revco is a separate legal entity, it
has no employees and acts to facilitate the equipment leasing
operations of the Employer. If this proposed exemption is granted,
there will be no new Olson Loans under PTE 2000-03. All Loans that are
in existence under both exemptions (i.e., both Olson Loans and the
Loans to Revco) will be aggregated for purposes of the maximum loan
amount requirement under this proposed exemption. When the Olson Loans
made under PTE 2000-03 are paid off by the Employer, Mr. Emery's duties
as the I/F for the Plan with respect to the Olson Loans will cease.
However, Mr. Emery will continue to exercise and carry out his duties
as the I/F for the Loans to Revco.
Mr. Emery represents that each new Loan will be evaluated
independently. Mr. Emery states that the Loans will be sufficiently
collateralized in accordance with the Loan documentation and the terms
and conditions of the proposed exemption. Furthermore, each Loan will
be separately accounted for and separately collateralized in accordance
with the Loan Agreements. Under the security agreement, all collateral
for any of the Loans must be used to satisfy any deficiency on the
Loans in the event of default. Mr. Emery maintains that the sufficiency
of the collateral will be assured and the Plan will be given the
maximum protection for all the Loans, if there is a default under the
terms of any Loan.
Mr. Emery represents that the Employer will be primarily liable
under the Loan Agreements for both the Olson Loans and the Loans to
Revco. Mr. Emery states that, in his capacity as the I/F, his
responsibility will be to protect the Plan and its participants and
beneficiaries. In default, Mr. Emery will assure repayment of all Loans
(i.e., both the Olson Loans and the Loans to Revco). If there is a
deficiency under any Loan, Mr. Emery will maximize the recovery of
value from all collateral sources, no matter which Loan is in default.
Mr. Emery states that the two Loan Agreements are essentially
identical. A default under one Loan will be a default under both Loan
Agreements. Each of the Loans will be cross-collateralized. In the
event that the Employer or Revco are unable to pay off the Loans, Mr.
Emery will assure that the Plan is in a position to maximize the value
of the collateral.
Mr. Emery states that he has been, and will continue to be, advised
by a
[[Page 24679]]
qualified ERISA attorney regarding his duties and responsibilities as
the I/F for the Plan. The income received by Mr. Emery from the Plan
for functioning as the I/F will not exceed 1% of his gross annual
income. In addition, Mr. Emery represents that he has no pre-existing
relationship with the Employer or with any of the shareholders of the
Employer.
9. Mr. Emery, as the I/F, represents that he will determine the
appropriateness and suitability of each Loan for the Plan prior to the
consummation of the Loan transaction. Mr. Emery will review the value
of the Equipment and the Equipment Leases pledged to secure the Loans
and confirm the sufficiency of the value of the collateral for each
Loan.
Mr. Emery will ensure that the Loans are appropriate investments
for the Plan. As the I/F, Mr. Emery will determine that the Loans are
in the best interests of the Plan's participants and beneficiaries, and
protective of their interests. Mr. Emery states that the terms of the
Loans will be at least as favorable to the Plan as the terms that would
be obtainable by the Plan in an arm's-length transaction with an
unrelated party. Mr. Emery states that he will enforce the terms of
each Loan including, but not limited to, making demand for timely
payments from Revco or the Employer, bringing suit or other appropriate
action against Revco or the Employer in the event of default, and
monitoring the performance of each Loan and taking whatever actions are
necessary to protect the interests of the Plan.
10. Mr. Emery, as the I/F, reserves the right under the I/F
Agreement to hire independent advisors, as necessary to perform his
duties. For example, Mr. Emery states that in the event of a
foreclosure on the Equipment used as collateral, it may be necessary,
for him to obtain legal advice from an independent, qualified legal
counsel on the mechanics of such foreclosure.
11. With respect to the terms and conditions of the Loans, Wells
Fargo Bank in Salt Lake City, Utah (Wells Fargo), has stated, in a
letter dated March 2, 2004, that it would enter into similar loan
transactions with Revco, under the same terms and conditions
(including, among other things, the Guarantee of Revco's credit by the
Employer). Wells Fargo has examined the terms of the Loans and
concluded that such terms are at least as favorable to the Plan as
those terms which the Plan could obtain in an arm's-length transaction
with an unrelated party.
12. The Applicant represents that in the event the I/F needs to be
replaced, the Department will be notified at least sixty (60) days
prior to the appointment of a successor I/F (the Successor I/F). The
Successor I/F will have the same duties and responsibilities as Mr.
Emery has under the I/F Agreement, and will have experience and
expertise that is substantially similar to that of Mr. Emery.
13. In summary, the applicant represents that the transactions will
meet the statutory criteria of section 408(a) of the Act and section
4975(c)(2) of the Code because:
(a) The interest rates paid to the Plan on the Loans will be at
least as favorable to the Plan as the current market rate of interest
that would be paid for similar loans;
(b) The Plan's interests with respect to the Loans will be
represented by Mr. Emery, as the I/F. Mr. Emery will monitor the Loans,
as well as the terms and conditions of the exemption (if granted), and
will take all appropriate actions necessary to safeguard the interests
of the Plan and its participants and beneficiaries;
(c) Mr. Emery will determine that each Loan is in the best
interests of the Plan's participants and beneficiaries at the time of
the transaction;
(d) Mr. Emery will review and approve each Loan prior to making any
disbursements of Loan amounts to Revco;
(e) The Loans will be secured at all times by the Equipment or
Equipment Leases, which will be valued at an amount for each Loan that
is not less than 200% of the outstanding principal balance of the Loan;
(f) The Loans will be guaranteed by the Employer, a creditworthy
entity, whose financial condition will be reviewed on a quarterly basis
by the I/F; and
(g) The aggregate outstanding balance of the Loans will not exceed
20% of the total value of the Plan's assets.
For Further Information Contact: Ekaterina A. Uzlyan of the Department
at (202) 693-8540 (This is not a toll-free number).
Svenska Cellulosa Aktiebolaget SCA (publ) (SCA) Located in Stockholm,
Sweden
[Application No. L-11217 through L-11219]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of section 406(a) and (b) of the Act shall not apply to the reinsurance
of risks and the receipt of premiums therefrom by SCA Reinsurance
Limited (SCA Re), through its USVI Branch, in connection with insurance
contracts sold by Aetna, Inc. (Aetna), or any successor insurance
company to Aetna which is unrelated to SCA, to provide long-term
disability, accidental death and dismemberment, and basic and
supplemental life insurance benefits to participants in programs
maintained by SCA North America, Inc. (SCA North America) to provide
such benefits to its employees (the Plans) \5\, provided the following
conditions are met:
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\5\ Each plan will be considered an ``employee welfare plan'' as
defined in section 3(1) of the Act.
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(a) SCA Re--
(1) Is a party in interest with respect to the Plans by reason of a
stock or partnership affiliation with SCA that is described in section
3(14)(E) or (G) of the Act;
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one State as defined in section 3(10) of the Act;
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state that has not been revoked or
suspended;
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its domiciliary State, the U.S. Virgin Islands) \6\ by the
Insurance Commissioner of the State within 5 years prior to the end of
the year preceding the year in which the reinsurance transaction
occurred; and
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\6\ The U.S. Virgin Islands are considered a ``State,'' as
defined in section 3(10) of the Act.
---------------------------------------------------------------------------
(5) Is licensed to conduct reinsurance transactions by a State
whose law requires that an actuarial review of reserves be conducted
annually by an independent firm of actuaries and reported to the
appropriate regulatory authority; and
(b) The Plans pay no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid by the Plans with respect to the direct
sale of such contracts or the reinsurance thereof;
(d) In the initial year of any contract involving SCA Re, there
will be an immediate and objectively determined benefit to the Plans'
participants and beneficiaries in the form of increased benefits;
(e) In subsequent years, the formula used to calculate premiums by
Aetna or
[[Page 24680]]
any successor insurer will be similar to formulae used by other
insurers providing comparable coverage under similar programs.
Furthermore, the premium charge calculated in accordance with the
formula will be reasonable and will be comparable to the premium
charged by the insurer and its competitors with the same or a better
rating providing the same coverage under comparable programs;
(f) The Plans only contract with insurers with a rating of A or
better from A.M. Best Company. The reinsurance arrangement between the
insurers and SCA Re will be indemnity insurance only, i.e., the insurer
will not be relieved of liability to the Plans should SCA Re be unable
or unwilling to cover any liability arising from the reinsurance
arrangement;
(g) SCA Re retains an independent fiduciary (the Independent
Fiduciary), at SCA North America's expense, to analyze the transactions
and render an opinion that the requirements of sections (a) thorough
(f) have been complied with. For purposes of this exemption, the
Independent Fiduciary is a person who:
(1) Is not directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with SCA, SCA North America or SCA Re (this relationship hereinafter
referred to as an ``Affiliate'');
(2) Is not an officer, director, employee of, or partner in, SCA,
SCA North America or SCA Re (or any Affiliate of either);
(3) Is not a corporation or partnership in which SCA, SCA North
America or SCA Re has an ownership interest or is a partner;
(4) Does not have an ownership interest in SCA or SCA Re, or any of
either's Affiliates;
(5) Is not a fiduciary with respect to the Plans prior to the
appointment; and
(6) Has acknowledged in writing acceptance of fiduciary
responsibility and has agreed not to participate in any decision with
respect to any transaction in which the Independent Fiduciary has an
interest that might affect its best judgment as a fiduciary.
For purposes of this definition of an ``Independent Fiduciary,'' no
organization or individual may serve as an Independent Fiduciary for
any fiscal year if the gross income received by such organization or
individual (or partnership or corporation of which such individual is
an officer, director, or 10 percent or more partner or shareholder)
from SCA, SCA Re, or their Affiliates (including amounts received for
services as Independent Fiduciary under any prohibited transaction
exemption granted by the Department) for that fiscal year exceeds 5
percent of that organization or individual's annual gross income from
all sources for such fiscal year.
In addition, no organization or individual who is an Independent
Fiduciary, and no partnership or corporation of which such organization
or individual is an officer, director, or 10 percent or more partner or
shareholder, may acquire any property from, sell any property to, or
borrow funds from SCA, SCA Re, or their Affiliates during the period
that such organization or individual serves as Independent Fiduciary,
and continuing for a period of six months after such organization or
individual ceases to be an Independent Fiduciary, or negotiates any
such transaction during the period that such organization or individual
serves as Independent Fiduciary.
Preamble
On August 7, 1979, the Department published a class exemption
(Prohibited Transaction Exemption 79-41 (PTE 79-41), 44 FR 46365) that
permits insurance companies that have substantial stock or partnership
affiliations with employers establishing or maintaining employee
benefit plans to make direct sales of life insurance, health insurance
or annuity contracts which fund such plans if certain conditions are
satisfied. In PTE 79-41, the Department stated its views that if a plan
purchases an insurance contract from a company that is unrelated to the
employer pursuant to an arrangement or understanding, written or oral,
under which it is expected that the unrelated company will subsequently
reinsure all or part of the risk related to such insurance with an
insurance company which is a party in interest with respect to the
plan, the purchase of the insurance contract would be a prohibited
transaction under the Act.
The Department further stated that as of the date of publication of
PTE 79-41, it had received several applications for exemption under
which a plan or its employer would contract with an unrelated company
for insurance, and the unrelated company would, pursuant to an
arrangement or understanding, reinsure part or all of the risk with
(and cede all or part of the premiums to) an insurance company
affiliated with the employer maintaining the plan. The Department felt
that it would not be appropriate to cover the various types of
reinsurance transactions for which it had received applications within
the scope of the class exemption, but would instead consider such
applications on the merits of each individual case.
Summary of Facts and Representations
1. The applicants for this exemption are SCA, its subsidiary, SCA
Re, and SCA Reinsurance Limited, USVI Branch. SCA is a multinational
company based in Sweden that produces and sells absorbent hygiene
products, packaging solutions and publication papers. In 2001, SCA
established a United States business unit, SCA North America, comprised
of various divisions in the United States and Canada.
2. SCA Re is a captive reinsurance corporation wholly-owned by SCA
and organized in Ireland to assist in managing SCA's European risks.
SCA Re was incorporated in Ireland on January 11, 1991. Ireland's
Department of Enterprise, Trade and Employment (DETE) authorizes a
reinsurer to conduct reinsurance business after the reinsurer notifies
DETE of company details (such as shareholder or parent company
identities, adequate capitalization, reasonableness of proposed
reinsurance policies, and substance of its residence and management in
Ireland), and the qualifications of each director and the general
manager. DETE also requires reinsurance companies to have certain
minimum paid-up share capital. SCA Re is in compliance with these
requirements, and DETE has authorized SCA Re to conduct reinsurance
business pursuant to these requirements.
In 2003, SCA Re established SCA Reinsurance Limited, USVI Branch
(the SCA Re/USVI Branch) as a captive insurance organization licensed
in the United States Virgin Islands (USVI), a State (as defined in
ERISA section 3(10) of the Act), to insure SCA benefit plan risks. The
SCA Re/USVI Branch was licensed by USVI to conduct insurance operations
in the USVI effective November 24, 2003. The laws of USVI require that
an actuarial review of reserves be conducted annually by an independent
firm of actuaries and reported to USVI's Department of Banking and
Insurance. Towers Perrin, an independent, qualified international
actuarial and benefits consulting firm, has been retained to provide
actuarial services to SCA Re/USVI Branch. The SCA Re/USVI Branch's
accounting functions, records retention and other management and
administrative services are expected to be performed by Marsh
Management Services Limited, a company licensed as an insurance manager
by USVI.
3. During 2001, SCA Re reinsured risks of SCA, accepted from
fronting insurance companies, for property damage, business
interruption,
[[Page 24681]]
employee benefits, and credit lines of business. At year-end 2002,
total capital and surplus of SCA Re was 179,842,000 Swedish Kronor
(approximately $20.5 million) and gross written premiums were
145,055,000 Swedish Kronor (approximately $16.5 million). The
independent certified public accounting firm of PriceWaterhouse
Coopers, LLP (PWC), which prepared SCA Re's most recent audited
financial statement, will examine SCA Re's reserves on an annual basis
in connection with the employee benefits business to be reinsured by
SCA Re through the SCA Re/USVI Branch to ensure that appropriate
reserve levels are maintained.
4. Among other benefit plans, SCA maintains the following:
(i) SCA North America Incontinence Care and Corporate Life
Insurance and Long-Term Disability Plan (the Inco and Corporate Plan);
(ii) SCA North America Packaging Life Insurance and Long-Term
Disability Plan (the Tuscarora Plan); and
(iii) SCA Tissue North America Life Insurance and Long-Term
Disability Plan (the Tissue Plan).
The Plans provide varying levels of accidental death and
dismemberment insurance, life insurance, and long-term disability
insurance to three groups of SCA's employees.
The Inco and Corporate Plan provides employer-paid basic life
insurance, accidental death and dismemberment, and long-term disability
benefits to approximately 260 employees, for approximately $150,000 in
employer-paid premiums. The Inco and Corporate Plan also provides
optional spouse and child life insurance coverage to approximately 140
employees for approximately $78,000 in employee-paid premiums.
The Tuscarora Plan provides employer-paid basic life insurance,
accidental death and dismemberment to approximately 1890 employees for
approximately $250,000 in employer-paid premiums. Approximately 475
employees are also provided employer-paid long-term disability benefits
for approximately $120,000 in premiums. The Tuscarora Plan also offers
optional supplemental coverage to approximately 100 employees for
approximately $20,000 in employee-paid premiums.
The Tissue Plan provides employer-paid basic life insurance to
approximately 2560 employees, and employer-paid long-term disability
insurance to approximately 800 employees, for approximately $490,000 in
total premiums. Employees covered by the Tissue Plan are also able to
elect additional, employee-paid supplemental life insurance, accidental
death and dismemberment insurance, and dependent supplemental life
insurance. Approximately 980 employees have elected such coverages, for
approximately $511,500 in employee-paid premiums.
The transaction resulting in the reinsurance of benefit plan risks
by SCA Re/USVI Branch has a number of advantages for the Plans.
Specifically, SCA will make substantial improvements to affected Plans.
With respect to the Plans providing life insurance benefits (which are
employer-paid, except for optional supplemental life insurance and
coverage for dependents, which are employee-paid), SCA will increase
employee life insurance, spouse and child life insurance, and basic
accidental death and dismemberment benefits. Under the employer-paid
basic life and accidental death and dismemberment insurance programs,
maximum benefits have been increased and the formula for calculating
the amount of employer-paid insurance has been revised to increase
benefits for all of SCA's employees. With respect to disability
benefits, the benefit enhancements include an increase in both monthly
maximum disability benefits and the optional buy-up amount.
5. SCA plans to insure SCA North America's accidental death and
dismemberment insurance, life insurance, and long-term disability
benefit plan risks with Aetna, which will reinsure the risk through the
SCA Re/USVI Branch. Aetna's overall financial strength is rated A by
A.M. Best. Aetna is headquartered in Hartford, Connecticut.
Aetna will insure the Plans with the enhanced new benefits. Aetna
will enter into a reinsurance agreement for 100% of SCA's benefit plan
risk with SCA Re/USVI Branch. That is, Aetna would continue to directly
insure the Plans' benefit risks, but SCA Re/USVI Branch would
ultimately provide reinsurance coverage for the full amount of that
risk. However, Aetna's reinsurance agreement will be ``indemnity
only''--that is, Aetna will not be relieved of its liability to the
affected SCA Plans if any of its reinsurers are unable or unwilling to
cover liability arising from the reinsurance arrangements.
In connection with the proposed transaction, SCA will pay no more
than adequate consideration for the Plans' insurance contracts with
Aetna or any successor insurer. The formula that Aetna and any
successor insurer will use to calculate its premiums will be similar to
the formulae used by other insurers providing similar insurance
coverages under similar insurance programs. Moreover, the premium
charge resulting from application of the formula will be reasonable and
comparable to the premium charged by the insurer and its competitors
with the same rating or better, providing the same coverage under
comparable programs of insurance. Finally, the Plans will not pay any
commissions in connection with the reinsurance transactions described
herein.
6. In connection with this exemption request, SCA Re has engaged
the services of U.S. Trust Company, National Association (U.S. Trust),
as the Independent Fiduciary for the Plans. U.S. Trust is a wholly-
owned subsidiary of The Charles Schwab Corporation that provides
various financial and special fiduciary services to clients, including
employee benefit plans. Norman P. Goldberg (Mr. Goldberg), Managing
Director, has signed the Independent Fiduciary's representations on
behalf of U.S. Trust. U.S. Trust's consultants are frequently retained
to provide specialized fiduciary decision-making services on behalf of
employee benefit plans in connection with investment management,
employer stock and ESOP transactions, pass-through voting and tender
offer decision-making, and various plan transactions requiring
exemptive relief, including captive insurance transactions.
7. For purposes of demonstrating independence, U.S. Trust has
represented that:
(a) U.S. Trust is not an Affiliate of SCA, SCA Re, or USVI Branch;
(b) U.S. Trust is not an officer, director, employee of, or
partners in SCA, SCA Re, or USVI Branch;
(c) U.S. Trust is not a corporation or partnership in which SCA,
SCA Re, or USVI Branch has an ownership interest or is a partner;
(d) U.S. Trust does not have an ownership interest, other than a
possible de minimis number of shares, in SCA, SCA Re, USVI Branch, or
any of their Affiliates;
(e) U.S. Trust was not a fiduciary to the Plans prior to its
appointment in connection with the transactions described herein;
(f) Mr. Goldberg has acknowledged in writing, on behalf of U.S.
Trust, his acceptance of fiduciary obligations, and has agreed not to
participate in any decision with respect to any transaction in which
U.S. Trust would have an interest that might affect his best judgment
as a fiduciary, in acting on behalf of U.S. Trust, or the interests of
U.S. Trust, as a corporate entity;
(g) The gross income received by U.S. Trust from SCA, SCA Re, SCA
Re/USVI Branch and their Affiliates (including
[[Page 24682]]
amounts received for services as the Independent Fiduciary for the
Plans under any prohibited transaction exemption granted by the
Department), does not exceed 5 percent of U.S. Trust's annual gross
income from all sources for any fiscal year; and
(h) U.S. Trust, and any partnership or corporation of which U.S.
Trust is an officer, director, or ten (10) percent or more partner or
shareholder, will not acquire any property from, sell any property to,
or borrow funds from SCA or SCA Re/USVI Branch while it is the
Independent Fiduciary for the Plans and for a period of six months
thereafter.
8. U.S. Trust represents that: (i) SCA Re/USVI Branch is licensed
to do business in the USVI; and (ii) SCA Re has been conducting
business since 1991 insuring and reinsuring property, casualty and
employee benefit business. SCA Re's reserves for the past two (2) years
have been reviewed by PWC, which is a firm independent of SCA Re and
SCA. U.S. Trust has reviewed the report on the reserves and is
satisfied that there are no issues to be resolved. In addition, U.S.
Trust represents that future reserves will be reviewed by a qualified
actuary approved by the USVI. U.S. Trust has confirmed that SCA Re has
undergone an examination by PWC, an independent certified public
accountant, for its last completed taxable year.
9. U.S. Trust has concluded that, as a result of the reinsurance
agreement described in representation 5, above, the Plans' risks will
be 100% covered by Aetna, a carrier rated A or better by A.M. Best,
even if SCA Re/USVI Branch is unable or unwilling to cover the Plans'
liabilities it is assuming as a result of the reinsurance agreement.
U.S. Trust represents that it has reviewed the terms of the proposed
reinsurance agreement between Aetna and SCA Re/USVI Branch. U.S. Trust
states that the agreement provides for the risk retained by SCA Re/USVI
Branch to revert back to Aetna at no further cost to the Plans should
SCA Re/USVI Branch be unable or unwilling to pay the benefits.
10. U.S. Trust has represented that it reviewed the Plans' benefits
before the reinsurance transaction and the benefits implemented in
anticipation of the reinsurance transaction. U.S. Trust has concluded
that there is an immediate benefit to the Plans' participants from the
reinsurance transaction. All participants in the Plans will receive
increased benefits and options. Specifically, under the long-term
disability programs, the proposed benefit changes improve disability
benefits and add buy-up options, in some cases, allowing employees to
purchase additional benefits. Under the employer-paid basic life and
accidental death and dismemberment insurance programs, maximum benefits
have been increased and the formula for calculating the amount of
employer-paid insurance has been revised to increase benefits for all
of SCA's employees. With respect to voluntary life insurance, rates
have been reduced for most employees and additional options have been
added to some programs, such as spouse and child life insurance. Where
programs already offered voluntary spouse and child life insurance, the
maximum benefit amounts have been increased. As a result, U.S. Trust
concluded that the enhancements represent an immediate benefit to the
Plans' participants from the reinsurance transaction.
11. U.S. Trust makes the following representations concerning the
determination of the initial premium to the Plans under the proposed
arrangement. The Plans contacted Aetna and were quoted a rate based on
Aetna's evaluation of the risk. SCA received quotes from five different
companies to provide insurance coverage for the programs. From these
five companies, SCA selected Aetna, which was somewhat higher than some
of its competitors with respect to its life insurance premiums, but
most competitive with respect to its disability premiums, making
Aetna's entire package the best choice for SCA Re. The premium paid to
SCA Re/USVI Branch is based on a reinsurance agreement where SCA Re/
USVI Branch receives a portion of the premium charged equal to the
proportion of the risk that SCA Re/USVI Branch covers. This is a
typical reinsurance arrangement for life and long-term disability
products. U.S. Trust represents that, based upon its review, the
premiums charged by Aetna are calculated according to a formula that is
reasonable. In addition, U.S. Trust states that the premiums are
similar to premiums charged by other insurers with the same or better
rating providing similar life and long-term disability insurance under
comparable programs. The applicants represent that the Independent
Fiduciary (i.e., either U.S. Trust or another qualified fiduciary
acting as a successor, as noted below) will confirm on an annual basis
that each Plan is paying a rate comparable to that which would be
charged by a comparably-rated insurer for a program of the approximate
size of the Plans with comparable claims experience. However, by letter
dated February 13, 2004, U.S. Trust states that no opinion can be given
at this time about whether the reinsurance arrangement will be in
compliance with these requirements in subsequent years.
12. U.S. Trust will represent the interests of the Plans as the
Independent Fiduciary at all times.\7\ U.S. Trust will monitor
compliance by the parties with the terms and conditions of the proposed
reinsurance transaction, and will take whatever actions are necessary
and appropriate to safeguard the interests of the Plans and their
participants and beneficiaries.
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\7\ In this regard, the applicants make a representation
regarding a successor Independent Fiduciary. Specifically, if it
becomes necessary in the future to appoint a successor Independent
Fiduciary (the Successor) to replace U.S. Trust, the applicants will
notify the Department sixty (60) days in advance of the appointment
of the Successor. Any Successor will have the same, or substantially
similar, responsibilities, experience and independence as U.S.
Trust.
---------------------------------------------------------------------------
13. The applicants represent that the proposed reinsurance
transaction will meet the following conditions of PTE 79-41 covering
direct insurance transactions:
(a) SCA Re is a party in interest with respect to the Plans (within
the meaning of section 3(14)(G) of the Act) by reason of a stock
affiliation with SCA, which maintains the Plans.
(b) SCA Re is licensed to conduct reinsurance transactions by the
USVI, through its branch, SCA Re/USVI Branch. The law under which USVI
Branch is licensed requires that an actuarial review of reserves be
conducted annually by an independent firm of actuaries and reported to
the appropriate regulatory authority;
(c) SCA Re has undergone an examination by the independent
certified public accounting firm of PWC for its last completed taxable
year;
(d) SCA Re, through its branch, SCA Re/USVI Branch, has received a
Certificate of Authority from its domiciliary state, USVI, which has
not been revoked or suspended;
(e) The Plans will pay no more than adequate consideration for the
insurance. In addition, in the initial year of the proposed reinsurance
transaction, there will be an immediate and objectively determined
benefit to the Plans' participants and beneficiaries in the form of
increased benefits; and
(f) No commissions will be paid by the Plans with respect to the
reinsurance arrangement with SCA Re, as described herein.
In addition, the Plans' interests will be represented by a
qualified, independent fiduciary (i.e., U.S. Trust or its Successor),
who has initially determined that the proposed reinsurance transactions
will be in the best interests, and protective, of the
[[Page 24683]]
Plans and their participants and beneficiaries. The Independent
Fiduciary will also confirm on an annual basis that the Plans are
paying a rate comparable to that which would be charged by a
comparably-rated insurer for a program of the approximate size of the
Plans with comparable claims experience.
14. In summary, the applicants represent that the proposed
reinsurance transactions will meet the criteria of section 408(a) of
the Act because: (a) The Plans' participants and beneficiaries are
afforded insurance protection by Aetna, a carrier rated A or better by
A.M. Best, at competitive market rates arrived at through arm's-length
negotiations; (b) SCA Re, which will enter into the reinsurance
agreements with Aetna, is a sound, viable insurance company that has
been in business since the 1850s (though it incorporated into its
present form in December 2000); (c) the protections described in
representation 13, above, provided to the Plans and their participants
and beneficiaries under the proposed reinsurance transactions are based
on those required for direct insurance by a ``captive'' insurer, under
the conditions of PTE 79-41 (notwithstanding certain other requirements
related to, among other things, the amount of gross premiums or annuity
considerations received from customers who are not related to, or
affiliated with, the insurer); \8\ (d) U.S. Trust, as the Plans'
Independent Fiduciary, has reviewed the proposed reinsurance
transaction and has determined that the transaction is appropriate for,
and in the best interests of, the Plans and that there will be an
immediate benefit to the Plans' participants as a result thereof by
reason of an improvement in benefits under the terms of the Plans; and
(e) U.S. Trust will monitor compliance by the parties with the terms
and conditions of the proposed reinsurance transaction, and will take
whatever action is necessary and appropriate to safeguard the interests
of the Plans and of their participants and beneficiaries.
---------------------------------------------------------------------------
\8\ The proposal of this exemption should not be interpreted as
an endorsement by the Department of the transactions described
herein. The Department notes that the fiduciary responsibility
provisions of Part 4 of Title I of the Act apply to the fiduciary's
decision to engage in the reinsurance arrangement.
Specifically, section 404(a)(1) of the Act requires, among other
things, that a plan fiduciary act prudently, solely in the interest
of the plan's participants and beneficiaries, and for the exclusive
purpose of providing benefits to participants and beneficiaries when
making investment decisions on behalf of the plan. In this regard,
the Department is not providing any opinion as to whether a
particular insurance or investment product, strategy or arrangement
would be considered prudent or in the best interests of a plan, as
required by section 404 of the Act. The determination of the
prudence of a particular product or arrangement must be made by a
plan fiduciary after appropriate consideration to those facts and
circumstances that, given the scope of such fiduciary's investment
duties, the fiduciary knows or should now are relevant to the
particular product or arrangement involved, including the plan's
potential exposure to losses and the role a particular insurance or
investment product plays in that portion of the plan's investment
portfolio with respect to which the fiduciary has investment duties
and responsibilities (see 29 CFR 250.404a-1).
---------------------------------------------------------------------------
Notice to Interested Persons
SCA will provide notice of the proposed exemption to all of its
affected benefit Plan participants by posting copies of the proposed
exemption (as published in the Federal Register on the date of
publication) and a copy of the Supplemental Statement, as required
pursuant to 29 CFR 2570.43(b)(2), which will advise interested persons
of their right to comment and/or request a hearing. SCA will post this
information on bulletin boards in prominent areas at those SCA work
sites at which more than ten participants of the Plans work. All other
SCA work sites will distribute the information by hand delivery to the
Plan participants. Copies of the proposed exemption will also be
available to Plan participants, upon request, at SCA work sites where
the information is posted.
FOR FURTHER INFORMATION CONTACT: 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 29th day of April, 2004.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 04-10111 Filed 5-3-04; 8:45 am]
BILLING CODE 4510-29-P
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