[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Notices]
[Pages 35932-35941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17075]
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[[Page 35933]]
DEPARTMENT OF LABOR
[Prohibited Transaction Exemption 95-56; Exemption Application No. D-
09724, et al.]
Grant of Individual Exemptions; Mellon Bank, N.A., and Its
Affiliated (Collectively, Mellon), et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of Individual Exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) 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).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, DC. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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 proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Mellon Bank, N.A., and Its Affiliates (Collectively, Mellon) Located in
Pittsburgh, Pennsylvania
[Prohibited Transaction Exemption 95-56; Application No. D-09724]
Exemption
Section I--Exemption for Cross-Trading Between Certain Accounts
The restrictions of sections 406(a)(1)(A) and 406(b)(2) of the Act,
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) of the Code, shall not apply
to (1) the purchase and sale of securities (including the stock of
Mellon Bank Corporation (MBC)) between Indexed Accounts, as defined in
Section IV(a); and (2) the purchase and sale of securities, including
the common stock of MBC, between Indexed Accounts and various large
accounts (the Large Accounts) pursuant to portfolio restructuring
programs of the Large Accounts; provided that the following conditions
and the General Conditions of Section III are met:
(a) The Indexed Account is based on an index which represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries. The organization creating and maintaining the index must be
(1) engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients, (2) a publisher of financial news or information, or (3) a
public stock exchange or association of securities dealers. The index
must be created and maintained by an organization independent of Mellon
and its affiliates. The index must be a generally accepted standardized
index of securities which is not specifically tailored for the use of
Mellon or its affiliates.
(b) The price for the securities is set at the current market value
for the securities on the date of the transactions. For equity
securities, the price shall be the closing price for the security on
the day of trading; unless the security was added to or deleted from an
index underlying an Indexed Account after the close of trading, in
which case the price shall be the opening price for that security on
the next business day after the announcement of the addition or
deletion. For debt securities, the price shall be the fair market value
determined as of the close of the day of trading pursuant to Rule 17a-
7(b) issued by the Securities and Exchange Commission under the
Investment Company Act of 1940.
(c) The transaction takes place within three business days of the
``triggering event'' giving rise to the cross-trade opportunity. A
triggering event is defined as:
(1) A change in the composition or weighting of the index
underlying an Indexed Account by the organization creating and
maintaining the index;
(2) A change in the overall level of investment in an Indexed
Account as a result of investments and withdrawals made on the
Account's opening date, where the Indexed Account is a collective
investment fund, or on any relevant date, where the Indexed Account is
not a collective investment fund; provided, however, that Mellon does
not change the level of investment in the Indexed Account through
investments or withdrawals of assets of any employee benefit plan
maintained by Mellon or its affiliates (the Mellon Plans) other than
any Mellon Plan which is a defined contribution plan under which
participants direct the investment of their accounts among various
investment options, including Indexed Accounts; or
(3) A declaration by Mellon (recorded on Mellon's records) that a
``triggering event'' has occurred, which will be made upon an
accumulation of cash in an Indexed Account attributable to interest or
dividends on, and/or tender offers for, portfolio securities equal to
not more than .5 percent of the Indexed Account's total value.
(d) With respect to any Indexed Account that is model-driven, no
cross-trades are engaged in by the Account for 10 business days
subsequent to any change made by Mellon to the model underlying the
Account.
(e) In the event that the amount of a particular security which all
of the Indexed Accounts or Large Accounts propose to sell on a given
day is less than the amount of such security which all of the Indexed
Accounts or Large Accounts propose to buy, or vice versa, the direct
cross-trade opportunity must be allocated by Mellon among potential
buyers or sellers of the security on a pro rata basis.
(f) An Indexed Account does not participate in a cross-trade if
more than 10 percent of the assets of the Indexed Account at the time
of the proposed cross-trade are comprised of assets of Mellon Plans for
which Mellon exercises investment discretion.
[[Page 35934]]
(g) Prior to any proposed cross-trading by an Indexed Account or a
Large Account, Mellon provides to each employee benefit plan invested
in the Account information which describes the existence of the cross-
trading program, the ``triggering events'' which will create cross-
trade opportunities, the pricing mechanism that will be utilized for
securities purchased or sold by the Accounts, and the allocation
methods and other procedures which will be implemented by Mellon for
its cross-trading practices. Any employee benefit plan which
subsequently invests in the Indexed Account or Large Account shall be
provided the same information prior to or immediately after the plan's
initial investment in the Account.
(h) With respect to cross-trade transactions involving a Large
Account:
(1) Total assets of the Large Account are in excess of $50 million.
(2) Fiduciaries or other appropriate decisionmakers of the Large
Account who are independent of Mellon are, prior to any cross-trade
transactions, fully informed of the cross-trade technique and provide
advance written approval of the cross-trade transactions.
Such authorization shall be terminable at will by the Large Account
upon receipt by Mellon of written notice of termination. A form
expressly providing an election to terminate the authorization, with
instructions on the use of the form, must be supplied to the
authorizing Large Account fiduciary concurrent with the receipt of the
written information describing the cross-trading program. The
instructions for such form must include the following information:
(i) The authorization is terminable at will by the Large Account,
without penalty to the Large Account, upon receipt by Mellon of written
notice from the authorizing Large Account fiduciary; and
(ii) Failure to return the termination form will result in the
continued authorization of Mellon to engage in cross-trade transactions
on behalf of the Large Account.
(3) Within 45 days of the completion of the Large Account's
portfolio restructuring program, the Large Account's fiduciaries shall
be fully apprised in writing of the transaction results. However, if
the program takes longer than three months to complete, interim reports
of the transaction results will be made within 30 days of the end of
each three month period.
(4) The Large Account transactions occur only in situations where
Mellon has been authorized to restructure all or a portion of the Large
Account's portfolio into an Indexed Account (including a separate
account based on an index or computer model) or to act as a ``trading
adviser'' in carrying out a Large Account-initiated liquidation or
restructuring of its portfolio.
(i) Mellon receives no additional direct or indirect compensation
as a result of any cross-trade transactions.
(j) Mellon does not purchase or sell any debt securities issued by
Mellon or an affiliate for the Indexed Accounts.
Section II--Exemption for the Acquisition, Holding and Disposition of
MBC Stock
The restrictions of sections 406(a)(1)(D), 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)(D) and (E) of the
Code, shall not apply to the acquisition, holding or disposition of the
common stock of MBC (the MBC Stock) by Indexed Accounts, if the
following conditions and the General Conditions of Section III are met:
(a) The acquisition or disposition of the MBC stock is for the sole
purpose of maintaining strict quantitative conformity with the relevant
index upon which the Indexed Account is based.
(b) In the event that MBC Stock is added to an index on which an
Indexed Account is based or is added to the portfolio of the Indexed
Account which tracks an index that includes MBC Stock, all acquisitions
necessary to bring the Indexed Account's holdings of MBC Stock to its
capitalization weighting in the index, other than cross-trade
transactions meeting the conditions of Section I, shall comply with
Rule 10b-18 of the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934, including the limitations regarding
the price paid for such stock.
(c) Subsequent to acquisitions necessary to bring the Indexed
Account's holdings of MBC Stock to its capitalization weighting in the
index pursuant to the restrictions of SEC Rule 10b-18, all aggregate
daily purchases of MBC stock, other than cross-trade purchases meeting
the conditions of Section I, shall not constitute more than the greater
of: (1) 15 percent of the stock's average daily trading volume for the
previous five days; or (2) 15 percent of the stock's trading volume on
the date of the transaction.
(d) If the necessary number of shares of MBC stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Indexed Account to require MBC stock, Mellon
shall appoint a fiduciary which is independent of Mellon and its
affiliates to design acquisition procedures and monitor Mellon's
compliance with such procedures.
(e) All purchases and sales of MBC stock, other than cross-trades
meeting the conditions of Section I, shall be executed on the national
exchange on which MBC stock is primarily traded.
(f) No transactions shall involve purchases from, or sales to,
Mellon or any affiliate, officer, director or employee of Mellon or any
party in interest with respect to a plan which has invested in an
Indexed Account.1 This requirement does not preclude purchases and
sales of MBC stock in cross-trade transactions meeting the conditions
of Section I, provided that the Indexed Accounts are not maintained by
Mellon primarily for the investment of assets of Mellon or any
affiliate, including officers, directors or employees of Mellon other
than in connection with a Mellon Plan.
\1\ The Department notes that ``blind transactions'', in which
the identity of the purchaser or seller is not known because the
transaction is executed by an independent broker, acting as agent,
on a national securities exchange, would not be subject to this
requirement.
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(g) No more than five (5) percent of the total amount of MBC stock
issued and outstanding at any time shall be held in the aggregate by
the Indexed Accounts which hold plan assets.
(h) MBC stock shall constitute no more than two (2) percent of the
value of any independent third-party index on which the investments of
an Indexed Account are based.
(i) A plan fiduciary independent of Mellon authorizes the
investment of such plan's assets in an Indexed Account which purchases
and/or holds MBC stock.
(j) A fiduciary independent of Mellon and its affiliates shall
direct the voting of the MBC stock held by an Indexed Account on any
matter in which shareholders of MBC stock are required or permitted to
vote.
Section III--General Conditions
(a) Mellon maintains or causes to be maintained for a period of six
years from the date of the transaction the records necessary to enable
the persons described in paragraph (b) of this Section to determine
whether the conditions of the exemption have been met, except that (1)
a prohibited transaction will not be considered to have occurred if,
due to circumstances beyond the control of Mellon, the records are lost
or destroyed prior to the end of the six-year period, and (2) no party
in interest other than Mellon shall be subject to the civil penalty
that may be assessed under section 502(i) of the
[[Page 35935]]
Act or to the taxes imposed by section 4975(a) and (b) of the Code if
the records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of section 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are available at their
customary location for examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service,
(B) Any fiduciary of a plan participating in an Indexed Account who
has authority to acquire or dispose of the interests of the plan, or
any duly authorized employee or representative of such fiduciary,
(C) Any contributing employer with respect to any plan
participating in an Indexed Account or any duly authorized employee or
representative of such employer, and
(D) Any participant or beneficiary of any plan participating in an
Indexed Account, or any duly authorized employee or representative of
such participant or beneficiary.
(2) None of the persons described in paragraph (b)(1)(B) through
(D) shall be authorized to examine trade secrets of Mellon, any of its
affiliates, or commercial or financial information which is privileged
or confidential.
Section IV--Definitions
(a) Indexed Account--Any Index Fund or Model-Driven Fund.
(b) Index Fund--Any investment fund, account or portfolio
sponsored, maintained, trusteed, or managed by Mellon or an affiliate
in which one or more investors invest that is designed to replicate the
capitalization-weighted composition of an independently maintained
securities index which satisfies the conditions of Section I(a) and
Section II(h).
(c) Model-Driven Fund--Any investment fund, account or portfolio
sponsored, maintained, trusteed, or managed by Mellon or an affiliate,
in which one or more investors invest which is based on computer models
using prescribed objective criteria to transform an independently
maintained securities index which satisfies the conditions of Section
I(a) and Section II(h).
(d) Opening date--The date on which investments in or withdrawals
from an Indexed Account that is a collective investment fund may be
made.
(e) Large Account--An account of an investor that is either: (1) an
employee benefit plan within the meaning of section 3(3) of the Act
that has $50 million or more in total assets; or (2) an institutional
investor, other than an investment company registered under the
Investment Company Act of 1940 (i.e. a mutual fund) advised or
sponsored by Mellon, such as an insurance company separate account or
general account, a governmental plan, a university endowment fund, a
charitable foundation fund, or a trust or other fund which is exempt
from taxation under section 501(a) of the Code, that has total assets
in excess of $50 million. As noted in Section I(g)(4), a ``Large
Account'' shall only be an account to which Mellon has been authorized
to restructure all or a portion of the portfolio for such account into
an Indexed Account or to which Mellon has been authorized to act as a
``trading adviser'' (as defined below) in connection with a specific
liquidation or restructuring program for the account.
(f) Trading adviser--A person whose role is limited to arranging a
Large Account-initiated liquidation or restructuring of an equity or
debt portfolio within a stated period of time so as to minimize
transaction costs. The person must not be a fiduciary with investment
discretion for any underlying asset allocation, restructuring or
liquidation decisions for the account in connection with such
transactions.
(g) Affiliate--Any person, directly or indirectly through one or
more intermediaries, controlling, controlled by, or is under common
control with Mellon (except Mellon/McMahon Real Estate Advisors, Inc.).
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on April 7, 1995, at 60 FR
17814.
WRITTEN COMMENTS AND MODIFICATIONS: The applicant submitted the
following comments and requests for modifications regarding the notice
of proposed exemption (the Proposal).
With respect to the heading used in the Proposal, the applicant
states that the term ``Mellon'' refers specifically to Mellon Bank,
N.A., but not to its affiliates. The applicant notes that in various
places throughout the Proposal, the relevant provisions refer to
``Mellon and its affiliates''. However, in numerous other provisions of
the Proposal the reference is simply to Mellon which, as designated in
the heading, is too narrow since the affiliates should also be covered.
The applicant requests that the reference to ``Mellon'' in the heading
be changed to include both Mellon Bank, N.A. and its affiliates. The
Department concurs with the applicant's requested clarification and has
so modified the heading of the Proposal.
With respect to the definition of a ``triggering event'' in Section
I(c) of the Proposal, the applicant states that subparagraph (2) limits
investments and withdrawals from an Indexed Account to those occurring
on a ``regularly scheduled opening date'' for the Indexed Account. The
applicant represents that the concept of ``an opening date'', as
defined in Section IV(d) of the Proposal, is not applicable to Indexed
Accounts that are not collective investment funds, such as separate
accounts for both employee benefit plans and other institutional
clients. Since separate accounts would be encompassed within the
definition of an Indexed Account under Section IV(a) of the Proposal,
the applicant requests that an appropriate clarification be made. In
addition, with respect to the concept of a ``regularly scheduled''
opening date, the applicant represents that the trend for collective
investment funds is toward more frequent, and in many cases daily,
opening dates. Thus, the applicant requests that the words ``regularly
scheduled'' be deleted from Section I(c)(2) of the Proposal.
The Department concurs with the applicant's requested
clarifications and has modified the language of Sections I(c)(2) and
IV(d) of the Proposal. In this regard, Section I(c)(2) has been
modified as follows:
* * * A change in the overall level of investment in an Indexed
Account as a result of investments and withdrawals made on the
Account's [regularly scheduled] opening date, where the Indexed
Account is a collective investment fund, or on any relevant date,
where the Indexed Account is not a collective investment fund * * *.
(emphasis added)
In addition, Section IV(d) has been modified as follows:
* * * Opening date--The [regularly-scheduled] date on which
investments in or withdrawals from an Indexed Account that is a
collective investment fund may be made. (emphasis added)
With respect to the proviso in Section I(c)(2) of the Proposal
relating to any Mellon Plans for which Mellon has investment
discretion, the applicant states that its understanding of the intent
of this proviso is to exclude from the definition of a ``triggering
event'' those investments into or withdrawals from an Indexed Account
which result from Mellon's exercise of its discretion
[[Page 35936]]
for a Mellon Plan. However, the applicant states that this proviso was
not intended to cover changes in the level of investment in an Indexed
Account which result from investment elections made by individual
participants in a Mellon Plan (i.e. a defined contribution plan) that
permits such participants to direct the investment of their accounts
among various available investment options, including Indexed Accounts.
Thus, the applicant maintains that the language of the proviso is too
broad in that it would apply to any Mellon Plan as to which Mellon
exercises any investment discretion, including discretion for the
management of assets which have been allocated to an Indexed Account,
even though participants have directed the investment of their assets
to such Indexed Accounts. Therefore, the applicant suggests that this
proviso be clarified by deleting the phrase ``* * * for which Mellon
has investment discretion'' and substituting therefor the following:
* * * other than any Mellon Plan which is a defined contribution
plan under which participants direct the investment of their
accounts among various investment options, including Indexed
Accounts.
The Department concurs with the applicant's requested clarification
and has so modified the language of Section I(c)(2) of the Proposal.
With respect to Section II(f) of the Proposal, the applicant states
that the first sentence sets forth a requirement that transactions by
an Indexed Account involving MBC Stock not be with any affiliate,
officer, director or employee of Mellon or any party in interest for
any plan which has invested in the Indexed Account. The applicant
requests that it be made clear that this limitation does not apply to
any transaction on an exchange executed by an independent broker acting
as agent, given that such transactions would be considered to be
``blind transactions'' for this purpose.
In this regard, the Department concurs with the applicant's
requested clarification and has added a footnote at the end of the
first sentence of Section II(f) stating that ``blind transactions''
executed on a national securities exchange by an independent broker
will not be subject to the requirements of Section II(f).
Finally, with respect to the definition of ``Large Account'' in
Section IV(e) of the Proposal, the applicant states that the definition
excludes any investment company registered under the Investment Company
Act of 1940 (i.e. any mutual fund). The applicant represents that
Mellon had previously agreed to exclude only affiliated mutual funds
(i.e. mutual funds advised or sponsored by Mellon or an affiliate) from
the definition of ``Large Account''. The Department acknowledges this
error in the Proposal and concurs with the applicant's clarification.
Thus, the Department has modified the language of Section IV(e)(2) of
the Proposal by inserting the phrase ``* * * advised or sponsored by
Mellon'' following the reference to mutual funds in the definition of
``Large Account''.
No other comments, and no requests for a hearing, were received by
the Department during the comment period.
Accordingly, based on the current exemption application file and
record, the Department has determined to grant the proposed exemption
as modified herein.
FOR FURTHER INFORMATION CONTACT: Mr. E.F. Williams of the Department,
telephone (202) 219-8194. (This is not a toll-free number.)
T.J. Lambrecht Construction, Inc.; Employees' Profit Sharing Plan and
Trust; Brown & Lambrecht Earthmovers, Inc.; Employees' Profit Sharing
Plan and Trust (collectively, the Plans) Located in Joliet, Illinois
[Prohibited Transaction Exemption 95-57; Application Nos. D-09872 and
D-09873]
Exemption
The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1) (A) through (E) of the Code
shall not apply to the cash sale (the Sale) by each of the Plans of a
12.5% partnership interest in Prime Industries (the Partnership
Interest) to Mr. Thomas J. Lambrecht, a party in interest with respect
to the Plans; provided the following conditions are satisfied: (1) The
Sale is a one-time transaction for cash; (2) the sale price for each
Partnership Interest will be the higher of (a) the fair market value of
the Partnership Interest as determined by a qualified independent
appraiser at the time of the Sale or, (b) each Plan's total investment
in the Partnership Interest ($300,000); and (3) the Plans do not suffer
any loss nor incur any expenses in connection with the transaction.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on May 10, 1995 at 60 FR
24899.
FOR FURTHER INFORMATION CONTACT: Virginia J. Miller of the Department,
telephone (202) 219-8971. (This is not a toll-free number.)
Guarantee Mutual Life Company (Guarantee Mutual) Located in Omaha,
NE
[Prohibited Transaction Exemption 95-58; Exemption Application No. D-
09941]
Exemption
Section I. Covered Transaction
The restrictions of section 406(a) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (D) of the Code, shall not apply to
the proposed receipt of common stock of The Guarantee Life Companies
Inc., or the receipt of cash or policy credits by an eligible
policyholder (the Eligible Policyholder) of Guarantee Mutual which is
an employee benefit plan (the Plan), other than an Eligible
Policyholder which is a plan sponsored by Guarantee Mutual for its own
employees, in exchange for the termination of such Eligible Plan
Policyholder's membership interest in Guarantee Mutual, in accordance
with the terms of a plan of demutualization (the Plan of Conversion or
the Conversion Plan) adopted by Guarantee Mutual and implemented
pursuant to the Nebraska Insurers Demutualization Act, Nebraska Revised
Statutes, Sections 44-6101 through 44-6120.
The exemption is subject to the general conditions set forth below
in Section II.
Section II. General Conditions
(a) The Conversion Plan is implemented in accordance with
procedural and substantive safeguards that are imposed under Nebraska
law and is subject to the review and supervision by the Director of the
Department of Insurance of the State of Nebraska (the Director).
(b) The Director reviews the terms of the options that are provided
to Eligible Policyholders of Guarantee Mutual, as part of such
Director's review of the Conversion Plan, and the Director only
approves the Conversion Plan following a determination that such
Conversion Plan is fair and equitable to all Eligible Policyholders.
(c) Each Eligible Policyholder has an opportunity to comment on the
Conversion Plan and decide whether to vote to approve such Conversion
Plan after full written disclosure is given such Eligible Policyholder
by Guarantee Mutual, of the terms of the Conversion Plan.
(d) Any election by an Eligible Plan Policyholder to receive stock,
cash or policy credits, pursuant to the terms of the Conversion Plan is
made by one or more independent fiduciaries of such
[[Page 35937]]
Plan and neither Guarantee Mutual nor any of its affiliates exercises
any discretion or provides investment advice with respect to such
election.
(e) After each Eligible Policyholder entitled to receive stock is
allocated at least 10 shares of common stock, additional consideration
is allocated to Eligible Policyholders who own participating policies
based on actuarial formulas that take into account each participating
policy's contribution to the surplus of Guarantee Mutual which formulas
have been approved by the Director.
(f) All Eligible Plan Policyholders participate in the transactions
on the same basis within their class groupings as other Eligible
Policyholders that are not Plans.
(g) No Eligible Policyholder pays any brokerage commissions or fees
in connection with their receipt of stock or in connection with the
implementation of the commission-free sales program.
(h) All of Guarantee Mutual's policyholder obligations remain in
force and are not affected by the Conversion Plan.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Guarantee Mutual'' means Guarantee Mutual Insurance
Company and any affiliate of Guarantee Mutual as defined in paragraph
(b) of this Section III.
(b) An ``affiliate'' of Guarantee Mutual includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Guarantee Mutual. (For purposes of this paragraph, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an
officer, director or a 5 percent partner or owner.
(c) The term ``Eligible Policyholder'' means a policyholder who is
eligible to vote and to receive consideration in a demutualization.
Such policyholder is a policyholder of the mutual insurer on the day
the plan of conversion is adopted by the board of directors of the
insurer.
(d) The term ``policy credit'' means an increase in accumulation
account value (to which no surrender or similar charges are applied) in
the general account or an increase in a dividend accumulation on a
policy.
Written Comments
The Department received three written comments with respect to the
notice of proposed exemption. Two comments were submitted by Plan
policyholders of Guarantee Mutual. Of the comments in this category,
one was withdrawn. The third comment was submitted by Guarantee Mutual.
Following is a discussion of the Plan policyholder comment that was
not withdrawn and the response made by Guarantee Mutual with respect to
this comment. Also discussed is the comment that was submitted by
Guarantee Mutual and the Department's response to that comment.
Plan Policyholder Comment
The commentator states that he is opposed to the conversion because
he does not believe there are adequate safeguards to ensure that
management of Guarantee Mutual will not use the demutualization process
as an opportunity to further their personal interests. The commentator
explains that owners of corporations are no better off than owners of a
mutual company in terms of democratic rule over the company. The
commentator further asserts that managers should not be permitted to
convert or change organizational structures of companies until
corporate democratic principles can be guaranteed. Therefore, the
commentator does not recommend that the Department approve the proposed
exemption.
In response, Guarantee Mutual states that the comment does not
address the merits of the proposed transaction. Guarantee Mutual notes
that before the Conversion Plan can proceed, it must be approved by the
Director of the Nebraska Department of Insurance after a public
hearing. According to Guarantee Mutual, the public hearing was held on
April 13, 1995 and June 12, 1995 in Lincoln, Nebraska. Notice of the
hearing was mailed to each Eligible Policyholder and published in the
Omaha World-Herald, the Lincoln Journal-Star and the Omaha Daily
Record.
Guarantee Mutual points out that the next step of the Conversion
Plan is for the Director to approve such Plan and find that (a) the
Conversion Plan is fair and equitable to policyholders, (b) the
Conversion Plan does not deprive policyholders of property rights or
due process of law and (c) the new stock insurer would meet the minimum
requirements to be issued a certificate of authority by the Director to
transact business in Nebraska and the continued operations of the new
stock insurer would not be hazardous to future policyholders and the
public. Guarantee Mutual notes that the Director will continue to
monitor the demutualization through the effective date of the
conversion and, with respect to other matters, after the effective
date. In addition, Guarantee Mutual points out that Nebraska law
requires that two-thirds of voting Eligible Policyholders vote for the
adoption of the Conversion Plan before the demutualization can occur.
With respect to the commentator, Guarantee Mutual explains that he,
along with other Eligible Policyholders, was mailed a notice of the
public hearing and has been afforded the opportunity to express his
views to the Director either in writing or at the public hearing.
Guarantee Mutual also explains that the commentator will be given the
opportunity to vote for or against the Conversion Plan. Accordingly,
Guarantee Mutual believes that the commentator is being offered all of
the procedural safeguards inherent in the Nebraska conversion statute
and that the comment should not affect the Department's granting of the
exemption.
Guarantee Mutual's Comment
Guarantee Mutual's comment is intended to clarify information
contained in a footnote to the Summary of Facts and Representations of
the proposed exemption. In this regard, Footnote 16 of the Notice
states, in pertinent part, that prior to the public hearing, Guarantee
Mutual
* * * will provide each Eligible Policyholder with a summary of
the Conversion Plan, a notice of the public hearing and a more
detailed policyholder information statement.
Guarantee Mutual notes, however, that the Director will first
conduct the public hearing, and later, if the Director makes an initial
determination to approve Guarantee Mutual's application, a policyholder
vote will take place. Guarantee Mutual explains that Eligible
Policyholders will receive the more detailed policyholder statement
before the vote, but not before the hearing. Therefore, Guarantee
Mutual requests that Footnote 16 be modified to read as follows:
Guarantee Mutual also represents that prior to the public
hearing, it will provide each Eligible Policyholder with a summary
of the Conversion Plan and a notice of the public hearing and that
prior to the policyholder meeting and vote, it will provide each
Eligible Policyholder with a more detailed policyholder information
statement.
In addition, Guarantee Mutual requests certain modifications in
[[Page 35938]]
references to Guarantee Mutual and The Guarantee Life Companies Inc. In
this regard, Guarantee Mutual notes that Representations 10 (c), (d)
and (h) of the Summary of Facts and Representations refer to ``State
Mutual'' but not to ``Guarantee Mutual.'' Therefore, Guarantee Mutual
requests that these references be corrected. Further, Guarantee Mutual
explains that the reference to ``The Guarantee Companies, Inc.'' in
Section I of the proposed exemption should be modified by deleting the
comma after the word ``Companies.''
Finally, it is noted that Guarantee Mutual did not comply with the
notice to interested persons requirement within the time frame stated
in the exemption application. By letter dated May 25, 1995, Guarantee
Mutual certifies that it extended the comment period until June 5, 1995
by mailing postcards to the same group of Eligible Policyholders it had
previously notified of the proposed exemption. Other than the two
comments that were submitted by the Plan policyholders of Guarantee
Mutual and the comment submitted by Guarantee Mutual, no additional
comments were received by the Department.
The Department does not object to any of the clarifications or
modifications to the proposed exemption. After giving full
consideration to the entire record, including the written comments that
were submitted, the Department has decided to grant the exemption as
described and revised above. The comment letters have been included as
part of the public record of the exemption application. The complete
application file, including all supplemental submissions received by
the Department, is made available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, Room
N-5638, U.S. Department of Labor, 200 Constitution Avenue, N.W.,
Washington, D.C. 20210.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on April 14, 1995 at 60 FR
19096.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Rothschild, Incorporated (Rothschild) Located in New York, New York
[Prohibited Transaction Exemption 95-59; Exemption Application No. D-
09993]
Exemption
I. Transactions
A. The restrictions of sections 406(a) and 407(a) of the Act and
the taxes imposed by section 4975(a) and (b) of the Code by reason of
section 4975(c)(1)(A) through (D) of the Code shall not apply to the
following transactions involving trusts and certificates evidencing
interests therein:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and an employee benefit plan when the sponsor,
servicer, trustee or insurer of a trust, the underwriter of the
certificates representing an interest in the trust, or an obligor is a
party in interest with respect to such plan;
(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates;
and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.A.(1) or (2).
Notwithstanding the foregoing, section I.A. does not provide an
exemption from the restrictions of sections 406(a)(1)(E), 406(a)(2) and
407 for the acquisition or holding of a certificate on behalf of an
Excluded Plan by any person who has discretionary authority or renders
investment advice with respect to the assets of that Excluded Plan.\2\
\2\ Section I.A. provides no relief from sections 406(a)(1)(E),
406(a)(2) and 407 for any person rendering investment advice to an
Excluded Plan within the meaning of section 3(21)(A)(ii) and
regulation 29 CFR 2510.3-21(c).
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B. The restrictions of sections 406(b)(1) and 406(b)(2) of the Act
and the taxes imposed by section 4975(a) and (b) of the Code by reason
of section 4975(c)(1)(E) of the Code shall not apply to:
(1) The direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between the
sponsor or underwriter and a plan when the person who has discretionary
authority or renders investment advice with respect to the investment
of plan assets in the certificates is (a) an obligor with respect to 5
percent or less of the fair market value of obligations or receivables
contained in the trust, or (b) an affiliate of a person described in
(a); if:
(i) the plan is not an Excluded Plan;
(ii) solely in the case of an acquisition of certificates in
connection with the initial issuance of the certificates, at least 50
percent of each class of certificates in which plans have invested is
acquired by persons independent of the members of the Restricted Group
and at least 50 percent of the aggregate interest in the trust is
acquired by persons independent of the Restricted Group;
(iii) a plan's investment in each class of certificates does not
exceed 25 percent of all of the certificates of that class outstanding
at the time of the acquisition; and
(iv) immediately after the acquisition of the certificates, no more
than 25 percent of the assets of a plan with respect to which the
person has discretionary authority or renders investment advice are
invested in certificates representing an interest in a trust containing
assets sold or serviced by the same entity.\3\ For purposes of this
paragraph B.(1)(iv) only, an entity will not be considered to service
assets contained in a trust if it is merely a subservicer of that
trust;
\3\ For purposes of this exemption, each plan participating in a
commingled fund (such as a bank collective trust fund or insurance
company pooled separate account) shall be considered to own the same
proportionate undivided interest in each asset of the commingled
fund as its proportionate interest in the total assets of the
commingled fund as calculated on the most recent preceding valuation
date of the fund.
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(2) The direct or indirect acquisition or disposition of
certificates by a plan in the secondary market for such certificates,
provided that the conditions set forth in paragraphs B.(1)(i), (iii)
and (iv) are met; and
(3) The continued holding of certificates acquired by a plan
pursuant to subsection I.B.(1) or (2).
C. The restrictions of sections 406(a), 406(b) and 407(a) of the
Act, and the taxes imposed by section 4975(a) and (b) of the Code by
reason of section 4975(c) of the Code, shall not apply to transactions
in connection with the servicing, management and operation of a trust,
provided:
(1) such transactions are carried out in accordance with the terms
of a binding pooling and servicing arrangement; and
(2) the pooling and servicing agreement is provided to, or
described in all material respects in the prospectus or private
placement memorandum provided to, investing plans before they purchase
certificates issued by the trust.\4\
\4\ In the case of a private placement memorandum, such
memorandum must contain substantially the same information that
would be disclosed in a prospectus if the offering of the
certificates were made in a registered public offering under the
Securities Act of 1933. In the Department's view, the private
placement memorandum must contain sufficient information to permit
plan fiduciaries to make informed investment decisions.
[[Page 35939]]
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Notwithstanding the foregoing, section I.C. does not provide an
exemption from the restrictions of section 406(b) of the Act or from
the taxes imposed by reason of section 4975(c) of the Code for the
receipt of a fee by a servicer of the trust from a person other than
the trustee or sponsor, unless such fee constitutes a ``qualified
administrative fee'' as defined in section III.S.
D. The restrictions of sections 406(a) and 407(a) of the Act, and
the taxes imposed by sections 4975(a) and (b) of the Code by reason of
sections 4975(c)(1)(A) through (D) of the Code, shall not apply to any
transactions to which those restrictions or taxes would otherwise apply
merely because a person is deemed to be a party in interest or
disqualified person (including a fiduciary) with respect to a plan by
virtue of providing services to the plan (or by virtue of having a
relationship to such service provider described in section 3(14)(F),
(G), (H) or (I) of the Act or section 4975(e)(2)(F), (G), (H) or (I) of
the Code), solely because of the plan's ownership of certificates.
II. General Conditions
A. The relief provided under Part I is available only if the
following conditions are met:
(1) The acquisition of certificates by a plan is on terms
(including the certificate price) that are at least as favorable to the
plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates are not
subordinated to the rights and interests evidenced by other
certificates of the same trust;
(3) The certificates acquired by the plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Corporation
(S&P's), Moody's Investors Service, Inc. (Moody's), Duff & Phelps Inc.
(D & P) or Fitch Investors Service, Inc. (Fitch);
(4) The trustee is not an affiliate of any member of the Restricted
Group. However, the trustee shall not be considered to be an affiliate
of a servicer solely because the trustee has succeeded to the rights
and responsibilities of the servicer pursuant to the terms of a pooling
and servicing agreement providing for such succession upon the
occurrence of one or more events of default by the servicer;
(5) The sum of all payments made to and retained by the
underwriters in connection with the distribution or placement of
certificates represents not more than reasonable compensation for
underwriting or placing the certificates; the sum of all payments made
to and retained by the sponsor pursuant to the assignment of
obligations (or interests therein) to the trust represents not more
than the fair market value of such obligations (or interests); and the
sum of all payments made to and retained by the servicer represents not
more than reasonable compensation for the servicer's services under the
pooling and servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith; and
(6) The plan investing in such certificates is an ``accredited
investor'' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
B. Neither any underwriter, sponsor, trustee, servicer, insurer, or
any obligor, unless it or any of its affiliates has discretionary
authority or renders investment advice with respect to the plan assets
used by a plan to acquire certificates, shall be denied the relief
provided under Part I, if the provision of subsection II.A.(6) above is
not satisfied with respect to acquisition or holding by a plan of such
certificates, provided that (1) such condition is disclosed in the
prospectus or private placement memorandum; and (2) in the case of a
private placement of certificates, the trustee obtains a representation
from each initial purchaser which is a plan that it is in compliance
with such condition, and obtains a covenant from each initial purchaser
to the effect that, so long as such initial purchaser (or any
transferee of such initial purchaser's certificates) is required to
obtain from its transferee a representation regarding compliance with
the Securities Act of 1933, any such transferees will be required to
make a written representation regarding compliance with the condition
set forth in subsection II.A.(6) above.
III. Definitions
For purposes of this exemption:
A. ``Certificate'' means:
(1) a certificate--
(a) that represents a beneficial ownership interest in the assets
of a trust; and
(b) that entitles the holder to pass-through payments of principal,
interest, and/or other payments made with respect to the assets of such
trust; or
(2) a certificate denominated as a debt instrument--
(a) that represents an interest in a Real Estate Mortgage
Investment Conduit (REMIC) within the meaning of section 860D(a) of the
Internal Revenue Code of 1986; and
(b) that is issued by and is an obligation of a trust;
with respect to certificates defined in (1) and (2) above for which
Rothschild or any of its affiliates is either (i) the sole underwriter
or the manager or co-manager of the underwriting syndicate, or (ii) a
selling or placement agent. For purposes of this exemption, references
to ``certificates representing an interest in a trust'' include
certificates denominated as debt which are issued by a trust.
B. ``Trust'' means an investment pool, the corpus of which is held
in trust and consists solely of:
(1) either
(a) secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home equity
loans and obligations secured by shares issued by a cooperative housing
association);
(b) secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, qualified equipment notes secured by
leases, as defined in section III.T);
(c) obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family
residential and commercial real property (including obligations secured
by leasehold interests on commercial real property);
(d) obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or qualified
motor vehicle leases (as defined in section III.U);
(e) ``guaranteed governmental mortgage pool certificates,'' as
defined in 29 CFR 2510.3-101(i)(2);
(f) fractional undivided interests in any of the obligations
described in clauses (a)-(e) of this section B.(1);
(2) property which had secured any of the obligations described in
subsection B.(1);
(3) undistributed cash or temporary investments made therewith
maturing no later than the next date on which distributions are to be
made to certificateholders; and
(4) rights of the trustee under the pooling and servicing
agreement, and rights under any insurance policies, third-party
guarantees, contracts of suretyship and other credit support
[[Page 35940]]
arrangements with respect to any obligations described in subsection
B.(1).
Notwithstanding the foregoing, the term ``trust'' does not include any
investment pool unless: (i) the investment pool consists only of assets
of the type which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have
been rated in one of the three highest generic rating categories by
S&P's, Moody's, D & P, or Fitch for at least one year prior to the
plan's acquisition of certificates pursuant to this exemption, and
(iii) certificates evidencing interests in such other investment pools
have been purchased by investors other than plans for at least one year
prior to the plan's acquisition of certificates pursuant to this
exemption.
C. ``Underwriter'' means:
(1) Rothschild;
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
Rothschild; or
(3) any member of an underwriting syndicate or selling group of
which Rothschild or a person described in (2) is a manager or co-
manager with respect to the certificates.
D. ``Sponsor'' means the entity that organizes a trust by
depositing obligations therein in exchange for certificates.
E. ``Master Servicer'' means the entity that is a party to the
pooling and servicing agreement relating to trust assets and is fully
responsible for servicing, directly or through subservicers, the assets
of the trust.
F. ``Subservicer'' means an entity which, under the supervision of
and on behalf of the master servicer, services loans contained in the
trust, but is not a party to the pooling and servicing agreement.
G. ``Servicer'' means any entity which services loans contained in
the trust, including the master servicer and any subservicer.
H. ``Trustee'' means the trustee of the trust, and in the case of
certificates which are denominated as debt instruments, also means the
trustee of the indenture trust.
I. ``Insurer'' means the insurer or guarantor of, or provider of
other credit support for, a trust. Notwithstanding the foregoing, a
person is not an insurer solely because it holds securities
representing an interest in a trust which are of a class subordinated
to certificates representing an interest in the same trust.
J. ``Obligor'' means any person, other than the insurer, that is
obligated to make payments with respect to any obligation or receivable
included in the trust. Where a trust contains qualified motor vehicle
leases or qualified equipment notes secured by leases, ``obligor''
shall also include any owner of property subject to any lease included
in the trust, or subject to any lease securing an obligation included
in the trust.
K. ``Excluded Plan'' means any plan with respect to which any
member of the Restricted Group is a ``plan sponsor'' within the meaning
of section 3(16)(B) of the Act.
L. ``Restricted Group'' with respect to a class of certificates
means:
(1) each underwriter;
(2) each insurer;
(3) the sponsor;
(4) the trustee;
(5) each servicer;
(6) any obligor with respect to obligations or receivables included
in the trust constituting more than 5 percent of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of the initial issuance of certificates by the trust; or
(7) any affiliate of a person described in (1)-(6) above.
M. ``Affiliate'' of another person includes:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, partner, employee, relative (as defined
in section 3(15) of the Act), a brother, a sister, or a spouse of a
brother or sister of such other person; and
(3) Any corporation or partnership of which such other person is an
officer, director or partner.
N. ``Control'' means the power to exercise a controlling influence
over the management or policies of a person other than an individual.
O. A person will be ``independent'' of another person only if:
(1) such person is not an affiliate of that other person; and
(2) the other person, or an affiliate thereof, is not a fiduciary
who has investment management authority or renders investment advice
with respect to any assets of such person.
P. ``Sale'' includes the entrance into a forward delivery
commitment (as defined in section Q below), provided:
(1) The terms of the forward delivery commitment (including any fee
paid to the investing plan) are no less favorable to the plan than they
would be in an arm's length transaction with an unrelated party;
(2) The prospectus or private placement memorandum is provided to
an investing plan prior to the time the plan enters into the forward
delivery commitment; and
(3) At the time of the delivery, all conditions of this exemption
applicable to sales are met.
Q. ``Forward delivery commitment'' means a contract for the
purchase or sale of one or more certificates to be delivered at an
agreed future settlement date. The term includes both mandatory
contracts (which contemplate obligatory delivery and acceptance of the
certificates) and optional contracts (which give one party the right
but not the obligation to deliver certificates to, or demand delivery
of certificates from, the other party).
R. ``Reasonable compensation'' has the same meaning as that term is
defined in 29 CFR 2550.408c-2.
S. ``Qualified Administrative Fee'' means a fee which meets the
following criteria:
(1) the fee is triggered by an act or failure to act by the obligor
other than the normal timely payment of amounts owing in respect of the
obligations;
(2) the servicer may not charge the fee absent the act or failure
to act referred to in (1);
(3) the ability to charge the fee, the circumstances in which the
fee may be charged, and an explanation of how the fee is calculated are
set forth in the pooling and servicing agreement; and
(4) the amount paid to investors in the trust will not be reduced
by the amount of any such fee waived by the servicer.
T. ``Qualified Equipment Note Secured By A Lease'' means an
equipment note:
(1) which is secured by equipment which is leased;
(2) which is secured by the obligation of the lessee to pay rent
under the equipment lease; and
(3) with respect to which the trust's security interest in the
equipment is at least as protective of the rights of the trust as would
be the case if the equipment note were secured only by the equipment
and not the lease.
U. ``Qualified Motor Vehicle Lease'' means a lease of a motor
vehicle where:
(1) the trust holds a security interest in the lease;
(2) the trust holds a security interest in the leased motor
vehicle; and
(3) the trust's security interest in the leased motor vehicle is at
least as protective of the trust's rights as would be the case if the
trust consisted of motor vehicle installment loan contracts.
V. ``Pooling and Servicing Agreement'' means the agreement or
[[Page 35941]]
agreements among a sponsor, a servicer and the trustee establishing a
trust. In the case of certificates which are denominated as debt
instruments, ``Pooling and Servicing Agreement'' also includes the
indenture entered into by the trustee of the trust issuing such
certificates and the indenture trustee.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on May 22, 1995 at 60 FR
27132.
The Department notes that this exemption is included within the
meaning of the term ``Underwriter Exemption'' as it is defined in
section V(h) of the grant of the Class Exemption for Certain
Transactions Involving Insurance Company General Accounts, for which
the notice of proposed exemption was published on August 22, 1994 at 59
FR 43134.
FOR FURTHER INFORMATION CONTACT: Gary Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application are true and complete and accurately describe all material
terms of the transaction which is the subject of the exemption. In the
case of continuing exemption transactions, if any of the material facts
or representations described in the application change after the
exemption is granted, the exemption will cease to apply as of the date
of such change. In the event of any such change, application for a new
exemption may be made to the Department.
Signed at Washington, D.C., this 7th day of July, 1995.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 95-17075 Filed 7-11-95; 8:45 am]
BILLING CODE 4510-29-P
