[Federal Register Volume 62, Number 133 (Friday, July 11, 1997)]
[Notices]
[Pages 37299-37311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18128]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-09685, et al.]
Proposed Exemptions; EBPLife Insurance Company, et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction 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
request 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. 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
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 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).
[[Page 37300]]
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
EBPLife Insurance Company Located in Minneapolis, Minnesota
[Application No. D-09685]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act in accordance with the
procedures set forth in 29 C.F.R. part 2570, subpart B (55 FR 32836,
32847, August 10, 1990).
Section I--Transaction
If the exemption is granted, the restrictions of section 406(a) of
the Act shall not apply, effective April 15, 1994, to the reinsurance
of risks and the receipt of premiums therefrom by EBPLife Insurance
Company (EBPLife) in connection with certain stop-loss policies (the
Stop-Loss Policy or Stop-Loss Policies) issued by unrelated third party
insurance carriers (the Carriers or Carrier) to employers (the
Employers or Employer) any of whose employees were covered by various
employee welfare benefit plans (the Plans or Plan) 1, when
at the time EBPLife reinsured risks and received premiums, Affiliates
of EBPLife, as defined in paragraph (a) of section III below or the
predecessors of such Affiliates also provided non-discretionary
administrative services to such Plans for a fee, provided that the
conditions set forth in section II below were satisfied.
---------------------------------------------------------------------------
\1\ The Department, herein, is not proposing relief for
transactions involving any plans sponsored by EBPLife or its
affiliates (the Affiliates), as defined in paragraph (a) of section
III below, or any predecessors of such Affiliates. In this regard,
EBPLife represents that it may have issued or may issue stop-loss or
other insurance contracts in connection with welfare benefit plans
that cover or may have covered employees of EBPLife, its Affiliates
or predecessors of such Affiliates. However, in all cases, EBPLife
represents that it either satisfies the requirements of the
statutory exemption provided by section 408(b)(5) of the Act, or it
ensures that the insurance contracts are not ``plan assets'' within
the meaning of the Act.
---------------------------------------------------------------------------
Section II--Conditions
This exemption is conditioned upon the adherence to the material
facts and representations described herein and upon the satisfaction of
the following requirements, as of the effective date of this proposed
exemption and thereafter:
(a) Each transaction was effected by EBPLife in the ordinary course
of its business as an insurance company;
(b) The terms of each transaction were at least as favorable to the
Plans as those negotiated at arm's-length with unrelated third parties
under similar circumstances;
(c) The combined total of all fees and other consideration received
by EBPLife, its Affiliates, and predecessors of such Affiliates for the
provision of services to Employers and their Plans and in connection
with the purchase of insurance contracts was not in excess of
``reasonable compensation'' within the meaning of sections 408(b)(2)
and 408(c)(2) of the Act.
(d) EBPLife, its agents or Affiliates, or the predecessors to such
Affiliates have not served as: (1) Trustees to any of the Plans (other
than as non-discretionary trustees, as defined in paragraph (f) in
section III below, who do not render investment advice with respect to
any of the assets of such Plans); (2) plan administrators, within the
meaning of section 3(16)(A) of the Act; (3) fiduciaries who are
expressly authorized in writing to manage, acquire, or dispose of the
assets of any of the Plans; or (4) employers any of whose employees are
covered by any of the Plans.
(e) EBPLife, its Affiliates, or the predecessors of such Affiliates
have not acted as fiduciaries in connection with the decision by the
Employer to purchase Stop-Loss Policies reinsured by EBPLife;
(f) As of the effective date of this exemption, if an Employer
executed an agreement (the Administration Agreement) with the
Affiliates of EBPLife or with the predecessors of such Affiliates to
provide services to an Employer or Plan; and such Employer also
purchased or renewed a Stop-Loss Policy reinsured by EBPLife for the
purpose of funding a Plan, then the fiduciaries of such Plan (the Plan
Fiduciaries or Plan Fiduciary), as defined in paragraph (g) of section
III below, must have received prior to the decision which resulted in
the retention of Affiliates of EBPLife or the predecessors of such
Affiliates to provide services and stop-loss insurance reinsured by
EBPLife, a full and detailed written disclosure, including but not
limited to a copy of the Administration Agreement which, among other
things, disclosed whether EBPLife reinsured risk under a Stop-Loss
Policy issued to the Employer of such Plan and described all of the
services provided by EBPLife, its Affiliates, or the predecessors of
such Affiliates to such Plan or such Employer. Such disclosures have
been provided by EBPLife or its Affiliates or by the predecessors of
such Affiliates, in a form calculated to be understood by such Plan
Fiduciaries who have no special expertise in insurance.
(g)(1) As of the effective date of this exemption, and prior to the
execution of a transaction described in this exemption, following
receipt of the disclosures, described in paragraph (f) of this section
II, the Plan Fiduciary, by signing the Administration Agreement,
acknowledged receipt of such disclosures and acknowledged that the
decision to engage in a transaction which is the subject of this
exemption was a decision made in a fiduciary capacity, and that such
Plan Fiduciary approved of the subject transaction.
(2) With respect to the renewal by Employers of expired Stop-Loss
Policies reinsured by EBPLife where Affiliates of EBPLife or the
predecessors of such Affiliates were parties in interest with respect
to a Plan by reason of the provision of services to such Plan, the
written disclosures required under paragraph (f) of this section II
need not have been repeated, unless--
(A) More than three years had passed since such disclosures were
made with respect to the same kind of services provided by the
Affiliates of EBPLife or by predecessors of such Affiliates or the same
kind of reinsurance of the risk on the Stop-Loss Policies, or
(B) The reinsurance of the risk on such Stop-Loss Policies by
EBPLife or the receipt of compensation for services by Affiliates of
EBPLife or by predecessors of such Affiliates thereto was materially
different from that for which approval described in paragraph (g) of
this section II was obtained.
(h) The Plans have paid no commission with respect to the
reinsurance by EBPLife of the Stop-Loss Policies.
(i) Each of the Plan Fiduciaries have not received, directly or
indirectly (i.e. through any Affiliates), any compensation or other
consideration for his or her own personal account from EBPLife, any of
its Affiliates, any predecessors of such Affiliates, or other party
dealing with any of the Plans in connection with a transaction
described in this exemption.
(j) EBPLife and its Affiliates and any predecessors of such
Affiliates followed
[[Page 37301]]
the standard claims processing practices regarding any claims submitted
with respect to benefits under any of the Plans covered by any of the
Stop-Loss Policies reinsured by EBPLife;
(k) The Employer had final authority regarding the payment or
nonpayment of any and all claims submitted with respect to benefits
under any of the Plans covered by the Stop-Loss Policies reinsured by
EBPLife;
(l) EBPLife or its Affiliates or the predecessors of such
Affiliates have made available upon request by the Employers of each of
the Plans at no additional charge full and detailed written reports
which detail any and all of the following information:
(1) The average turn-around time from the date that a claim was
initially received to the date that the claim was processed for
payment;
(2) The percentage of claims processed within the target period, as
set forth in the Administration Agreement;
(3) The average turn-around time from the date that a claim was
received to the date that a claim was actually paid; and
(4) A summary of pending claims that were received but not paid
accompanied by a code indicating the reason why each claim had not yet
been paid.
(m) Regarding its operations and reserves, EBPLife complied with
all applicable requirements of law and insurance regulations of the
State of Oklahoma, where it is domiciled and licensed to do business;
(n) EBPLife has been subject to a financial audit by the Department
of Insurance of the State of Oklahoma, where it is domiciled and
licensed to do business no less frequently than once every three years;
(o) The issuing Carriers of the Stop-Loss Policies are fully liable
for all claims covered by the Stop-Loss Policies in excess of the
applicable stop-loss limits under such Stop-Loss Policies;
(p) Where the Stop-Loss Policies are reinsured by EBPLife, EBPLife,
as reinsurer, is fully liable for the payments of claims under such
Stop-Loss Policies;
(q) Independent insurance consultants (the Consultants), who were
unrelated to EBPLife, its Affiliates, or to the predecessors of such
Affiliates, solicited bids for administrative services and/or Stop-Loss
Policies on behalf of Employers and served as brokers or agents to
Employers with respect to the purchase by Employers of Stop-Loss
Policies reinsured by EBPLife;
(r)(1) EBPLife or its Affiliates retain or the predecessors of such
Affiliates have retained for a period of six (6) years from the date of
any transaction covered by this exemption, the records necessary to
enable the persons, as described in paragraph (s) of this section II,
to determine whether the conditions of this exemption have been met.
Such records shall include, but not be limited to, the following
information:
(A) A copy of the information disclosed by EBPLife, its Affiliates,
or by the predecessors of such Affiliates to the Plan Fiduciaries,
pursuant to paragraph (f) of section II above;
(B) A copy of the Administration Agreement which discloses, among
other things, whether EBPLife reinsures risk under a Stop-Loss Policy
issued to an Employer;
(C) Any additional information or documents provided to any Plan
Fiduciary with respect to a transaction covered by this exemption;
(D) Evidence of the written acknowledgment of receipt of
disclosures by the Plan Fiduciary as described in paragraph (g) of this
section II.
(2) A prohibited transaction will not be deemed to have occurred
if, due to circumstances beyond the control of EBPLife, its Affiliates,
or the predecessors of such Affiliates, such records were or are lost
or destroyed prior to the end of the six (6) year period.
(3) No party in interest, other than EBPLife, its Affiliates, and
the predecessors of such Affiliates, shall be subject to the civil
penalty that may be assessed under section 502(i) of the Act, if the
records are not maintained, or are not available for examination as
required by paragraph (s) of this section II; and
(S)(1) Except as provided in paragraph (s)(2) of this section II
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (r) of
section II above are unconditionally available for examination during
normal business hours by--
(A) Any duly authorized employee or representative of the
Department of Labor;
(B) Any fiduciary of each of the Plans or any duly authorized
employee or representative of such fiduciary; and
(C) Any Employer of Plan participants and beneficiaries, any
participant or beneficiary of the Plans or duly authorized employee or
representative of such participant or beneficiary; any employee
organization any of whose members are covered by a Plan.
(2) None of the persons described in paragraph (s)(1) (B) and (C)
of section II shall be authorized to examine trade secrets of EBPLife,
its Affiliates, or the predecessors of such Affiliates or commercial or
financial information which is privileged or confidential.
Section III--Definitions
For purposes of this exemption:
(a) An ``Affiliate'' or ``Affiliates'' of a person 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, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(c) The term, ``relative,'' means a ``relative'' as that term is
defined in section 3(15) of the Act, or a brother, a sister, or a
spouse of a brother or a sister.
(e) The term ``non-discretionary services'' means custodial
services and services ancillary to custodial services, none of which
services are discretionary.
(f) The term ``non-discretionary trustee'' of a Plan means a
trustee whose powers and duties with respect to any assets of the Plan
are limited to (1) the provision of non-discretionary trust services,
as defined in paragraph (e) of this section III, to the Plan, and (2)
duties imposed on the trustee by any provision or provisions of the
Act.
(g) The term ``Plan Fiduciary'' or ``Plan Fiduciaries'' means a
person(s) who are independent of EBPLife, its Affiliates, and any
predecessors of such Affiliates, are sufficiently knowledgeable with
respect to administration, benefits, funding, and any matters related
thereto concerning such Plan, are capable of making an informed and
independent decision, and are responsible for executing the
Administration Agreement and for deciding to purchase or renew the
Stop-Loss Policies reinsured by EBPLife.
EFFECTIVE DATE: If the proposed exemption is granted, the exemption
will be effective, as of April 15, 1994, the date the application was
filed.
Summary of Facts and Representations
1. Employee Benefit Plans, Inc. (EBP), incorporated under the laws
of Delaware in February 1986, is a managed healthcare company
headquartered in Minneapolis, Minnesota. Prior to the fall of 1995, EBP
was the holding company for a number
[[Page 37302]]
of subsidiaries, including EBPLife and EBPHealth Plans, Inc.
(EBPHealth), described more fully below. The common stock of EBP along
with its subordinated debentures, are traded on the New York Stock
Exchange. As of December 31, 1993, EBP and its Affiliates had aggregate
assets of approximately $200 million and provided products and services
for approximately 2,600 Employers who sponsor self-funded employee
welfare benefit plans nationwide.
2. EBPLife, a wholly owned subsidiary of EBP, was formed from the
merger of two companies, First Security Life Insurance Company and
Sooner Life Insurance Company, after such companies were acquired by
EBP in 1986 and 1991, respectively. EBPLife is a life and health
insurance company domiciled in the State of Oklahoma and is subject to
the insurance laws and regulation of that state which requires EBPLife
to maintain minimum capital and surplus ratios and minimum reserves. In
addition, it is represented that EBPLife is currently licensed to sell
health and life insurance in forty (40) other states and is seeking
licensure in most of the remaining states in the United States.
As of December 31, 1993, EBPLife had assets of approximately $110
million, including insurance loss reserves of approximately $22
million. It is represented that EBPLife has received Standard and
Poor's highest rating for capital adequacy. Further, EBPLife, as of
December 31, 1993, maintained a level of risk-based capital percentage
in excess of the amount required under rules promulgated by the
National Association of Insurance Commissioners. It is represented that
in July 1996, EBPLife was issued a B+ rating by the A.M. Best Company,
the leading national rating organization that evaluates the financial
strength of insurance companies.
As of December 31, 1993, the investment portfolio of EBPLife
consisted primarily of investment grade bonds, all of which are rated A
or higher by Standard & Poor's, with an average duration of 4.7 years.
It is represented that the investment policy of EBPLife is generally
more restrictive than that required under applicable insurance laws and
regulations.
EBPLife directly issues stop-loss insurance and offers fully
insured group health insurance, group term life insurance, accidental
death and dismemberment insurance, and individual major medical and
life insurance conversion policies.2 In addition, EBPLife
reinsures Stop-Loss Policies issued by other Carriers in connection
with self-funded health benefit programs offered by Employers to their
employees. It is represented that all of the insurance policies issued
or reinsured by EBPLife are offered for one-year periods, with annual
repricing and renewals.
---------------------------------------------------------------------------
\2\ It is represented that where EBPLife issued or issues any of
these policies directly to employee benefit plans, the sale of the
insurance policy is eligible for exemptive relief under PTCE 84-24.
The applicant is not requesting relief for such transactions, nor is
the Department, herein, proposing such relief.
---------------------------------------------------------------------------
3. Until 1996, EBPHealth was a wholly owned subsidiary of EBPLife
and a contract administrator to approximately 1,700 Employers who
sponsored self-funded welfare benefit plans covering approximately
775,000 plan participants nationwide.
It is represented that the principal business of EBPHealth as
contract administrator consisted of providing administrative services
to Employers in connection with the establishment and operation of
Plans. The administrative services provided by EBPHealth included
benefit claims processing, benefit disbursement, data analysis. For its
services as contract administrator, EBPHealth received a fee generally
in the form of a fixed monthly amount per eligible employee. In this
regard, the Employers, and not the Plans, paid directly for claims
administration services provided by EBPHealth. It is represented that
EBPHealth did not act as a plan administrator. In this regard, it is
represented that the provisions of Administration Agreements between
EBPHealth and Employers made clear that EBPHealth did not have final
authority to adjudicate benefit claims.
It is represented that prior to 1996, EBPHealth had divisions
operating in the western, central, northeast, and southeast regions of
the United States and employed approximately 855 employees at thirteen
(13) claims processing service centers in these regions. It is
represented that EBPHealth processed claims for health, dental,
disability, vision, and prescription drug programs in excess of $2
billion annually for its clients.
EBPHealth also engaged in the preparation of utilization and claims
experience reports, and offered to Employers the services of several
computerized claims processing and reporting systems which generated
statistical reports. It is represented that these reports provided
information on benefit utilization, claims processing activity, and
accounting data, and other summary and detailed information for use by
Employers. In addition, EBPHealth developed a computerized database
system that permitted customers who elected to participate, among other
things, to review preliminary benefit eligibility determinations and to
create reports comparing health claims expenditures with other
statistical data maintained by EBPHealth.
It is represented that EBPHealth maintained a separate training and
claims auditing staff which conducted routine internal audits of claims
examiners and monitored and updated claims processing methods and
procedures consistent with industry standards. In addition, EBPHealth
was subject to audit by Employers and the Carriers whose Stop-Loss
Policies are reinsured by EBPLife.
4. It is represented that in 1995 and 1996, EBP, EBPLife, and
EBPHealth were the subjects of several mergers and acquisitions. In
this regard, on October 19, 1995, First Financial Management
Corporation (FFMC), a Georgia corporation, acquired EBP and its
Affiliates, EBPLife and EBPHealth. As a result of this merger, EBP
became a wholly-owned subsidiary of FFMC, while EBPLife and EBPHealth
remained wholly-owned subsidiaries, respectively, of EBP and EBPLife.
Subsequently, through a stock merger approved by shareholders on
October 25, 1995, FFMC and its Affiliates, EBP, EBPLife, and EBPHealth,
were acquired by First Data Corporation (FDC). FDC, a Fortune 100
company, is engaged in over 102 countries in providing a variety of
services, including information and financial transaction processing
services, health claims administration, data imaging and information
management.
As a result of the merger on October 25, 1995, FFMC became a
wholly-owned subsidiary of FDC, while EBP and EBPLife, and EBPHealth
remained subsidiaries of FFMC. As of November 21, 1995, it was
estimated that FFMC and FDC had combined annual earnings of more than
$400 million and employed approximately 36,000 persons. It is
represented that, as of December 12, 1996, FDC has assets in excess of
$12.2 billion.
It is represented that prior to the mergers described above that
FFMC had a subsidiary known as First Health Strategies (TPA), Inc.
(First Health), a Utah corporation which was formerly known as Alta
Health Strategies, Inc. (ALTA).3 First Health from its
corporate
[[Page 37303]]
headquarters in Salt Lake City, Utah, and from a number of separate
processing centers around the country, employs sophisticated technology
to integrate claims administration, data analysis, medical case
management, and other services. Subsequent to the mergers described
above, FDC converted all of EBPHealth's clients to the integrated and
automated claim and administration computer system provided by First
Health. It is represented that the conversion required the execution of
new Administration Agreements between First Health and Employers. In
addition, as a result of the conversion, EBPHealth's clients became
eligible to participate in all of the health-related services and
benefits offered by First Health. Accordingly, upon completion of the
conversion in 1996, EBPHealth was formally merged into First Health and
ceased to operate as a third party administrator.
---------------------------------------------------------------------------
\3\ It is represented that ALTA and ALTA Reinsurance Company
(ALTA RE) were granted Prohibited Transaction Exemption 89-75 (PTE
89-75; 54 FR 35959, Aug. 30, 1989; proposed 54 FR 26266, June 22,
1989) by the Department for certain reinsurance transactions
involving stop-loss insurance.
---------------------------------------------------------------------------
It is represented that after the conversion and the two mergers
were completed, the new corporate structure of FDC consisted of a new
health services group comprised of: (1) GENEX Services, Inc., a
workers' compensation managed care company; (2) VIPS, Inc., an
information systems development and consulting company; (3) First
Health, a provider of integrated health care cost management services
to private, self-funded, and government markets; and (4) EBPLife, a
risk-bearing organization through which stop-loss insurance products,
group life insurance products, and other health-related insurance
products are provided to clients of First Health.
Notwithstanding the changes that resulted from the conversion and
mergers, as described above, it is represented that EBPLife did not
change its name nor its domicile. EBPLife intends to maintain its
headquarters in Minneapolis, Minnesota and will continue to maintain
its underwriting, contracts, compliance, premium and billing, finance
and accounting, and insurance claim processing departments separate
from the claim administration functions maintained by First Health.
5. It is represented that Employers who sponsor self-funded Plans
4 often choose to limit exposure to claims by purchasing
stop-loss insurance. Some such stop-loss insurance may be issued by
unrelated Carriers, may be issued directly by EBPLife, or may be issued
by Carriers with which EBPLife has an active reinsurance
arrangement.5 It is represented that where EBPLife is the
issuing carrier, the acquisition of the stop-loss insurance is eligible
for exemptive relief under PTCE 84-24, to the extent such relief is
required.6 If stop-loss insurance is issued by a Carrier
with which EBPLife has an active reinsurance arrangement, EBPLife may
choose to reinsure all or a major portion of the risk under such policy
under two circumstances: (1) Where EBPLife is not licensed to issue
such insurance directly in the state where an Employer does business;
or (2) where the Carrier has greater name recognition. It is
represented that often simultaneous with the purchase or renewal of
Stop-Loss Policies insured or reinsured by EBPLife, Employers have
chosen Affiliates of EBPLife or have chosen predecessors of such
Affiliates to provide services to their Plans. In this regard, it is
represented that, as of August 2, 1994, approximately 70 percent (70%)
of the clients of EBPHealth purchased Stop-Loss Policies which were
insured or reinsured by EBPLife. Further, it is represented that, as of
the same date, approximately 55 percent (55%) of the Stop-Loss Policies
reinsured by EBPLife were sold to Employers who sponsored Plans with
respect to which EBP or its Affiliates were retained to provide claims
administration or other services, although EBP or its Affiliates might
not have been providing such services at the time such Stop-Loss Policy
was reinsured by EBPLife.
---------------------------------------------------------------------------
\4\ It is represented that Plans involved in the transactions
which are the subject of this exemption are maintained by Employers
unrelated to EBPLife, its Affiliates, or the predecessors of such
Affiliates. In this regard, however, the applicant represents that
it could not supply a list of Plans or any specific information on
such Plans in the application, because the Employers and the Plans
change from time to time, and because of the large number of
Employers and Plans nationwide for which EBPLife, its Affiliates
provide products or services or for which the predecessors of such
Affiliates have provided products or services.
\5\ It is represented that the unaffiliated insurance Carriers
with whom EBPLife, as of December 12, 1996, had reinsurance
arrangements are Insurance Company of North America, and the CNA
Insurance Companies. It is further represented that in the past
EBPLife has also had reinsurance arrangements with ITT/Hartford
Insurance Company, and Fortis Benefits Insurance Company.
\6\ The applicant states that because PTCE 84-24 covers the
purchase of any ``insurance or annuity contract'' from an insurance
company, the purchase of Stop-Loss Policies by the Employers should
be eligible for exemptive relief thereunder where EBPLife is the
issuing carrier of such a policy. The Department is expressing no
opinion, herein, whether such transaction satisfies the conditions
as set forth under PTCE 84-24, nor is the Department, herein,
proposing any relief for such transaction.
---------------------------------------------------------------------------
6. It is represented that prior to the mergers described above, EBP
focused on selling products and services to smaller Employers. For this
purpose, EBP employed a sales force of approximately fifty (50)
employees who marketed products and services offered by EBPLife and by
EBPHealth primarily to unaffiliated Consultants who served as brokers
or agents to such Employers. These Consultants received as compensation
for the sale of a Stop-Loss Policy a commission based on a percentage
of gross premiums. In addition, these Consultants may have received a
fee from the Employer for services performed on behalf of such
Employer.
The products and services offered by EBP or its Affiliates included
benefit plan design and consulting, claims administration and
processing, data analysis and reporting, medical cost containment
programs, and underwriting of insurance coverage, including Stop-Loss
Policies issued directly by EBPLife and Stop-Loss Policies issued by
other Carriers but reinsured by EBPLife. It is represented that EBPLife
reinsured the risk under the Stop-Loss Policies, pursuant to the terms
of a reinsurance agreement between the Carrier and EBPLife which
provided that the Carrier issuing the Stop-Loss Policy cede to EBPLife
all or most of the balance of the premiums paid to the Carriers after
various fees, commissions, and taxes had been paid. In this regard, it
is represented that EBPLife paid the issuing Carrier a fee ranging from
one percent (1%) to three and a half percent (3\1/2\%) of the
applicable premium.
7. After the conversion and mergers described above, it is
represented that First Health focused on selling products and services
to larger Employers, generally companies with over 250 employees. In
this regard, almost all of the Employers who were interested in
maintaining a self-funded Plan retained Consultants to advise them on
the purchase of services and products necessary to maintain such Plans.
Once retained by the Employer, these Consultants who were independent
of First Health put together a request for proposal (RFP) for
submission to multiple vendors of services and products, including
stop-loss insurance, for self-funded Plans. It is represented that
First Health may have been one of these vendors.
Upon receipt of a RFP, First Health sales representatives
determined the appropriate pricing for administrative and managed care
services offered through First Health. These services included claims
administration, preferred provider networks, medical utilization
management programs, pharmacy card benefits, and disability
[[Page 37304]]
management services. In addition, First Health sales representatives
may have contacted several stop-loss insurers for quotations for stop-
loss coverage. In this regard, Employers or their Consultants could
have identified an insurance company from which they wished First
Health to obtain a quotation as part of First Health's proposal. The
quotations collected by First Health may often have included Stop-Loss
Policies directly issued by EBPLife; may have included Stop-Loss
Policies issued by Carriers with which EBPLife had a reinsurance
relationship; or may have included Stop-Loss Policies issued by
insurance companies completely unrelated to EBPLife. In addition,
Consultants were free to obtain quotations themselves from any other
insurance company.
Once First Health sales representatives received stop-loss premium
quotations from insurers, it reviewed these quotations for price as
well as other policy variables, such as limitations on coverage.
Depending on these variables, it is represented that Stop-Loss Policies
issued or reinsured by EBPLife may or may not have been included in a
proposal by First Health. If First Health's proposal included a quote
for a Stop-Loss Policy reinsured by EBPLife, it is represented that
such information was disclosed in the proposal.
It is represented that Consultants reviewed the proposals provided
by First Health, by other vendors, by third party administrators, or by
other insurers. Based on this review, the Consultants advised Employers
in selecting an insurance company to provide stop-loss coverage, as
well as other products and services. In this regard, the Consultants
may have recommended a different vendor to provide each service and
product. In the event an Employer determined to purchase administrative
services from First Health, the Administration Agreement included a
disclosure of the relationship, if any, between First Health and the
issuer of the Stop-Loss Policy purchased by the Employer. It is further
represented that no employees of First Health received commissions as a
result of the reinsurance arrangement between EBPLife and an issuing
Carrier where an Employer for which First Health provided services also
purchased a Stop-Loss Policy reinsured by EBPLife.
8. It is represented that subsequent to the mergers described
above, instances in which First Health deals directly with an Employer
accounts for less than one percent (1%) of all sales of EBPLife's
products. In this regard, it is represented that any direct dealing
with Employers usually involved one of First Health's larger clients.
First Health maintains that it did not have an opportunity to influence
any Employer's decision to purchase a Stop-Loss Policy reinsured by
EBPLife, because First Health did not offer Stop-Loss Policies
reinsured by EBPLife in any instance in which it dealt directly with an
Employer.
9. EBPLife requests retroactive exemptive relief, effective April
15, 1994, to ensure that the purchase by Employers of Stop-Loss
Policies reinsured by EBPLife, as of such effective date, have not
resulted in a prohibited use of ``plans assets'' for the benefit of
parties in interest.7 The purchase by the Employer of a
Stop-Loss Policy reinsured by EBPLife may have constituted a prohibited
use of the assets of such Plans for the benefit of EBPLife, as
described in section 406(a)(1)(D), because under a reinsurance
arrangement all or most of the balance of the premiums after various
fees were subtracted were paid to EBPLife, as reinsurer.
---------------------------------------------------------------------------
\7\ In this regard, it is represented that FDC and FFMC have
been parties in interest, respectively, by reason of direct or
indirect ownership of First Health. While it is represented that
prior to the conversion and mergers in 1995 and 1996, as described
above, EBPLife was also a party in interest by reason of its direct
ownership of EBPHealth, after the corporate restructuring, the
applicant maintains that EBPLife is not a party in interest with
respect to the Plans for which First Health provided services,
because EBPLife and First Health are related solely through a
brother-sister controlled group relationship not described in
section 3(14) of the Act.
---------------------------------------------------------------------------
It is represented that neither EBPLife nor its Affiliates,
including First Health, have acted as fiduciaries, nor have the
predecessors of such Affiliates acted as fiduciaries in connection with
the decision by any Employer to purchase a Stop-Loss Policy reinsured
by EBPLife. Moreover, it is represented that First Health has not had
discretionary authority, nor has EBPHealth had any discretionary
authority over the funds of the Employers or the funds of the Plans.
For this reason, EBPLife maintains that none of the concerns addressed
by the prohibitions of section 406(b) of the Act have arisen, nor will
such prohibitions arise under the circumstances as described, and no
relief from section 406(b) of the Act is requested by the
applicant.8
---------------------------------------------------------------------------
\8\ The Department is proposing relief, pursuant to section
408(a) of the Act, only for those transactions described herein and
expresses no opinion whether fiduciary violations of section 406(b)
of the Act may arise, or have arisen, under the circumstances.
---------------------------------------------------------------------------
10. It is represented that prior to the conversion and the mergers,
described above, EBP and its Affiliates had implemented procedures
designed to ensure that, where exemptive relief was needed, full and
detailed written disclosures had been provided by EBP or its Affiliates
to the Consultants, where such Consultants who solicited bids for
services and insurance were retained as agents by the Employer. In this
regard, such disclosure, included but was not limited to information
concerning the services provided by EBP and its Affiliates to the
Employer and the Plan, the Carriers which issued the Stop-Loss Policies
and, if applicable, the reinsurance arrangements between such Carriers
and EBPLife. Further, EBP encouraged Consultants to disclose to Plan
Fiduciaries the commissions and fees to be earned by such Consultants
in a manner consistent with the terms and conditions as set forth in
PTCE 84-24. In addition EBPLife provided Employers with information
required to be reported on the Schedule A filed as part of the form
5500 Series.
Subsequent to the conversion and mergers, First Health and EBPLife
have provided to the independent Consultant or broker a complete
description of all services, commissions, and fees paid by the Plan or
by the Employer. In addition, First Health and EBPLife have disclosed
the relationship between EBPLife and the issuing Carrier, if any.
Specifically, EBPLife represents that it has disclosed any reinsurance
arrangements and its affiliation with First Health in each stop-loss
insurance proposal. Further, First Health also has disclosed these
relationships in each Administration Agreement. It is represented that
the proposal and the Administration Agreement are provided to the
broker or the Consultant in every case where a prospective client has
retained such parties. In these cases, EBPLife represents that it
confirmed in writing with the broker or the Consultant that such
parties have delivered information outlining the disclosure of
EBPLife's relationship to First Health and any and all reinsurance
arrangements to the prospective client prior to the making of a
decision to purchase services performed by First Health and any Stop-
Loss Policy reinsured by EBPLife. It is represented that this written
record has been and will be kept in EBPLife's files for at least six
(6) years.
11. It is represented that the proposed exemption is subject to a
number of conditions that protect the interests of the Plans. In this
regard, the Plan Fiduciaries must have acknowledged in writing receipt
of the information, required to be disclosed by EBPLife and its
Affiliates, or required to have been disclosed by predecessors of such
Affiliates, and must have approved any
[[Page 37305]]
transaction which is the subject of this exemption. In this regard,
because the disclosures were made in writing in the Administration
Agreement, if a Plan Fiduciary signed such agreement, such Plan
Fiduciary will be deemed to have acknowledged receipt of such
disclosures and have acknowledged that, as of the effective date of
this exemption, the decision to engage in transactions which are the
subject of this exemption was a decision made in a fiduciary capacity,
and that, as of the effective date of this exemption, such Plan
Fiduciary approved of the subject transaction. It is represented that
the Plan Fiduciaries were independent of EBPLife and its Affiliates,
and were independent of predecessors of such Affiliates, and were
sufficiently knowledgeable with respect to administration, benefits,
funding, and any matters related thereto concerning the Plans. Further,
it is represented that the Plan Fiduciaries were capable of making
informed and independent decisions on matters affecting the Plans and
were responsible for deciding whether to hire Affiliates of EBPLife or
have been responsible for hiring predecessors of such Affiliates to
provide non-discretionary administrative services to Plans where such
fiduciaries have also purchased or renewed Stop-Loss Policies reinsured
by EBPLife.
Where Affiliates of EBPLife or predecessors of such Affiliates
provided services to an Employer or Plan, in the event Employers
purchased Stop-Loss Policies reinsured by EBPLife after the initial
purchase of such a policy or renewed expired Stop-Loss Policies
reinsured by EBPLife, the written disclosures initially required need
not have been repeated, unless--more than three (3) years had passed
since such disclosures were made or unless the services, products, or
compensation involved were materially different from that for which
approval was originally obtained.
12. In addition to the safeguards discussed in paragraph eleven
(11) above, the exemption is conditioned upon the satisfaction of
various additional requirements. First, each transaction must have been
effected by EBPLife in the ordinary course of its business as an
insurance company on terms that were at least as favorable to Plans as
those obtainable in an arm's length transaction with an unrelated
party. Second, the combined total of all fees and other consideration
which was received by EBPLife and its Affiliates and by predecessors of
such Affiliates for the provision of services to Employers and their
Plans and in connection with the purchase of insurance contracts has
not exceeded ``reasonable compensation'' within the meaning of section
408(b)(2) and 408(c)(2). Third, EBPLife, its agents or Affiliates, or
the predecessors of such Affiliates, have not been trustees, plan
administrators, fiduciaries with discretionary authority over the
assets of the Plan, or Employers of the Plans. Neither EBPLife nor its
Affiliates, nor the predecessors of such Affiliates have acted as
fiduciaries in connection with the decision by the Employer to purchase
Stop-Loss Policies reinsured by EBPLife where Affiliates of EBPLife or
predecessors of such Affiliates also provided services. Fourth, the
Plans have paid no commissions with respect to the reinsurance of the
Stop-Loss Policies, nor have the Plan Fiduciaries received, directly or
indirectly (i.e. through any Affiliates), any compensation or other
consideration for their own personal account from EBPLife, any of its
Affiliates, any predecessor of such Affiliates, or other party dealing
with any of the Plans in connection with a transaction described
herein. Finally, EBPLife is currently licensed and regulated by the
State of Oklahoma and forty (40) other states in which it does
business. It is represented that EBPLife has complied with all
applicable state insurance laws and regulations, regarding its
operations and reserves in the State of Oklahoma where it is domiciled
and licensed to do business and has been subject to financial audit by
the State of Oklahoma Department of Insurance no less frequently than
once every three years. 13. It is represented that the
reinsurance arrangement as described herein provides additional
protection to the Plans. In this regard, the issuing Carriers of the
Stop-Loss Policies are primarily liable for all claims covered by such
Stop-Loss Policies in excess of the applicable stop-loss limits under
such Stop-Loss Policies. However, EBPLife is also liable for the
payment of claims covered by the Stop-Loss Policies where such policies
have been and are reinsured by EBPLife. In this way, it is represented
that the Plans have been and will be protected by the financial
strength of two insurance companies rather than one. Further, because
in the event of EBPLife's insolvency, the Carriers remain fully liable
for any unpaid claims against the Stop-Loss Policies, it is represented
that these Carriers have every incentive to ensure that EBPLife has not
engaged in and does not engage in questionable practices which might
affect the reinsurance of the risk associated with the Stop-Loss
Policies. For this reason, EBPLife has been and will be subject to the
continuous oversight of the Carriers that issue the Stop-Loss Policies
reinsured by EBPLife.
With respect to practices regarding claims submitted under
reinsured Stop-Loss Policies, it is represented that EBPLife and its
Affiliates, and any predecessors of such Affiliates have followed
standard claims processing procedures. In this regard, it is
represented that the Employer has had the final authority regarding the
payment or nonpayment of each claim. Further, it is represented that
EBPHealth did not exercise fiduciary authority with respect to the
authorization or disallowance of any benefit claims.
In order to assist the Employer: (1) To monitor the performance of
EBPHealth in the processing of claims, prior to the conversion, and to
monitor the subsequent performance of FIRST HEALTH in the processing of
claims; (2) to prevent possible abuse involving claims avoidance; and
(3) to provide additional safeguards against possible conflicts of
interest, it is represented that EBPLife and its Affiliates have made
and will make available, or the predecessors of such Affiliates have
made available upon request by the Employers of each of the Plans at no
additional charge full and detailed written reports. Such reports have
provided and will provide certain information which permits Employers
to verify that EBPLife has not and does not delay its processing or
payment of claims in order to avoid coverage under the Stop-Loss
Policies that it reinsures.
Further, First Health maintains that the larger Employers with
which it does business can be assumed to be more sophisticated and
therefore more likely to monitor the provision of claims administration
services provided by First Health and to understand the issues involved
in this exemption. In addition, First Health represents that the
conversion of EBPHealth, as described above, eliminated the possibility
that First Health could exercise discretion in a manner intended to
reduce the potential liability of EBPLife under the Stop-Loss Policies.
In this regard, it is represented that the claims processing program
currently adopted by First Health and the implementation of its
automated claims processing system ensures that claims administration
cannot in any way be affected by the identity of the insurer or
reinsurer of the Stop-Loss Policies.
14. In summary, the applicant represents that the proposed
transactions meet the statutory criteria of section 408(a) of the Act
because:
[[Page 37306]]
(a) Each transaction was effected by EBPLife in the ordinary course
of its business as an insurance company;
(b) The terms of each transaction were at least as favorable to the
Plans as those negotiated at arm's-length with unrelated third parties
under similar circumstances;
(c) The combined total of all fees and other consideration received
by EBPLife, its Affiliates, and by the predecessors of such Affiliates
for the provision of services to the Employers and their Plans and in
connection with the purchase of insurance contracts was not in excess
of ``reasonable compensation'' within the meaning of sections 408(b)(2)
and 408(c)(2) of the Act;
(d) Neither EBPLife, its agents, its Affiliates, nor the
predecessors of such Affiliates have served as trustees (other than as
non-discretionary trustees who do not render investment advice with
respect to any of the assets of such Plans), plan administrators,
fiduciaries with discretionary authority over the assets of any of the
Plans, or Employers any of whose employees are covered by any of the
Plans;
(e) Neither EBPLife, its Affiliates, nor the predecessors of such
Affiliates have acted in connection with the decision by the Employer
to purchase Stop-Loss Policies reinsured by EBPLife;
(f) Plan Fiduciaries who are independent of EBPLife and its
Affiliates, and independent of the predecessors of such Affiliates; who
are sufficiently knowledgeable with respect to administration,
benefits, funding, and any matters related, thereto concerning such
Plans; and who are capable of making an informed and independent
decision, have been responsible for deciding to purchase or renew the
Stop-Loss Policies reinsured by EBPLife and for executing the
Administration Agreement with Affiliates of EBPLife or have been
responsible for executing Administration Agreements with predecessors
of such Affiliates to provide services to such Plans;
(g) Plan Fiduciaries have received full and detailed written
disclosures, including but not limited to a copy of the Administration
Agreement which among other things disclosed whether EBPLife reinsured
risk under a Stop-Loss Policy issued to the Employer or a Plan and
described all of the services provided by Affiliates of EBPLife, or by
the predecessors of such Affiliates to such Plan or such Employer,
prior to the decision which caused Affiliates of EBPLife or the
predecessors of such Affiliates to provide services to the Plan or the
Employer where the Employer also purchased or renewed a Stop-Loss
Policy reinsured by EBPLife;
(h) Plan Fiduciaries acknowledged in writing receipt of disclosures
with respect to the transactions described herein, and acknowledged
that the decision to engage in such transaction was a decision made in
a fiduciary capacity, and, as of the effective date of this exemption,
approved the subject transaction;
(i) The Plans paid no commissions with respect to the reinsurance
by EBPLife of the Stop-Loss Policies.
(j) The Plan Fiduciaries did not receive, directly or indirectly
(i.e. through any Affiliates), any compensation or other consideration
for his or her own personal account from EBPLife, any of its
Affiliates, any predecessor of such Affiliates, or other party dealing
with any of the Plans in connection with a transaction described in
this exemption.
(k) EBPLife and its Affiliates, and any predecessors of such
Affiliates followed standard claims processing practices regarding any
claims submitted with respect to benefits under any of the Plans
covered by any of the Stop-Loss Policies reinsured by EBPLife;
(l) The Employer had final authority regarding the payment or
nonpayment of any and all claims submitted with respect to benefits
under any of the Plans covered by the Stop-Loss Policies reinsured by
EBPLife;
(m) EBPLife and its Affiliates have made and will make available,
or the predecessors of such Affiliates have made available upon request
by the Employers of each of the Plans at no additional charge certain
information to Employers;
(n) Regarding its operations and reserves, EBPLife has complied
with all applicable requirements of law and insurance regulations of
the State of Oklahoma, where it is domiciled and licensed to do
business;
(o) EBPLife has been subject to a financial audit by the Department
of Insurance of the State of Oklahoma, where it is domiciled and
licensed to do business no less frequently than once every three years;
(p) The issuing Carriers of the Stop-Loss Policies are fully liable
for all claims covered by the Stop-Loss Policies in excess of the
applicable stop-loss limits under such Stop-Loss Policies;
(q) Where the Stop-Loss Policies are reinsured by EBPLife, EBPLife,
as reinsurer, is fully liable for the payments of claims under such
Stop-Loss Policies; and
(r) Consultants who were unrelated to EBPLife, its Affiliates, or
to the predecessors of such Affiliate, solicited bids for
administrative services and/or Stop-Loss Policies on behalf of
Employers and served as brokers or agents to Employers with respect to
the purchase by Employers of Stop-Loss Policies reinsured by EBPLife;
(s) As of December 12, 1996, EBPLife, its Affiliates, and the
predecessors and successors of such Affiliates have not and will not
offer Stop-Loss Policies reinsured by EBPLife in any instance where
EBPLife or its Affiliates deal directly with Employers, rather than
with Consultants representing such Employers, in providing services to
such Employers or their Plans;
(t) EBPLife, its Affiliates have retained or shall retain, or cause
to be retained, or the predecessors of such Affiliates have retained or
caused to be retained for a period of six (6) years from the date of
any transaction the records necessary to enable certain parties to
determine whether the conditions of this exemption have been met.
Notice to Interested Persons
Those persons who may be interested in the pendency of the
requested exemption include the Employers who sponsor the Plans and the
Plan fiduciaries of such Plans for which First Health and/or EBPHealth
provided non-discretionary administrative services. It is possible that
any or all such Employers also choose to purchase Stop-Loss Policies
reinsured by EBPLife. For this reason, the Department has determined
that the only practical form of providing notice to interested persons
is the distribution by the applicant by first class mail of a copy of
the notice of pendency of this proposed exemption (the notice) within
fifteen (15) days of the date of the publication of such Notice in the
Federal Register to the Employers who sponsor of any of the Plans for
which First Health and/or EBPHealth have provided services as of the
effective date of this proposed exemption. Such distribution to
interested persons shall include a copy of the Notice, as published in
the Federal Register, plus a copy of the supplemental statement, as
required, pursuant to 29 CFR 2570.43(b)(2), which shall inform such
interested persons of their right to comment.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, telephone (202) 219-8883 (This is not a toll-free number.)
[[Page 37307]]
Smart Chevrolet Co. Employees' Profit Sharing Retirement Plan (the
Plan) Located in Pine Bluff, Arkansas
[Application No. D-10445]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a), 406(b)(1) and 406(b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of sections 4975(c)(1) (A) through (E) of
the Code shall not apply to: (1) The proposed secured loans (the Loans)
by the Plan to Motors Finance Company (Motors), a party in interest
with respect to the Plan, and (2) the guaranty of such Loans (the
Guaranty) by the individual partners of Motors; provided that the
following conditions are met: (a) The terms and conditions of the Loans
are at least as favorable as those which the Plan could have received
in similar transactions with an unrelated third party; (b) an
independent fiduciary negotiates, reviews, approves, and monitors the
Loans and the Guaranty under the terms and conditions, as set forth in
paragraph #6 below; and (c) the balance of all Loans will at no time
exceed 15% of the assets of the Plan.\9\
---------------------------------------------------------------------------
\9\ For purposes of this proposed exemption references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
Temporary Nature of Exemption
The proposed exemption is temporary and, if granted, will expire
five (5) years after the date of the grant. However, the exemption will
extend until the maturity of any of the 90 day Loans made within the 5
year period.
Summary of Facts and Representations
1. The Plan is a defined contribution profit sharing plan which, as
of December 31, 1995, had assets totaling $3,385,217. As of the same
date, the Plan had forty-five (45) participants. Richard L. Smart (Mr.
Smart), S. Ray West, Jr. (Mr. West), Lee Smart (Lee) and Roger Smart
(Roger) are participants in and are the Advisory Committee of the Plan.
Smart Chevrolet Company (the Employer) is the sponsor of the Plan. The
Employer sells new and used automobiles in the Pine Bluff, Arkansas
area. As of December 31, 1995, the Employer had a net worth of
$2,883,009. Mr. Smart is the president of and a shareholder in the
Employer.
2. Motors is engaged in financing the purchase of new and used
automobiles sold by the Employer to its customers. The net worth of
Motors, as of December 31, 1995, was $300,000. Certain of the principal
owners of the Employer are also partners in Motors. Mr. Smart is a five
percent (5%) managing partner in Motors. Meredith S. Maxwell, Felix
Smart, Lee, Roger and Mr. West each own a fifteen percent (15%)
partnership interest in Motors. The collective net worth of the
partners of Motors, as of December 31, 1995, was $8,500,000. The net
worth of the partners of Motors includes their respective interests in
Motors, in the Employer, and in certain notes payable to its partners
by Motors.
3. The current trustee of the Plan is Boatmen's Trust Company of
Arkansas (Boatmen's Trust), the successor in interest to Worthen Trust
Co., Inc., the trustee at the time PTE 92-43 (see rep. 4, below) was
granted. Boatmen's National Bank of Pine Bluff (BNBPB), a sister
corporation to Boatmen's Trust, participates in a line of credit to
supply the Employer and Motors with operating funds of from $100,000 to
$200,000 daily. Mr. Smart is on the Advisory Board of BNBPB and is a
shareholder in Boatmen's Bancshares, Inc., the parent of Boatmen's
Trust and of BNBPB.
4. On July 8, 1985, (50 FR 27863), the Department granted an
exemption (PTE 85-121) which permitted for a period of seven (7) years
beginning July 8, 1985, certain Loans to Motors by two employee benefit
plans (the Plans) then sponsored by the Employer, and to the guaranty
of such Loans by the Employer and the individual partners of Motors.
Subsequent to the grant of PTE 85-121, the Smart Chevrolet Employees
Retirement Plan, one of the Plans which participated in the exemption
for PTE 85-121, was merged into the Plan.\10\ On June 17, 1992, (57 FR
27073), the Department granted an exemption (PTE 92-43) which
permitted, for a period of five (5) years, certain Loans by the Plan to
Motors.
---------------------------------------------------------------------------
\10\ All references in this Summary of Fact and Representations
to the Plan will, if applicable, include both Plans prior to the
merger unless the context clearly dictates otherwise.
---------------------------------------------------------------------------
It is represented that under the two prior exemptions Motors has
made all payments on the Loans in a timely manner and has never
defaulted on any of the Loans made by the Plans. As a result of such
Loans made pursuant to PTE 92-43, the Plan received an interest rate of
between 5.50% to 7.25%, depending on the federal discount rate in
effect at the time such Loans were executed. Further, though the
principal balance of these Loans has varied from time to time, the
terms and conditions of each of the Loans complied with the
requirements set forth in the exemptions. The aggregate fair market
value of these Loans by the Plan to Motors, as of the most recent
annual report, was $818,449 which represented 24.18% of the fair market
value of the total assets of the Plan. The applicant, herein, is
requesting another exemption which will permit the continuation of such
Loans for a period of five (5) years beginning on the date of the grant
of this proposed exemption. However, PTE 85-121 and PTE 92-43 permitted
the Plan to invest up to 25% of its assets in these Loans. The
applicant has represented that with respect to Loans made pursuant to
the exemption proposed herein, the Loans will not exceed 15% of
aggregate Plan assets.
5. Jess P. Walt (Mr. Walt) has agreed to serve as the independent
fiduciary. Mr. Walt, who is a banker, represents that he is independent
in that none of the partners of Motors, or the stockholders, officers,
or directors of the Employer are officers or directors of the bank
where Mr. Walt is employed. In addition, Mr. Walt represents that none
of these persons are stockholders of the bank that employs Mr. Walt,
except Felix Smart, who owns 35 of the 7,500 outstanding shares, which
represent a .47% ownership percentage of the bank. It is represented
that the partners of Motors, the Employer and its officers, directors,
and shareholders do not have any loans or accounts outstanding at the
bank which employs Mr. Walt. Further, the bank which employs Mr. Walt
represents that it does not participate in the line of credit extended
to Motors by BNBPB.
Mr. Walt represents that he is qualified to act on behalf of the
Plan in that he, as a bank officer, has been involved for many years in
making automobile installment loans and evaluating credit and
collateral considerations related to such loans. Mr. Walt also
represents that he is knowledgeable in selecting appropriate rates of
return on short term investments and will be continuously aware of the
fluctuations in short term interest rates and the alternative low risk
short term investments that would be available to the Plan.
6. Mr. Walt will accept fiduciary responsibility with respect to
the proposed transactions. In this regard, Mr. Walt will be responsible
for determining whether it is advisable for the Plan to enter into the
Loans and the Guaranty which are the subject of this proposed exemption
and to continue to
[[Page 37308]]
participate in such transactions, taking into account the rate of
return of such investment and the liquidity and diversification of the
Plan.
It is represented that Mr. Walt will approve Loans in an amount not
to exceed fifteen percent (15%) of the assets of the Plan, provided
that all of the terms and conditions described herein are met.\11\ All
Loans will have a maturity of ninety (90) days and will bear interest
at a rate which is two percentage points above the federal discount
rate. Mr Walt represents that such interest rate reflects the
prevailing fair market interest rate on comparable investments. Mr.
Walt represents that he will receive copies of all the promissory notes
evidencing the Loans in order to insure that the interest rate is two
percent (2%) above the federal discount rate. If at any time a rate of
two percentage points above the federal discount rate is not reflective
of the prevailing fair market rate of return on a comparable ninety
(90) day investments, Mr. Walt indicates that the Loans should be
liquidated at the next maturity date, or the yield on such Loans be
increased to the then prevailing fair market rate.
---------------------------------------------------------------------------
\11\ As noted above in rep. 4, PTE's 85-121 and 92-43 permitted
the Plan to invest up to 25% of its assets in these Loans. The
applicant has represented that no more than 15% of the Plan's assets
will be invested in the Loans under the exemption proposed herein.
---------------------------------------------------------------------------
The Loans will be secured by all of the installment sale contracts
(the Contracts) of Motors. As of December 31, 1995, Motors had 833
outstanding Contracts totaling $5,597,582, with an average balance of
$6,720 per Contract. Mr. Walt has represented that he will examine the
security agreement and financing statements with regard to the
Contracts and will ascertain that the Plan's security interest in all
of the Contracts is properly executed, and that such security interest
is perfected by properly filed financing statements in conformity with
the Uniform Commercial Code, as adopted in Arkansas. It is represented
that Mr. Walt, through a combination of monthly reports from Boatmen's
and monthly Certification of Compliance Statements signed by Mr. Smart,
will insure that at all times the aggregate face value of the Contracts
equals at least 200% of the total outstanding balance of the Loans. It
is further represented that if at the end of any month the report from
Boatmen's indicates that the aggregate face value of the Contracts does
not equal at least 200% of the total outstanding balance of the Loans,
Mr. Walt will direct Motors to pay the Plan an amount sufficient to
bring the Loans into compliance with the 200% collateral requirement.
Mr. Walt, on behalf of the Plan, has accepted the commitment of the
Employer and Motors that the Contracts will conform to the following
loan policy guidelines: (a) A complete credit history will be performed
for each customer; (b) a customer's credit history will be analyzed
together with the customer's equity and the terms of the Loan; (c)
depending on the use of the vehicle, a customer equity of from 10% to
30% will be required; (d) with an extension of six months available in
circumstances of minimal vehicle use, the maximum term of any of the
Contracts will be 60 months on new and current year used vehicles, 54
months, 42 months, 36 months, and 24 months, respectively, on one, two,
three, four, and five year old vehicles; (e) prior to closing on any
Contracts, a written certificate of insurance from an insurance agent
will be required showing that the automobile is covered for physical
damage with no more than a $250 deductible; (f) such insurance coverage
includes fire, theft, and other perils and shows Motors as loss payee;
and (g) Motors will employ a full time collector and strict management
supervision will be maintained daily over collections.
Motors has represented that, if at any time, it changes the above-
described loan policy guidelines it will notify Mr. Walt. Therefore, it
is the responsibility of Mr. Walt to determine whether such changes
materially affect the value of the Contracts. Mr. Walt represents that
if the value of the Contracts is materially affected, such Contracts
will be excluded from the collateral which secures the Loans by the
Plan to Motors.
The Loans will also be secured by the Guaranty of the partners of
Motors. In this regard, the partners of Motors have executed a blanket
Guaranty in order to satisfy the requirements of PTE 92-43. Mr. Walt is
responsible for ascertaining that any Loans entered by the Plan
pursuant to this proposed exemption are also covered by this blanket
Guaranty or, if necessary, a new Guaranty will be executed. In
addition, it is represented that all of the partners in Motors are
jointly and severally liable for the debts of the partnership,
specifically including the Loans.
It is represented that from time to time in order to secure its
line of credit to Motors, Boatmen's may take a security interest in the
Contracts. However, it is represented that such security interest will
at all times be subordinated to 200% of the indebtedness of Motors to
the Plan. Further, it is represented that other notes payable from
Motors to its partners will be subordinated to the Loans. As of
December 31, 1995, a total amount of $3,536,123 was due to the partners
of Motors under the terms of the notes, but such amount was
subordinated, to the indebtedness of Motors to the Plans incurred under
PTE 92-43.
In addition, it is represented that all of the Contracts provide
Motors with recourse against the Employer for the amount of any
defaulted Contracts. In this regard, should there be defaults on any of
the Contracts, it is represented that the Employer will repurchase such
Contracts from Motors after giving legal notice to the customer under
Arkansas law. Once the Employer repurchases any defaulted Contracts,
the Employer, not Motors, will repossess the vehicles. The Employer has
informed the Department that for 1995 and 1996, the average number of
Contracts equaled 818. Of these Contracts forty (40) vehicles were
repossessed in 1995 and twenty (20) vehicles were repossessed in 1996.
The Employer maintains that defaults and repossessions constitute a
very small percentage of the total number of Contracts outstanding at
any time.
In addition to the responsibilities outlined above, Mr. Walt is
responsible for monitoring Motors' compliance with the terms of the
Loans and the Guaranty. In this regard, Mr. Walt has reviewed certain
monthly reports (the Monthly Reports) which have been furnished to Joe
D. Ratliff, second successor independent fiduciary; Pine Bluff National
Bank, first successor independent fiduciary; and the First National
Bank of Altheimer, the independent fiduciary under PTE 85-121. Mr. Walt
represents that such Monthly Reports are appropriate for the purposes
of monitoring the proposed transactions. If this proposed exemption is
granted, it is represented that similar Monthly Reports will be
provided to Mr. Walt and will be reviewed monthly by Mr. Walt, or more
frequently, as Mr. Walt determines is necessary.
In addition, Mr. Walt is responsible for receiving and reviewing
the monthly financial statements for Motors and for the Employer and
annual financial statements of the partners of Motors. Mr. Walt
represents that this information will assist him in monitoring the
credit worthiness of the Employer and Motors. If there are any material
decreases in the net worth of any of the parties involved, it is
represented that Mr. Walt will liquidate the Loans at the next maturity
date. In this regard, Mr. Walt represents that he places the most
significance on the ability of the Employer to
[[Page 37309]]
repurchase any of the Contracts that are in default and considers the
net worth of the partners of Motors to be a secondary source of
protection for the Plan. Mr. Walt further represents that if, in
reviewing the monthly financial statements of the Employer, he
determines that a decrease in the net worth of the Employer has
impaired the Employer's ability to repurchase any of the Contracts, he
will carefully review the aggregate net worth of the partners of
Motors. After such review, if he determines, based on his banking
experience, judgment, and other factors, that the Plan is not properly
protected, Mr. Walt will instruct Boatmen's to liquidate the Loans at
the next maturity date. In the event of a default by Motors on the
Loans, Mr. Walt will be responsible for taking all necessary steps to
protect the Plan and for enforcing all of the rights of the Plan,
including pursuing the partners of Motors under the terms of the
Guaranty.
In the opinion of Mr. Walt, the terms and conditions of the Loans
and Guaranty are based on arm's length considerations. After reviewing
the proposed transactions, Mr. Walt represents that he would make the
Loans under the same terms to Motors. In conclusion, Mr. Walt has
determined that the proposed transactions are in the best interest of
the Plan and its participants and beneficiaries for the following
reasons: (a) The Loans by the Plan to Motors are well collateralized;
(b) the risk of loss to the Plan is almost non-existent; (c) the ninety
(90) day maturity of the Loans will enable the Plan to shift its
investments from the Loans in a short period of time, if necessary to
provide liquidity to the Plan; (d) the yield to the Plan is
approximately 227 basis points greater than that of a ninety (90) day
bank certificate of deposit; (e) the rate of return, which will at all
times be two percentage points above the federal discount rate,
prevents the Plan from becoming locked into a below market interest
rate and insures a favorable rate on a continuing basis; and (f)
administration of the proposed transactions should generate less
expense than that of other investments.
7. The applicant maintains that the wide diversity of customers
executing the Contracts significantly spreads the risk to the Plan.
Further, the Employer will bear all costs of filing the application for
exemption, providing notice to interested persons, and paying for the
services rendered by Mr. Walt, as independent fiduciary, to the Plan.
In addition, it is represented that throughout the five (5) year
duration of this proposed exemption, the Plan will not pay any fees,
expenses, or commissions in connection with the proposed transactions.
8. In summary, the applicant represents that the Loans will satisfy
the criteria of section 408(a) of the Act as follows: (a) Mr. Walt, the
independent fiduciary of the Plan, has agreed to review, approve, and
monitor the terms of the Loans and the Guaranty; (b) Mr. Walt has
represented that the Loans will be in the best interest of the
participants and beneficiaries of the Plan; (c) the Loans will be short
term loans limited to no more than 15% of the assets of the Plan; (d)
the Loans will be collateralized by a perfected security interest in
the Contracts; (f) the face amount of the Contracts will at all times
exceed 200% of the total amount of the Loans; (g) the Loans are
guaranteed by the partners of Motors; (h) the terms of the Contracts
provide Motors with recourse to the Employer in the event of a default
on any of the Contracts; and (i) the Plan will receive a return on the
Loans of at least two percentage points above the federal discount rate
which is represented to be the prevailing fair market rate of return on
comparable investments.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll free number.)
Ronald L. Chez (Mr. Chez) IRA and Lawrence G. Kuntz (Mr. Kuntz) IRA
(Collectively; the IRAs) Located in Chicago, Illinois and Wilmington,
Delaware, Respectively
[Application Nos. D-10359 and D-10360]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 C.F.R. Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990.) If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to:
(a) the proposed sale by the IRAs of certain closely held stock (the
Stock) to Happy Valley Corporation (the Corporation), the issuer of the
Stock and an unrelated third party with respect to the IRAs; and (b)
the subsequent repurchase of the Stock from the Corporation by
Mr. Chez and Mr. Kuntz, fiduciaries and disqualified persons with
respect to the IRAs; provided that the following conditions are met:
1. The sale and the repurchase of the Stock will be one-time
transactions for cash;
2. The transactions described in (1) above will take place on the
same business day;
3. Mr. Chez and Mr. Kuntz, in their individual capacity, will
purchase the same shares of the Stock, as those that were sold to the
Corporation by the IRAs. The stock transfer records of the Corporation
will evidence that this is the case; and
4. The amount paid to the IRAs for the Stock will be the fair
market value of the Stock determined at the time of the sale by a
qualified independent appraiser. Mr. Chez and Mr. Kuntz will purchase
the Stock from the Corporation for the same consideration as was
received by the IRAs for the sale of the Stock.
Summary of Facts and Representations
1. The IRAs are self-directed individual retirement accounts. The
Trustee for the IRAs is Delaware Charter Guarantee & Trust Company. In
December 1995, Mr. Kuntz invested $12,500 of his IRA assets in 1250
shares of the Stock, and Mr. Chez invested $50,000 of his IRA assets in
5000 shares of the Stock. The investment in the Stock represents
approximately 90% of Mr. Kuntz's IRA, and virtually 100% of Mr. Chez's
IRA is invested in the Stock.12 The IRAs hold a minority
interest in the Corporation, whereby Mr. Kuntz's IRA holds 2.25% of the
outstanding shares of the Stock, and Mr. Chez's IRA holds 9% of the
outstanding shares. The Stock is closely held.
---------------------------------------------------------------------------
\12\ It is represented that Mr. Chez has numerous IRAs, and the
investment in the Stock represents less than 1% of the aggregate
assets of these IRAs.
---------------------------------------------------------------------------
The applicant represents that Mr. Chez and Mr. Kuntz are related to
the Corporation only as investors through their IRAs and do not have
any other business or personal relationship with each other. Mr. Kuntz
and Mr. Chez learned about the investment opportunity through business
contacts and made the decision to invest in the Stock because they
anticipated capital gain appreciation.
2. The issuer of the Stock is the Corporation, an Illinois
corporation in the restaurant business. The Corporation was
incorporated in April 1995, and on May 19, 1995 it elected ``S''
Corporation status for the tax year ending December 31, 1995.
Subsequently, the Corporation determined to raise additional
capital and on May 20, 1995 prepared an offering memorandum for the
Stock (the Memorandum). The Memorandum disclosed that the Corporation
elected
[[Page 37310]]
subchapter ``S'' status and intended to operate as such. As such, the
Corporation had only one class of stock and the offering was limited to
no more than 35 potential shareholders. Under Internal Revenue Service
(IRS) rules, only qualified shareholders may hold shares of a
subchapter ``S'' corporation.
3. On July 27, 1995, the Corporation accepted a subscription
agreement from Mr. Chez. The subscription agreement stated that Mr.
Chez was purchasing the Stock as investment for his IRA. On December 4,
1995, the Corporation issued the Stock in Mr. Chez's name. However, on
December 20, 1995, at the request of Mr. Chez, the Corporation issued a
replacement stock certificate to Mr. Chez's IRA.
On August 1, 1995, Mr. Kuntz subscribed for Stock shares in his own
name. On December 20, 1995, at the request of Mr. Kuntz, the
Corporation issued a replacement stock certificate to Mr. Kuntz's IRA.
4. However, during the preparation of the Corporation's income tax
return for the year 1995, the Corporation's accountants discovered that
pursuant to IRS Revenue Ruling 92-73, the IRAs are not permissible
shareholders of a subchapter ``S'' corporation under section 1361 of
the Internal Revenue Code (the Code).13 Therefore, the
issuance of the Stock to the IRAs terminated the Corporation's
subchapter ``S'' status for the year. The applicant represents that the
Corporation has received relief from the IRS under section 1362(f) of
the Code. However, as a condition of the IRS relief, the IRAs will be
required to terminate their ownership of the Stock.
---------------------------------------------------------------------------
\13\ In this regard, Revenue Ruling 92-73 also provides that if
a shareholder inadvertently causes a termination of an ``S''
corporation by transferring stock to a trust that qualifies as an
individual retirement account under section 408(a) of the Code,
relief may be requested under section 1362(f) of the Code and the
regulations thereunder. Section 1362(f) of the Code provides that
notwithstanding an event terminating subchapter ``S'' status of a
corporation, if the IRS determines that the termination was
inadvertent the IRS can waive the effect of the terminating event
for any period, if the corporation timely corrects the event, and if
the corporation and the shareholders agree to be treated as if the
election has been in effect for such a period.
---------------------------------------------------------------------------
5. Therefore, the applicant requests exemptive relief for the sale
of the Stock by the IRAs back to the Corporation, the issuer of the
stock, and the subsequent repurchase of the Stock by Mr. Chez and Mr.
Kuntz, in their individual capacity. By letter dated May 22, 1997, the
attorneys for the Corporation (the Attorneys) represent that the
transaction must be structured through the Corporation. The Attorneys
believe that the redemption and resale of the Stock is consistent with
section 1362(f)(3) of the Code which requires that steps be taken so
that the Corporation is once more a small business corporation. Because
section 1361(b)(1) of the Code which defines ``small business
corporation'' does not permit an IRA to be a shareholder in such a
corporation, the Attorneys believe that removing non-permitted
shareholders is most effective where the transaction is completely
reversed. Because the Stock was originally issued to the IRAs by the
Corporation, the Attorneys propose to reverse the transaction through
the redemption and the resale. The Attorneys also represent that this
factual situation was examined by the IRS when it issued a ruling dated
April 11, 1997, granting the Corporation relief under section 1362(f)
of the Code.
6. The applicant submitted an appraisal dated May 7, 1997,
regarding shares of the Stock (the Appraisal). The Appraisal was
prepared by Blackman Kallick Bartelstein, LLP (BKB), certified public
accountants, who are independent of the parties involved in the subject
transactions. In the Appraisal, Michael Dorman of BKB relied primarily
on the net book value and capitalized earnings approaches, and
determined that the fair market value of the Stock was $7.20 per share
as of April 27, 1995, and $10.10 per share as of March 23, 1997. As a
result, both IRAs will realize a gain for the time period that the IRAs
held the Stock.
Pursuant to the terms of the exemption, BKB will update the
Appraisal at the time the transactions take place and the Stock will be
sold at its fair market value as of the date of sale. Mr. Chez and Mr.
Kuntz will purchase the Stock from the Corporation for the same
consideration as was received by the IRAs for the sale of the Stock.
7. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 4975(c)(2) of the Code
because:
1. The sale and the repurchase of the Stock will be one-time
transactions for cash;
2. The transactions described in (1) above will take place on the
same business day;
3. Mr. Chez and Mr. Kuntz, in their individual capacity, will
purchase the same shares of the Stock, as those that were sold to the
Corporation by the IRAs. The stock transfer records of the Corporation
will evidence that this is the case; and
4. The amount paid to the IRAs for the Stock will be the fair
market value of the Stock determined at the time of the sale by a
qualified independent appraiser. Mr. Chez and Mr. Kuntz will purchase
the Stock from the Corporation for the same consideration as was
received by the IRAs for the sale of the Stock.
Notice to Interested Persons
Because Mr. Kuntz and Mr. Chez are the sole participants of their
respective IRAs, it has been determined that there is no need to
distribute the notice of proposed exemption to interested persons.
Comments and requests for a hearing are due 30 days from the date of
publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department
at (202) 219-8883. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and
[[Page 37311]]
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 3rd day of July 1996.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 97-18128 Filed 7-10-97; 8:45 am]
BILLING CODE 4510-29-P
