EBSA (Formerly PWBA) Federal Register Notice Proposed Exemptions; Merganser Capital
Management LP (Merganser), et al. [06/04/2001]
EBSA (Formerly PWBA) Federal Register Notice Proposed Exemptions; Merganser Capital
Management LP (Merganser), et al. [06/04/2001]
Volume 66, Number 107, Page 30012-30021
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10951, et al.]
Proposed Exemptions; Merganser Capital Management LP (Merganser),
et al.
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests: All interested persons are
invited to submit written comments or request for a hearing on the
pending exemptions, unless otherwise stated in the Notice of Proposed
Exemption, within 45 days from the date of publication of this Federal
Register Notice. Comments and requests for a hearing should state: (1)
the name, address, and telephone number of the person making the
comment or request, and (2) the nature of the person's interest in the
exemption and the manner in which the person would be adversely
affected by the exemption. A request for a hearing must also state the
issues to be addressed and include a general description of the
evidence to be presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. __, stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N-5638, 200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons: Notice of the proposed exemptions
will be provided to all interested persons in the manner agreed upon by
the applicant and the Department within 15 days of the date of
publication in the Federal Register. Such notice shall include a copy
of the notice of proposed exemption as published in the Federal
Register and shall inform interested persons of their right to comment
and to request a hearing (where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Merganser Capital Management LP (Merganser) Located in Cambridge,
Massachusetts
[Application No. D-10951]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, Subpart B (55 FR 32836, August 10, 1990).
Section I. Transaction
If the exemption is granted, Merganser shall not be precluded from
functioning as a ``qualified professional asset manager'' pursuant to
Prohibited Transaction Exemption 84-14 (49 FR 9494, Mar. 13, 1984) (PTE
84-14) for the period between April 6, 2000 and December 31, 2006,
solely because of its failure to satisfy the shareholders' or partners'
equity requirement under section V(a)(4) of PTE 84-14, provided that
the conditions set forth in section II are met.
Section II. Conditions
(a) Merganser shall obtain an irrevocable Letter of Credit, which
shall be reduced only by ERISA Claims paid on behalf of ERISA Clients.
(b) The amount available under the Letter of Credit shall be at
least $750,000 as of the first day of each fiscal year during which the
Letter of Credit is maintained.
(c) Merganser shall cause the Letter of Credit to be issued to an
Agent to be held for the benefit of all ERISA Clients.
(d) Merganser shall notify current and future ERISA Clients in
writing of: (i) Their status as beneficiaries of the Letter of Credit;
(ii) their right to make a draw against the Letter of Credit by
presenting the Agent with the documentation described in (g) below; and
(iii) the U.S. address of the Agent at which an ERISA Client may
present such documentation. Merganser shall promptly notify all ERISA
Clients of any changes in the information as to how to contact the
Agent.
(e) Merganser shall provide current and future ERISA Clients with a
copy of the proposed and final exemption, if granted, as published in
the Federal Register.
(f) Merganser shall provide the Agent with a complete list of all
ERISA Clients, which shall be updated each time Merganser obtains a new
ERISA Client.
(g) The Letter of Credit shall be payable on demand solely to any
ERISA Client (or its agent) if the ERISA Client provides the Agent
with:
(i)(A) a certified copy of the final judgment against Merganser
based on an ERISA Claim of such client, entered by a court of competent
jurisdiction with all rights of appeal having expired or having been
exhausted, or (B) a true copy of a settlement agreement between the
ERISA Client and Merganser providing for damages to the ERISA Client
with respect to an ERISA Claim;
(ii) in the case of a final court judgment, a certified true copy
of a Sheriff's or Marshall's levy and execution on the judgment,
returned unsatisfied, or such other documentation, certified by an
officer of the court in which the judgment was entered, stating that
the judgment remains unsatisfied following attempts
[[Page 30013]]
to collect the judgment in accordance with local court rules; and
(iii) a certificate of an authorized representative of the ERISA
Client stating the amount of the judgment or settlement which remains
unsatisfied.
(h)(i) The Letter of Credit shall be maintained until the earlier
of December 31, 2006 or Merganser's satisfaction of the partners'
equity requirement under section V(a)(4) of PTE 84-14.
(ii) Notwithstanding subparagraph (i), in the event that one or
more ERISA Clients has a Pending ERISA Claim on December 31, 2006,
Merganser shall either (A) cause the Letter of Credit to be maintained
until the earlier of December 31, 2008 or a final judgment or
settlement disposing of all such Pending ERISA Claims, or (B) cause a
bond to be purchased which fully insures all such Pending ERISA Claims
in the total amount equal to the amount of such Pending ERISA claims
but not to exceed $750,000.
Section III. Definitions
(a) ``Agent'' shall mean a commercial bank, trust company or other
financial institution subject to federal or state banking regulation
that is independent of Merganser.
(b) ``Claim'' shall mean a civil proceeding for monetary relief
which is commenced by the filing or service of a civil complaint or
similar pleading, or a request for monetary relief which could have
been the subject of such a complaint or pleading but for a settlement
agreement.
(c) ``ERISA Claim'' shall mean a Claim filed against Merganser or
with respect to which a settlement is reached with Merganser prior to
December 31, 2006, by reason of Merganser's alleged breach or violation
of a duty described in sections 404 or 406 of the Act.
(d) ``ERISA Client'' shall mean any employee benefit plan covered
by Title I of ERISA to which Merganser provides or provided investment
management services on or before December 31, 2006.
(e) ``Letter of Credit'' shall mean a standby letter of credit in
the amount of $750,000 issued by a commercial bank, trust company or
other financial institution subject to federal or state banking
regulation that is independent of Merganser.
(f) ``Pending ERISA Claim'' shall mean an ERISA Claim that: (i) has
been filed in court and is not the subject of a final judgment or
settlement; or (ii) has been the subject of a final judgment or
settlement which remains unsatisfied.
(g) A person will be ``independent'' of another person only if:
(i) for purposes of this exemption, such person is not an affiliate
of that other person; and
(ii) the other person, or an affiliate thereof, is not a fiduciary
that has investment management authority or renders investment advice
with respect to assets of such person.
(h) An ``affiliate'' of a person means:
(i) any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person. (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual);
(ii) any officer, director, employee or relative (as defined in
section 3(15) of the Act) of any such other person or any partner in
any such person; and
(iii) any corporation or partnership of which such person is an
officer, director or employee, or in which such person is a partner.
Summary of Facts and Representations
1. Based in Cambridge, Massachusetts, Merganser Capital Management
LP (the Partnership) is a registered investment adviser with more than
$2.4 billion in assets under its management, including $850 million in
ERISA plan assets. The Partnership's predecessor, Merganser Capital
Management Corporation (the Corporation), was founded in 1984 as a
wholly-owned subsidiary of the Polaroid Corporation. In 1987, Polaroid
sold the subsidiary to its founders, Edward R. Bedrosian and Edward
Safran. They were equal partners, each owning fifty percent of the
stock of the Corporation.
2. On April 6, 2000, Mr. Safran sold his shares back to the
Corporation for $10 million. The Corporation's purchase of the stock
was financed by a $2.5 million contribution from Mr. Bedrosian, a $6
million unsecured loan from a commercial bank, and a secured,
subordinated loan from Mr. Safran in the amount of $1.5 million.
Following the buyout, Mr. Bedrosian owned 100% of the Corporation. Five
employees of the Corporation participated in a phantom stock ownership
plan. The Corporation then transferred substantially all of its assets
and liabilities to the Partnership, a new limited partnership formed to
serve as Merganser's operating entity.
3. The general partner of the new Partnership is the Corporation.
The Partnership has a single limited partner, a limited liability
company owned by the same Merganser employees who had participated in
the Corporation's phantom stock ownership plan. The general partner has
an eighty percent interest and the limited partner has a twenty percent
interest in the Partnership.
4. The Applicant represents that as a result of the buyout of Mr.
Safran, as of December 31, 2000 (the last day of its fiscal year), the
Partnership has partners' equity of negative $6.5 million, determined
in accordance with ``generally accepted accounting principles'' (GAAP).
Because the buyout was an ``internal'' transaction, GAAP requires that
the assets of the Corporation (and the Partnership) be reflected at
``book'' rather than market value. As a result, goodwill, a significant
asset to a firm such as this one, cannot be recognized on the
Partnership's balance sheet. Because goodwill cannot be included as an
asset, the Partnership will have negative equity until most of its
current debt is repaid.
The Applicant further represents that, had the stock of the
Corporation been sold to outsiders in an external transaction, the
Corporation (and thus the Partnership) could have recognized the full
market value of its assets. Following an external transaction, the
Corporation (and the Partnership) would have had equity sufficient to
meet the requirements of PTE 84-14, even if it had financed the
transaction. Had Mr. Bedrosian personally borrowed the funds to buyout
Mr. Safran using the Partnership to guarantee the loan, the Partnership
would have had sufficient partners' equity. Although the partners'
equity is affected by the structure of the buyout, the Partnership's
earning potential is not.
The Partnership's current EBITDA (i.e., earnings before interest,
taxes, depreciation, and amortization) is over $2 million per year. It
is expected that, as a result of debt repayment and earnings, the
Partnership will satisfy the $750,000 equity requirement on a GAAP
basis within four or five years.
5. To qualify as a qualified professional asset manager (QPAM)
under PTE 84-14, an investment adviser must have partners' equity in
excess of $750,000. As a result of its reorganization, as of April 6,
2000, the Partnership will no longer qualify as a QPAM under PTE 84-14
because it will not have $750,000 in partners' equity.
6. The Partnership seeks an individual exemption permitting it to
substitute an irrevocable standby letter of credit for the partners'
equity requirement under PTE 84-14. Specifically, the Partnership will
cause First Union National Bank (First Union) to issue an irrevocable
standby letter of
[[Page 30014]]
credit for the benefit of employee benefit plans to which Merganser
provides or provided investment management services on or before
December 31, 2006 (ERISA Clients). The Applicant represents that, if
the exemption is granted, it will serve as a QPAM, as defined in PTE
84-14, for all the ERISA Clients with respect to which it provides
investment management services.
7. The letter of credit will initially be issued in the amount of
$750,000, the amount of the partners' equity requirement under PTE 84-
14. As a condition of continuing relief, the Partnership will ensure
that the amount available to ERISA Clients under the letter of credit
as of the first day of each of the Partnership's fiscal years for which
relief is needed is at least $750,000. Thus, in the event that there is
a payment under the letter of credit during one of the Partnership's
fiscal years, thereby reducing the remaining amount available under the
letter of credit, the Partnership will ensure that the letter of credit
is increased back to $750,000 no later than the first day of the
following fiscal year.
8. The letter of credit shall be payable on demand solely to any
ERISA Client (or its agent) if the ERISA Client provides:
(1) (A) a certified copy of the final judgment against Merganser
based on an ERISA Claim of such client, entered by a court of competent
jurisdiction with all rights of appeal having expired or having been
exhausted, or
(B) a true copy of a settlement agreement between the ERISA Client
and Merganser providing for damages to the ERISA Client with respect to
an ERISA Claim;
(2) in the case of a final court judgment, a certified true copy of
a Sheriff's or Marshall's levy and execution on the judgment, returned
unsatisfied, or such other documentation, certified by an officer of
the court in which the judgment was entered, stating that the judgment
remains unsatisfied following attempts to collect the judgment in
accordance with local court rules; and
(3) a certificate of an authorized representative of the ERISA
Client stating the amount of the judgment or settlement which remains
unsatisfied.
9. The letter of credit will be maintained by the Partnership for
the period of the exemption, unless the Partnership satisfies the
partners' equity requirement of PTE 84-14 at an earlier date.
Additionally, in the event that one or more ERISA Clients has a pending
ERISA claim against Merganser outstanding on December 31, 2006,
Merganser will either (i) cause the letter of credit to be maintained
until the earlier of December 31, 2008 or a final judgment or
settlement disposing of all such pending ERISA claims, or (ii) cause a
bond to be purchased which fully insures all such pending ERISA claims
in the total amount equal to the amount of such pending ERISA claims
but not to exceed $750,000.
If Merganser causes a bond to be purchased under subparagraph (ii)
above, the bond would be payable under terms consistent with the letter
of credit. Accordingly, the bond would cover the pending ERISA claim(s)
and would be payable in the event of a final judgment with rights to
appeal expired or exhausted, or in the event of a settlement. The
Applicant represents that it has inquired and been told by a bond
company that obtaining a bond for a claim that already has been filed
is commercially feasible, although it could require substantial
collateral.
10. During the life of the letter of credit, Merganser's ERISA
Clients will likely change; new clients will be added and existing
clients may end their relationships with Merganser. Because the letter
of credit is intended to provide protection to a changing group of
ERISA Clients, it will be necessary to issue the letter to an ``agent''
who can hold it on behalf of the multiple ERISA Clients. The agent
(Agent) will be a person or entity affiliated with First Union and
independent of the Partnership. The Agent will be required to demand
payment from First Union on behalf of any ERISA Client under exactly
the same circumstances under which First Union is obligated to pay
under the letter of credit (i.e., an unsatisfied claim or judgment for
ERISA Claims).
11. Neither First Union nor the Agent has any discretion in
determining whether, respectively, to pay under the letter of credit or
to demand payment under the letter of credit. If an ERISA Client meets
the conditions described in the letter of credit, the duty to pay or
demand payment is automatic. So long as the letter of credit is in
effect, the Agent will demand and First Union will pay any ERISA Client
who obtains a settlement or judgment of ERISA claims, irrespective of
when the alleged violations occurred.
12. The Agent will maintain an up-to-date list of all of
Merganser's ERISA Clients, each of which shall be entitled to instruct
the Agent to demand payment under the letter of credit consistent with
the conditions described above. This list will be made an exhibit to
the agreement between the Agent and the Partnership. Each current ERISA
Client will be provided with written notice of its rights with respect
to the letter of credit at the same time as it is provided with a copy
of the proposed exemption for purposes of its right to comment pursuant
to the Department's regulations at 29 CFR 2570.43. New ERISA Clients
will be provided with written notice of their rights with respect to
the letter of credit at the same time as they are provided with a copy
of the proposed and final exemption, if granted, as published in the
Federal Register. ERISA Clients will be provided with the U.S. address
of the Agent, and will be promptly notified of any changes in that
address. First Union's obligation to pay under the letter of credit
will be fully secured by marketable collateral with value of at least
$750,000.
13. In summary, it is represented that the proposed transactions
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) The requested exemption is administratively feasible because
the Partnership's compliance with the proposed conditions can be
readily determined. In addition, the exemption would not require
continued monitoring or other involvement on behalf of the Department.
(b) The requested exemption is in the interest of the Partnership's
ERISA Clients and their participants and beneficiaries because it
permits the Partnership to render continuing services to the ERISA
Clients and permits those ERISA Clients to continue to invest without
regard to the ``party in interest'' status of other parties to the
transactions, while providing security for any ERISA Claims arising out
of these investments.
(c) The requested exemption is protective of the rights of the
Partnership's ERISA Clients and their participants and beneficiaries
because it requires the maintenance of a letter of credit exclusively
for the Partnership's ERISA Clients.
For Further Information Contact: Karen Lloyd of the Department,
telephone (202) 219-8194. (This is not a toll-free number).
ATGI 401(k) Plan (the Plan) Located in Houston, Texas
[Application No. D-10970]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990). If the exemption is
granted, the restrictions of
[[Page 30015]]
sections 406(a), 406(b)(1) and (b)(2) and 407(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A) through (E) of the Code, shall not
apply effective November 30, 2000 to: (1) the acquisition of Stock
Rights (the Stock Rights) by the Plan in connection with a Stock Rights
offering by Alpha Technologies Group, Inc. (ATGI); (2) the holding of
the Stock Rights by the Plan during the subscription period of the
offering; and (3) the disposition or exercise of the Stock Rights by
the Plan; provided that the following conditions are met:
(a) The Stock Rights were acquired pursuant to Plan provisions for
individually-directed investment of such accounts;
(b) The Plan's receipt of the Stock Rights occurred in connection
with a Stock Rights offering made available to all shareholders of
common stock of ATGI;
(c) All decisions regarding the holding and disposition of the
Stock Rights by the Plan were made, in accordance with the Plan
provisions for individually-directed investment of participant
accounts, by the individual Plan participants whose accounts in the
Plan received Stock Rights in connection with the offering;
(d) The Plan's acquisition of the Stock Rights resulted from an
independent act of ATGI as a corporate entity, and all holders of the
Stock Rights, including the Plan, were treated in the same manner with
respect to the acquisition; and
(e) The price received by the Plan for the Stock Rights is no less
than the fair market value of the Stock Rights on the date of the
offering.
Effective Date: This exemption is effective as of November 30,
2000.
Summary of Facts and Representations
1. ATGI, the sponsor of the Plan, is a Delaware corporation engaged
primarily in the manufacturing of thermal management products,
principally heat sinks. ATGI's thermal management business is conducted
through several wholly owned subsidiaries: Wakefield Engineering, Inc.,
which includes the Wakefield-Fall River and Wakefield-Temecula
Divisions; Specialty Extrusion Corporation; Lockhart Industries, Inc;
and National Northeast Corporation (NNE).
2. The Plan is a defined contribution profit-sharing plan. The
initial effective date of the Plan was November 1, 1977. The Plan is a
qualified plan under Code section 401(a). As of February 19, 2001, the
Plan has approximately 730 participants. According to CIGNA Retirement
& Investment Services (CIGNA), the Plan's recordkeeper, approximately
200 of these participants had shares of ATGI stock, a NASDAQ publically
traded stock, allocated to their Plan accounts as of the Record Date.
In total, 188,983.82 shares of ATGI stock were allocated to Plan
participants' accounts on the Record Date for a total ATGI stock
balance of $1,994,971.06. These holdings of employer stock represented
approximately 19.95% of the Plan's total assets as of the Record Date.
3. Steve E. Chupik, ATGI's Vice-President of Administration, serves
as Plan Trustee. The Plan provides for participant-directed investment
of contributions made to the Plan. Investment in employer stock is a
permitted investment option under the terms of the Plan. The Plan
Trustee has authority to vote all shares of employer stock owned by
participants through the Plan. In addition to ATGI stock, Plan
participants may choose among the following investment options: (1) the
Guaranteed Long-Term Fund, (2) the Guaranteed Short-Term Securities
Fund, (3) the Large Company Stock Index Fund, (4) the Fidelity Advisor
Growth Opportunities Account, (5) the Janus Account, (6) the PBHG
Growth Account, and (7) the American Century Vista Account.
Each participant's Plan account is also subdivided into various
source accounts. Source accounts denote from which sources monies held
within a participant's Plan account were received. There are six source
account designations: (1) Employee Post-Tax, (2) Rollover, (3) Prior
Company Matching, (4) Company Discretionary, (5) Company Matching, and
(6) Employee Pre-Tax.
4. ATGI's decision to engage in the Stock Rights offering was made
in ATGI's capacity as issuer of its securities, not in its capacity as
a Plan fiduciary. The decision was prompted by a business need to raise
capital for the expansion of ATGI's thermal management business. The
offering was conducted as a mechanism for partially financing the
purchase of the stock of NNE, a leading manufacturer of aluminum
extrusions and heat sinks.
ATGI first began exploring the possibility of engaging in a Stock
Rights offering to assist in financing the purchase of NNE in September
2000. Based upon this initial consideration, ATGI filed an S-2
Registration Statement containing a preliminary prospectus with the
Securities and Exchange Commission (the SEC) on October 6, 2000. ATGI
made the Stock Rights offering contingent upon the completion of the
purchase of NNE. On November 21, 2000, ATGI's Board of Directors (the
Board) resolved to meet the requirements of the lender through a Stock
Rights offering, and it settled upon a subscription price for the
offering. A revised S-2A Registration Statement including a final
prospectus were then filed with the SEC on November 30, 2000.
The acquisition of NNE was completed on January 9, 2001, and the
proceeds of the Stock Rights offering were contributed to the
approximately $50 million purchase price of NNE.
5. The Basic Subscription Privilege: ATGI offered all of its
shareholders as of the Record Date the opportunity to purchase
additional shares of ATGI's common stock at a fixed price and in
proportion to the shareholders' existing interests on the Record Date.
Through the Stock Rights offering, shareholders received one stock
right for each 25 shares of stock they owned on the Record Date.
Shareholders became entitled to receive their Stock Rights on or about
November 30, 2000 upon the effectiveness of ATGI's S-2A Registration
Statement. No fractional Stock Rights were distributed. Rather, the
number of Stock Rights received by a shareholder was rounded up to the
nearest whole number if the fraction was greater than \1/2\ and rounded
down to the nearest whole number if the fraction was less than \1/2\.
Each stock right allowed the shareholder to purchase one share of
ATGI common stock at the fixed subscription price of $7.25 per share.
The Board set this subscription price after considering several
factors, including the historical and current market price of the
common stock, ATGI's current business prospects, recent and anticipated
operating results, ATGI's need for capital, the alternatives available
for raising capital, the amount of proceeds desired, the pricing of
similar transactions, the liquidity of the common stock, and the need
to offer shares at a price that would be attractive to investors
relative to the current trading price of ATGI's common stock.
Shareholders choosing to use the Stock Rights granted to them to
purchase additional shares of ATGI stock were required to exercise
their rights by 5 p.m., EST, on the Expiration Date. A shareholder
elected to exercise his or her Stock Rights by properly completing the
rights exercise agreement provided to the shareholder along with the
prospectus and delivering this rights exercise agreement to the
subscription agent, the American Stock Transfer and Trust Company (the
Subscription Agent), by 5 p.m., EST, on
[[Page 30016]]
the Expiration Date. A shareholder choosing to exercise rights also had
to deliver the purchase price of the stock purchased pursuant to the
exercise of rights to the Subscription Agent by 5 p.m., EST, on the
Expiration Date. Shareholders were allowed to exercise as few or as
many of their basic Stock Rights as they wished. The Stock Rights were
nontransferable, and an exercise of Stock Rights was irrevocable. All
unexercised rights expired at 5 p.m., EST, on the Expiration Date and
were forfeited.
6. ATGI limited the shares of common stock it issued under the
Stock Rights offering to 270,946 shares. However, ATGI expected that
not all of these shares would be purchased by shareholders pursuant to
the exercise of their basic subscription rights. Rather, ATGI expected
that some shareholders would not exercise any or all of the Stock
Rights granted to them under the basic subscription privilege. To
compensate for these under-subscribing shareholders, ATGI provided
shareholders who elected to exercise all of their Stock Rights pursuant
to the basic subscription privilege with the opportunity to purchase
those shares that were not purchased by the under-subscribing
shareholders (the Over-Subscription Privilege). Shareholders were
required to exercise their over-subscription rights at the same time
and in the same manner as they elected to exercise their basic
subscription rights.
ATGI also expected that the number of over-subscription requests
might exceed the number of shares available. In this event, ATGI
decided to allocate the available shares to over-subscribing
shareholders in proportion to the number of shares purchased by these
shareholders through the basic subscription privilege.
6. The Expiration Date of the Stock Rights Offering: the expiration
date and time of the Stock Rights offering were initially set for 5
p.m., EST, January 5, 2001. However, ATGI reserved the right to extend
the offering up to 10 days. On January 5, 2001, ATGI announced that it
was exercising this right to extend the offering. The new expiration
date and time were extended to 5 p.m., EST, January 8, 2001.
7. Pursuant to applicable securities laws, ATGI could not exclude
the Plan from the Stock Rights offering. Thus, as the holder of record
of the 188,983.82 shares of ATGI stock allocated to Plan participants'
accounts by CIGNA as of the Record Date, the Plan Trustee received
7,556 Stock Rights through the Stock Rights offering. The Plan was
treated in the same manner as all other holders of this class of
securities.
To avoid engaging in a prohibited transaction, the Plan Trustee
considered refusing to accept the Stock Rights offered from ATGI.
However, since participation in the Stock Rights offering was expected
to allow Plan participants whose Plan accounts held a minimum level of
ATGI stock on the Record Date (Invested Plan Participants) to purchase
shares of ATGI's common stock at a discount from market price, the Plan
Trustee concluded that refusing to accept the Stock Rights might
constitute a breach of his fiduciary duty to Plan participants. A
refusal of the Stock Rights would have denied Invested Plan
Participants the opportunity to purchase additional shares of ATGI
stock at the discounted price offered to all other ATGI shareholders.
8. The Plan provides for individually-directed investment of the
assets in each participant's account. Therefore, the Stock Rights
received by the Plan Trustee were allocated to individual Invested Plan
Participants' accounts based upon the participants' respective holdings
of ATGI stock on the Record Date. All decisions regarding the exercise
of the Stock Rights were made by the Invested Plan Participants. The
Plan Trustee undertook measures to ensure that Invested Plan
Participants were provided with adequate information regarding the
Stock Rights offering so that these participants could make informed
decisions regarding the exercise of their Stock Rights.
9. Following the Board's resolution on November 21, 2000 setting
the subscription price of the Stock Rights offering, a finalized
prospectus was filed with the SEC on November 30, 2000 as part of
ATGI's S-2A Registration Statement. On December 4, 2000, the Plan
received copies of this completed prospectus from the printer for
distribution to Invested Plan Participants. Completed prospectuses and
the accompanying materials described below were sent via Federal
Express on December 6, 2000 to the human resource departments at ATGI's
locations. On December 7, 2000, the prospectuses were distributed to
the approximately 125 Invested Plan Participants employed at these
locations. Approximately 70 Invested Plan Participants worked at remote
locations or were not current employees of ATGI. These participants
were mailed prospectuses and accompanying materials via first-class
mail on December 6, 2000. In comparison, copies of the prospectus were
not mailed to other ATGI shareholders until December 8, 2000.
10. A memorandum from the Plan Trustee accompanied the prospectus.
The memorandum introduced the Stock Rights offering and informed
Invested Plan Participants of the additional information they would be
receiving at a later date.
11. The Plan Trustee provided Invested Plan Participants with a
letter containing an explanation of the Stock Rights offering and
outlining the procedure they should follow to exercise their Stock
Rights. The letter also reminded Invested Plan Participants of the
risks involved in investing in ATGI stock. Invested Plan Participants
who were current employees of ATGI received the letter and the
accompanying materials described below via interoffice mail on December
8, 2000. Invested Plan Participants who worked at remote locations or
who were not current employees of ATGI were mailed the letter and
accompanying materials via U.S. priority mail on December 7, 2000.
12. A Direction Form accompanied the above letter provided to
Invested Plan Participants on December 7 and December 8, 2000. The
Direction Form served as the mechanism through which Invested Plan
Participants directed the Plan Trustee to exercise or to forfeit the
Stock Rights allocated to them. The Direction Form also required
Invested Plan Participants electing to exercise some or all of their
rights to designate which of their Plan investments were to be
liquidated to fund the exercise of the rights. A self-addressed
envelope was included with the Direction Form to assist Invested Plan
Participants in returning the Direction Form to the Plan Trustee.
In addition to the Direction Form, Invested Plan Participants
received a Source Designation Form enabling them to designate from
which Plan accounts, such as the employee pre-tax account or the
company matching account, they wished the purchase price of any stock
purchased pursuant to the exercise of rights to be withdrawn. Invested
Plan Participants who had already indicated through a return of their
Direction Forms that they would not be participating in the Stock
Rights offering were not sent a Source Designation Form. Approximately
110 of the Invested Plan Participants who were current employees of
ATGI received the Source Designation Form via facsimile on December 20,
2000. These Invested Plan Participants were asked to return this form
to the Plan Trustee by December 22, 2000 by either a return facsimile
or an email. Approximately 48 of the Invested Plan Participants who
were employed at remote locations or
[[Page 30017]]
who no longer worked at ATGI were sent a Source Designation Form by
U.S. priority mail on December 20, 2000. These Invested Plan
Participants were asked to respond via email, facsimile, or telephone
by December 26, 2000. ATGI's Human Resources Manager (the Human
Resources Manager), personally contacted by telephone the Invested Plan
Participants who could not be reached by facsimile. The Human Resources
Manager also contacted the Invested Plan Participants who indicated
through a return of their Direction Forms that they wished to
participate in the Stock Rights offering but whose Source Designation
Forms were not received by the deadline. Through these efforts, source
designations were obtained from all but two of the Invested Plan
Participants exercising rights. The Human Resources Manager also
attempted to contact these two Invested Plan Participants by telephone;
however, there was no response from either.
13. In addition to the Direction Form and the Source Designation
Forms, a table depicting ATGI's daily stock activity, including stock
closing prices, for the period from November 1, 2000 to December 6,
2000 accompanied the letter from the Plan Trustee provided to Invested
Plan Participants on December 7 and December 8, 2000.
14. On December 7, 2000, the Plan Trustee provided each Invested
Plan Participant with an individualized statement of his or her Plan
accounts reflecting that participant's investment fund allocations and
the value of that participant's various Plan accounts as of the Record
Date.
15. Representatives of ATGI and the Plan made themselves available
to answer participants' questions regarding the Stock Rights offering.
The Human Resources Manager conducted telephone conferences with
approximately 30 to 35 Plan participants and several ATGI human
resource representatives. The Plan Trustee visited several of ATGI's
larger locations where he answered questions presented to him during
his visits with employees on the shop floor. The Plan Trustee also
occupied a vacant office at these locations, allowing employees to stop
in with questions without an appointment.
16. An Invested Plan Participant exercised the Stock Rights by
properly completing and submitting the Direction Form to the Plan
Trustee. An Invested Plan Participant was required to include the
following information on the Direction Form; (i) how many Stock Rights,
if any, the participant wished to exercise; (ii) assuming the
participant elected to exercise all of the Stock Rights allocated to
him or her pursuant to the basic subscription privilege, whether and
how many additional shares of stock the participant wished to purchase
pursuant to the Over-Subscription Privilege; and (iii) which Plan
investments the participant wished to liquidate to cover the purchase
price of any shares of stock purchased pursuant to the exercise of
rights.
If an Invested Plan Participant elected to exercise rights but
failed to indicate from which investments the purchase price should be
withdrawn, he or she was deemed to have elected that the purchase price
be withdrawn pro rata from all of his or her investments, i.e., a
failure to specify constituted a pro rata election.
The deadline for receipt of properly completed Direction Forms by
the Plan Trustee was Friday, December 22, 2000. The rights of Invested
Plan Participants whose Direction Forms were not received by this date
were forfeited. The December 22 deadline was selected upon consultation
with CIGNA and Merrill Lynch, the Plan's broker for ATGI stock
transactions. The December 22 deadline for receipt of the Direction
Forms by the Plan Trustee from Invested Plan Participants was selected
as the latest date allowing the Plan Trustee to review and compile the
Direction Forms for submission of the data to CIGNA by December 27,
2000.
In addition to completing and returning the Direction Form,
Invested Plan Participants choosing to exercise rights were also
required to complete and return a Source Designation Form. On the
Source Designation Form, Invested Plan Participants designated from
which Plan accounts they wished the purchase price of the shares of
stock purchased under the Stock Rights offering to be withdrawn.
Invested Plan Participants were warned that if they failed to make this
designation, funds would be withdrawn from Plan accounts in the
following order; (i) Employee Post-tax; (ii) Rollover; (iii) Prior
Company Matching; (iv) Company Discretionary; (v) Company Matching; and
(vi) Employee Pre-Tax.
Invested Plan Participants who lacked sufficient funds in their
Plan accounts to cover the purchase price of the requested shares of
stock could exercise their rights pursuant to the basic or the Over-
Subscription Privileges only to the extent of the funds available in
their Plan accounts.
17. ATGI completed the Stock Rights offering at 5 p.m., EST, on
Monday, January 8, 2001. The Stock Rights offering raised almost $2
million towards the acquisition of NNE. All 270,946 shares of ATGI
common stock offered under the Stock Rights offering were purchased.
Invested Plan Participants purchased 2,427 shares pursuant to the basic
subscription privilege and 5,405 shares pursuant to the Over-
Subscription Privilege. Since the Stock Rights offering was over-
subscribed, the shares available for purchase under the over-
subscription privilege were allocated to over-subscribing shareholders
in proportion to the number of shares purchased by these shareholders
pursuant to their basic subscription rights.
ATGI's closing stock price on the Expiration Date was listed on
NASDAQ as $7.813.
18. The applicant states that the proposed transaction is in the
best interests of the Plan and its participants and beneficiaries
because the acquisition of the Stock Rights from ATGI benefitted the
Plan and its participants by providing Invested Plan Participants with
a mechanism through which they could increase the net worth of their
Plan accounts. Through the exercise of the Stock Rights, the Invested
Plan Participants acquired stock worth $7.813 per share as of the close
of business on the Expiration Date while only paying $7.25 per share, a
net gain of $.56 per share.
19. In summary, the applicant represents that the proposed
transaction meets the statutory criteria of section 408(a) of the Act
because:
(a) The Stock Rights were acquired pursuant to Plan provisions for
individually-directed investment of such accounts;
(b) The Plan's receipt of the Stock Rights occurred in connection
with a Stock Rights offering conducted by ATGI;
(c) All decisions regarding the holding and disposition of the
Stock Rights by the Plan were made, in accordance with the Plan
provisions for individually-directed investment of participant
accounts, by the individual Plan participants whose accounts in the
Plan received Stock Rights in connection with the offering;
(d) All holders of the Stock Rights, including the Plan, were
treated in the same manner with respect to the acquisition of the Stock
Rights; and
(e) Through the exercise of the Stock Rights, the Invested Plan
Participants acquired stock worth $7.813 per share as of the close of
business on the Expiration Date while only paying $7.25 per share, a
net gain of $.56 per share.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and
[[Page 30018]]
Department within 15 days of the date of publication in the Federal
Register. Comments and requests for a hearing are due forty-five (45)
days after publication of the notice in the Federal Register.
For Further Information Contact: Khalif Ford of the Department,
telephone (202) 219-8883. (This is not a toll-free number).
The Joliet Medical Group, Ltd. Employees Retirement Plan & Trust
(the Plan) Located in Joliet, Illinois
[Application D-10990]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, will not apply effective November 1, 1999 to the past and
continued leasing of a medical clinic (the Property) located at 2100
Glenwood Ave., Joliet, Illinois, from the Plan to Joliet Medical Group,
Ltd. (the Employer), provided that the following conditions have been
and will be met:
(a) The independent fiduciary has determined that the transaction
is feasible, in the interest of, and protective of the Plan;
(b) The fair market value of the Property has not exceeded and will
not exceed twenty percent (20%) of the value of the total assets of the
Plan;
(c) The independent fiduciary has negotiated, reviewed, and
approved the terms of the lease of the Property with the Employer;
(d) The terms and conditions of the lease of the Property with the
Employer have been and will continue to be no less favorable to the
Plan than those obtainable by the Plan under similar circumstances when
negotiated at arm's length with unrelated third parties;
(e) An independent qualified appraiser has determined the fair
market rental value of the Property;
(f) The independent fiduciary has monitored and will continue to
monitor compliance with the terms of the lease of the Property to the
Employer throughout the duration of such lease and is responsible for
legally enforcing the payment of the rent and the proper performance of
all other obligations of the Employer under the terms of the lease on
the Property; and
(g) The Plan has not incurred and will not incur any fees, costs,
commissions, or other charges or expenses as a result of its
participation in the proposed transaction, other than the fee payable
to the independent fiduciary.
Effective Date: This exemption is effective as of November 1, 1999.
Preamble
On February 15, 2001 (66 FR 10526), the Department published a
notice of proposed exemption (the Prior Notice) from the prohibited
transaction restrictions of the Employee Retirement Income Security Act
of 1974 and from certain taxes imposed by the Internal Revenue Code of
1986. The Prior Notice for which retroactive relief had been requested,
would have provided conditional relief for the past and continued
leasing of the Property, from the Plan to the Employer.
On April 3, 2001 (66 FR 17737), the Department published a
withdrawal of the Prior Notice. The notice of proposed exemption herein
provides the most recent information submitted by the applicant and the
independent fiduciary.
Summary of Facts and Representations
1. The Plan is a profit sharing plan which was created effective
January 1, 1975. As of August 29, 2000, the Plan had net assets valued
at approximately $20,075,282 and 165 participants.
2. The Employer is a medical corporation licensed to practice
medicine in the State of Illinois, whose principal place of business is
Joliet, Illinois. The Employer's principal place of business is the
Property. The Employer is engaged in the general practice of medicine.
3. The Property consists of a two story medical building located at
2100 Glenwood Avenue, Joliet Illinois. The Property contains
approximately 10,583 square feet on each floor for a total square
footage (above ground) of approximately 21,166 square feet. In
addition, there is a full basement which is finished and contains an
additional approximately 10,583 square feet. The fair market value of
the Property represents 15.94% of the total assets in the Plan.
The Plan initially leased the Property to the Employer for an
initial term of 18 years, which ended November 1, 1999. In response to
an exemption application filed by the Employer, the Department granted
an exemption covering the initial lease (the Initial Lease): Prohibited
Transaction Exemption 81-96 (PTE 81-96), 46 FR 53816 (October 30,
1981). It is represented that since the inception of the Initial Lease,
the Employer has always paid its rent on time and otherwise complied
with all of the terms and conditions of the Initial Lease and PTE 81-
96. Furthermore, the independent fiduciary has continued to monitor and
oversee compliance with the conditions of the exemption after the
expiration of the lease because the parties determined to continue the
arrangement after November 1, 1999.
4. Joseph E. Batis, (Mr. Batis), an accredited appraiser with
Edward J. Batis & Associates, Inc., located in Joliet, Illinois,
appraised the Property on October 24, 2000. Mr. Batis states that he is
a full time qualified, independent appraiser, as demonstrated by his
status as a State Certified General Real Estate Appraiser licensed by
the State of Illinois. In addition, Mr. Batis represents that both he
and his firm are independent of the Employer.
In his appraisal, Mr. Batis relied primarily on the ``Appraisal
Process''. Included within the steps of this process are three
approaches to a value estimate: the Cost Approach, the Direct Sales
Comparison Approach and the Income Approach. According to Mr. Batis,
these methods best represent the actions of buyers and sellers in the
market place. After Mr. Batis independently applies each approach to
value, the three resultant value estimates are reconciled into an
overall estimate of value. In the reconciliation process, the appraiser
analyzes each approach with respect to its applicability to the
property being appraised. Also considered in the reconciliation process
is the strength and weakness of each approach with regards to
supporting market data. After inspecting the Property and analyzing all
relevant data, Mr. Batis determined that a fee simple interest in the
Property had a fair market value of approximately $3,200,000. On
February 27, 2001, Mr. Batis updated the appraisal and determined the
fair market monthly rental value of the Property to be $32,000 and the
annual fair market rental value to be $384,000.
5. An independent party, the First Midwest Trust Company (the Bank)
has served and continues to serve as the independent fiduciary. The
Bank represents that since the inception of the Initial Lease, the
Employer has complied with all of the terms and conditions of the
Initial Lease and PTE 81-96. The Bank certifies that the transaction is
appropriate and in the best interests of the Plan and that the terms
and conditions of the proposed transactions are at least equal to what
the Plan would receive from an unrelated party in similar transaction.
In addition, the Bank will monitor the transaction and will have the
[[Page 30019]]
responsibility for exercising the Plan's rights in the proposed
transaction. On March 28, 2001 the Bank represented that the annual
fair market rental value of the Property should reflect 12% of the fair
market value of the Property (3,200,000 x .12 = $384,000).
6. The Employer will enter into a five year, ``triple net'' lease
with the Plan leasing the Property to the Employer for a ``floating''
monthly rental of 1% of the current appraised value of the subject
realty ($3,200,000 x 1%= $32,000). A new appraisal by an independent,
qualified appraiser would be performed every other year to update the
rent. The minimum guaranteed monthly rental value (regardless of any
possible decrease in the appraisal) is $32,000. The terms of the lease
provide for a primary term of five years with an option to renew and
extend for two additional successive terms of five years each subject
to the approval of the independent fiduciary. In the event of a
default, the Employer is required to reimburse the Plan on demand for
all costs reasonably incurred by the Plan in connection therewith,
including attorney's fees, court costs and related costs plus a
reasonable rate of return on the amount of accrued but unpaid rent due
the Plan, as determined by an appropriate third party source.
7. Since the Initial Lease, the Employer has continued to pay rent
to the Plan in a timely manner without default or rental delinquencies.
However, the Employer is aware of the fact that a prohibited
transaction occurred in violation of the Act subsequent to the
expiration of the lease under PTE 81-96 (November 1, 1999). Therefore,
the Employer has requested exemptive relief with respect to the past
and continued leasing of the Property by the Plan to the Employer. If
granted, the proposed exemption will be retroactive to November 1,
1999.
8. In summary, the applicant represents that the proposed
transaction meets the statutory criteria of section 408(a) of the Act
because:
(a) The independent fiduciary has determined that the transaction
is feasible, in the interest of, and protective of the Plan;
(b) The fair market value of the Property has not exceeded and will
not exceed twenty percent (20%) of the value of the total assets of the
Plan;
(c) The independent fiduciary has negotiated, reviewed, and
approved the terms of the lease with the Employer on the Property;
(d) The terms and conditions of the lease with the Employer on the
Property have been and will continue to be no less favorable to the
Plan than those obtainable by the Plan under similar circumstances when
negotiated at arm's length with unrelated third parties;
(e) An independent qualified appraiser has determined the fair
market rental value of the Property;
(f) The independent fiduciary has monitored and will continue to
monitor compliance with the terms of the lease of the Property to the
Employer throughout the duration of such lease and is responsible for
legally enforcing the payment of the rent and the proper performance of
all other obligations of the Employer under the terms of the lease; and
(g) The Plan has not incurred and will not incur any fees, costs,
commissions, or other charges or expenses as a result of its
participation in the proposed transactions, other than the fee payable
to the independent fiduciary.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
For Further Information Contact: Khalif Ford of the Department,
telephone (202) 219-8883 (this is not a toll-free number).
ACE Business Travel Accident Plan (the Plan) Located in
Philadelphia, Pennsylvania
[Application No. L-10955]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406(a) and (b) of the Act shall not apply to the
reinsurance of risks and the receipt of premiums therefrom by ACE
American Insurance Company (ACE USA) from the insurance contracts sold
by Life Insurance Company of North America (CIGNA) or any successor
company to CIGNA which is unrelated to ACE INA Holdings, Inc. (ACE
INA), to provide accidental death and dismemberment benefits to
participants in the Plan, provided the following conditions are met:
(a) ACE USA--
(1) Is a party in interest with respect to the Plan by reason of a
stock or partnership affiliation with ACE INA that is described in
section 3(14)(E) or (G) of the Act,
(2) Is licensed to sell insurance or conduct reinsurance operations
in at least one State as defined in section 3(10) of the Act,
(3) Has obtained a Certificate of Authority from the Insurance
Commissioner of its domiciliary state which has neither been revoked
nor suspended, and
(4)(A) Has undergone an examination by an independent certified
public accountant for its last completed taxable year immediately prior
to the taxable year of the reinsurance transaction; or
(B) Has undergone a financial examination (within the meaning of
the law of its domiciliary State, Pennsylvania) by the Insurance
Commissioner of the Commonwealth of Pennsylvania within 5 years prior
to the end of the year preceding the year in which the reinsurance
transaction occurred.
(b) The Plan pays no more than adequate consideration for the
insurance contracts;
(c) No commissions are paid with respect to the direct sale of such
contracts or the reinsurance thereof;
(d) The Plan only contracts with insurers with a rating of A or
better from A. M. Best Company (Best's). The reinsurance arrangement
between the insurers and ACE USA will be indemnity insurance only,
i.e., the insurer will not be relieved of liability to the Plan should
ACE USA be unable or unwilling to cover any liability arising from the
reinsurance arrangement; and
(e) For each taxable year of ACE USA, the gross premiums and
annuity considerations received in that taxable year by ACE USA for
life and health insurance or annuity contracts for all employee benefit
plans (and their employers) with respect to which ACE USA is a party in
interest by reason of a relationship to such employer described in
section 3(14)(E) or (G) of the Act does not exceed 50% of the gross
premiums and annuity considerations received for all lines of insurance
(whether direct insurance or reinsurance) in that taxable year by ACE
USA. For purposes of this condition (e):
(1) the term ``gross premiums and annuity considerations received''
means as to the numerator the total of premiums and annuity
considerations received, both for the subject reinsurance transactions
as well as for any direct sale or other reinsurance of life insurance,
health insurance or annuity contracts to such plans (and their
employers) by ACE USA. This total is to be reduced (in both the
numerator and the denominator of the fraction) by
[[Page 30020]]
experience refunds paid or credited in that taxable year by ACE USA;
and
(2) all premium and annuity considerations written by ACE USA for
plans which it alone maintains are to be excluded from both the
numerator and the denominator of the fraction.
Preamble
On August 7, 1979, the Department published a class exemption
[Prohibited Transaction Exemption 79-41 (PTE 79-41), 44 FR 46365] which
permits insurance companies that have substantial stock or partnership
affiliations with employers establishing or maintaining employee
benefit plans to make direct sales of life insurance, health insurance
or annuity contracts which fund such plans if certain conditions are
satisfied.
In PTE 79-41, the Department stated its views that if a plan
purchases an insurance contract from a company that is unrelated to the
employer pursuant to an arrangement or understanding, written or oral,
under which it is expected that the unrelated company will subsequently
reinsure all or part of the risk related to such insurance with an
insurance company which is a party in interest with respect to the
plan, the purchase of the insurance contract would be a prohibited
transaction.
The Department further stated that as of the date of publication of
PTE 79-41, it had received several applications for exemption under
which a plan or its employer would contract with an unrelated company
for insurance, and the unrelated company would, pursuant to an
arrangement or understanding, reinsure part or all of the risk with
(and cede part or all of the premiums to) an insurance company
affiliated with the employer maintaining the plan. The Department felt
that it would not be appropriate to cover the various types of
reinsurance transactions for which it had received applications within
the scope of the class exemption, but would instead consider such
applications on the merits of each individual case.
Summary of Facts and Representations
1. ACE INA is a publicly traded insurance holding company
incorporated under the laws of the Commonwealth of Pennsylvania. ACE
INA provides a full range of insurance related services through its
subsidiaries, including ACE USA.
2. ACE USA is a corporation organized under the laws of the
Commonwealth of Pennsylvania, with its principal administrative offices
in Philadelphia, Pennsylvania. ACE USA is a wholly-owned subsidiary of
ACE INA, and is currently licensed to do business in all states and the
District of Columbia. ACE USA is principally engaged in the business of
underwriting insurance including property and casualty, accident and
health, commercial automobile, aviation, crime, credit, crop/hail,
fidelity, general liability, inland marine, ocean marine, surety and
worker's compensation insurance. The applicant represents that $416
million in premiums was underwritten by ACE USA in 1999.
3. ACE INA and most of its subsidiaries provide their eligible
employees with certain welfare benefits through the Plan. The Plan is a
fully insured ``employee welfare benefit plan'' within the meaning of
section 3(1) of the Act that provides accidental death and
dismemberment benefits to approximately 4,800 eligible employees and
beneficiaries. Eligible employees include all full time and part time
salaried employees working at least 24 hours per week. Eligible
employees and beneficiaries receive accidental death or dismemberment
coverage in the event that the employee dies or is severely injured as
a result of an accident while traveling on company business. Coverage
under the Plan equals five times salary, rounded to the highest $1,000,
up to a maximum of $2,500,000. All premiums are paid by ACE INA and/or
its subsidiaries.
4. The benefits provided under the Plan are currently underwritten
by CIGNA, an unaffiliated insurance carrier. ACE INA, as a fiduciary of
the Plan, has entered into a policy with CIGNA for 100% of this
coverage. ACE INA proposes to use its subsidiary, ACE USA, to reinsure
50% of the risk through a reinsurance contract between ACE USA and
CIGNA in which CIGNA would pay 50% of the premiums to ACE USA. From the
participants' perspective, the participants have a binding contract
with CIGNA, which is legally responsible for the risk associated under
the Plan. CIGNA is liable to provide the promised coverage regardless
of the proposed reinsurance arrangement. The applicant has also
requested that the proposed exemption apply to any successor company to
CIGNA that is also unrelated to ACE INA should ACE INA, as a fiduciary
of the Plan, decide to insure this coverage with another carrier under
the same kind of arrangement.
5. The applicant represents that the proposed transaction will not
in any way affect the cost to the insureds of the accidental death and
dismemberment insurance benefits, and the Plan will pay no more than
adequate consideration for the insurance. Also, Plan participants are
afforded insurance protection from CIGNA at competitive rates arrived
at through arm's-length negotiations. CIGNA is rated ``A+'' by Best's,
whose insurance ratings are widely used in financial and regulatory
circles. CIGNA has assets in excess of $3.8 billion and reserves set
aside for group accident and health policies of approximately $2.2
billion. CIGNA will continue to have the ultimate responsibility in the
event of loss to pay insurance benefits to the employee or the
employee's beneficiary.\1\ The applicant represents that ACE USA is a
sound, viable company which does a substantial amount of business
outside of its affiliated group of companies. ACE USA is substantially
dependent upon insurance customers that are unrelated to itself and its
affiliates for premium revenue.
---------------------------------------------------------------------------
\1\ The applicant represents that any successor to CIGNA would
be a legal reserve life insurance company with assets and reserves
similar to CIGNA, and thus be of such a size as to afford similar
protection and responsibility.
---------------------------------------------------------------------------
6. The applicant represents that the proposed reinsurance
transaction will meet all of the conditions of PTE 79-41 covering
direct insurance transactions:
(a) ACE USA is a party in interest with respect to the Plan (within
the meaning of section 3(14)(G) of the Act) by reason of stock
affiliation with ACE INA, which maintains the Plan.
(b) ACE USA is licensed to do business in all states and the
District of Columbia.
(c) ACE USA has undergone an examination by an independent
certified public accountant for the last completed taxable year
immediately prior to the taxable year of the proposed reinsurance
transaction.
(d) ACE USA has received a Certificate of Authority from its
domiciliary state, Pennsylvania, which has neither been revoked nor
suspended.
(e) The Plan will pay no more than adequate consideration for the
insurance. The proposed transaction will not in any way affect the cost
to the insureds of the accidental death and dismemberment benefits.
(f) No commissions have been paid or will be paid with respect to
the acquisition of direct insurance or the reinsurance agreements
between CIGNA (or any successor) and ACE INA and ACE USA.
(g) For each taxable year of ACE USA, the ``gross premiums and
annuity considerations received'' in that taxable year for group life
and health insurance (both direct insurance and reinsurance) for all
employee benefit plans (and their employers) with respect to which ACE
USA is a party in interest by reason of
[[Page 30021]]
a relationship to such employer described in section 3(14)(E) or (G) of
the Act will not exceed 50% of the ``gross premiums and annuity
considerations received'' by ACE USA from all lines of insurance in
that taxable year. ACE USA has received no premiums for the Plan
insurance in the past. ACE USA wrote $416 million in premiums in 1999.
At least 80% of ACE USA's premiums for 1999 were derived from insurance
(or reinsurance thereon) sold to entities other than ACE INA and its
affiliated group. In addition, ACE USA is substantially dependent upon
insurance customers that are unrelated to CIGNA and its affiliates for
premium income.
7. In summary, the applicant represents that the proposed
transaction will meet the criteria of section 408(a) of the Act
because: (a) Plan participants and beneficiaries are afforded insurance
protection by CIGNA, an ``A+'' rated group insurer, at competitive
market rates arrived at through arm's-length negotiations; (b) ACE USA
is a sound, viable insurance company which does a substantial amount of
public business outside its affiliated group of companies; and (c) each
of the protections provided to the Plan and its participants and
beneficiaries by PTE 79-41 will be met under the proposed reinsurance
transaction.
For Further Information Contact: Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll-free number.)
General Informaiton
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 30th day of May, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 01-13905 Filed 6-1-01; 8:45 am]
BILLING CODE 4510-29-P
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