[Federal Register Volume 60, Number 183 (Thursday, September 21, 1995)]
[Notices]
[Pages 49014-49024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23464]
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DEPARTMENT OF LABOR
[Application No. L-09927, et al.]
Proposed Exemptions; Plumbers and Steamfitters Local No. 177
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction 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, N.W., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
[[Page 49015]]
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Plumbers and Steamfitters Local No. 177, Health and Welfare Fund (the
Welfare Plan), and Plumbers and Steamfitters Local No. 177, Pension
Trust Fund (the Pension Plan; collectively, the Plans), Located in
Brunswick, Georgia
[Application Nos. L-09927, D-09928 and L-09929]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted the restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of sections 4975(c)(1) (A) through (E) of
the Code, shall not apply (1) effective February 17, 1994, to the past
sale by the Welfare Plan of an office building located in Brunswick,
Georgia (the Office Building) to Plumbers and Steamfitters Local No.
177 (the Union), a party in interest with respect to the Plans; and (2)
effective February 16, 1995, to the past and proposed leases (the
Leases) of space in the Office Building by the Union to the Plans;
provided the following conditions are satisfied:
(a) The purchase price paid by the Union for the Office Building
was no less than the fair market value of the Office Building as of the
date of the sale;
(b) All terms of the Leases are at least as favorable to the Plans
as those which the Plans could obtain in arm's-length transactions with
unrelated parties;
(c) Rents paid under the Leases do not exceed the fair market
rental values of the leased spaces;
(d) The interests of the Plans under the Leases for all purposes
are represented by a qualified independent fiduciary who monitors the
Leases and takes appropriate action to enforce the Union's compliance
with all Lease terms and conditions; and
(e) Within 60 days of the publication in the Federal Register of a
notice granting this exemption, the Union pays any excise taxes
applicable under section 4975(a) of the Code by virtue of the past
Leases for the period commencing February 17, 1994 to February 16,
1995.
EFFECTIVE DATES: This exemption, if granted, will be effective as of
February 17, 1994 with respect to the sale of the Office Building, and
February 16, 1995 with respect to the Leases.
Summary of Facts and Representations
1. The Welfare Plan is a multi-employer welfare benefit plan with
total assets of $650,788 and approximately 600 participants as of July
31, 1994. The Pension Plan is a defined contribution money purchase
pension plan, with total assets of $8,406,592, and approximately 240
participants as of December 31, 1994. The Plans are maintained pursuant
to collective bargaining agreements between the Union and employers of
members of the Union (the Employers). The Plans share the same board of
trustees (the Trustees), consisting of three representatives of the
Union and three representatives of the Employers.
2. The Office Building, located on the New Jesup Highway in
Brunswick, Georgia, was constructed in 1960 as a single-family
residence, and has been remodeled and adapted for use as a business
office facility. The Office Building has 4,550 square feet of floor
space and is situated on a 4.11 acre parcel of land. The Trustees
represent that they purchased the Office Building on behalf of the
Welfare Plan on August 1, 1985 for $168,000 from an individual
unrelated to the Plans, the Union and the Employers. Since 1985 the
Office Building has served as the site of the administrative offices of
the Welfare Plan. The Welfare Plan also shared space in the Office
Building with the Pension Plan and the Union.1
\1\The Trustees represent that the sharing of office space in
the Office Building with the Pension Plan, the apprenticeship plan
and the Union satisfied the requirements of Prohibited Transaction
Class Exemption 76-1 (PTCE 76-1, 41 FR 12740, March 26, 1976) and
Prohibited Transaction Class Exemption 77-10 (PTCE 77-10, 42 FR
33918, July 1, 1977), and, therefore, is exempt from the
prohibitions of sections 406(a) and 406(b)(2) of the Act. The
Department expresses no opinion on whether the sharing arrangements
satisfied the requirements of PTCEs 76-1 and 77-10.
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3. In early 1994 the Trustees determined that the assets of the
Welfare Plan were in need of diversification and enhanced liquidity,
and that the Office Building should be sold in order to address these
needs. After investigations into the prevailing circumstances of the
real estate market in which the Office Building is situated, the
Trustees determined to accept an offer by the Union to purchase the
Office Building from the Welfare Plan. Accordingly, on February 17,
1994, the Union purchased the Office Building from the Welfare Plan,
and the Union immediately commenced leasing space in the Office
Building to the Welfare Plan and the Pension Plan (the New Leases). The
Trustees are requesting an exemption with respect to the sale of the
Office Building to the Union and the past and proposed New Leases,
under the terms and conditions described herein.
4. The Trustees represent that their sale of the Office Building
was necessary in order to diversify the investment of the assets of the
Welfare Plan, which were invested disproportionately in real property,
and that the sale to the Union was the most advantageous means of
achieving such a sale. The Trustees represent that due to the ``soft''
conditions prevailing in the local real estate market, the Welfare Plan
could not reasonably expect to receive the full appraised fair market
value of the Office Building in an arm's length sale transaction
involving an unrelated buyer. In the sale of the Office Building to the
Union, however, the Trustees state that they succeeded in obtaining a
purchase price in the amount of the Office Building's full fair market
value as of the sale date. The Office Building was appraised by Richard
C. Friedman, SRA (Friedman), an independent professional realty
appraiser in Brunswick, Georgia, who determined that as of February 5,
1994, the Office Building had a fair market
[[Page 49016]]
value of $230,000. In accordance with Friedman's appraisal, the Union
bought the Office Building on February 17, 1994 for a cash purchase
price of $230,000. Aside from a settlement charge of $230, the Union
paid all expenses related to the sale transaction.
5. Since the Union's purchase of the Office Building, the Welfare
Plan and the Pension Plan have continued to occupy and utilize space
therein as they had done prior to the sale transaction. Effective
February 28, 1994, leases were executed on behalf of each Plan (the
Leases) providing for the Plans' lease of space in the Office Building
from the Union. Under the Leases, each Plan leases one half of the same
1,327 square feet of space in the Office Building which the Plans had
shared and utilized prior to the Union's purchase of the Office
Building from the Union, consisting of a large office, supply room,
reception area, and use of all common areas. The Union occupies and
utilizes the remaining office space in the Office Building, which
consists of an office for the Union's business manager, a general
office, meeting space, storage space, reception area, and use of all
common areas. The Plans' Leases each have an initial term of three
years, with provisions for successive three-year renewal periods under
the same terms as the initial Lease, subject to increases in the rental
amounts. Under each Lease the Union is responsible for paying all
taxes, insurance and utilities other than telephone service, and for
all repairs to the Office Building. Each Lease includes a provision
giving the Plan the unconditional right to terminate the Lease at any
time without penalty upon sixty days written notice. The interests of
the Plans for all purposes under the Leases are represented by an
independent fiduciary (the Fiduciary), described below, whose functions
include the negotiation, monitoring and enforcement of the Leases'
terms and conditions on behalf of the Plans.
6. Rent under the Leases, payable monthly, will be no more than the
fair market value of the space leased. In another appraisal of the
Office Building, Friedman determined that as of April 17, 1995, the
fair market rental value of the Office Building space leased under each
Lease was $359.40 per month, for a combined total of $718.80. In
accordance with Friedman's appraisal, initial rent under each Lease is
set at $359.40 per month. Rental during any successive renewal term(s)
will be established as follows: During the last two months of the
initial term, and thereafter during the last two months of the renewal
term, the Fiduciary shall cause the Office Building to be reappraised
for its fair market rental value, and the rental in the subsequent
renewal term, if any, shall be the newly reappraised fair rental market
of the leased space.
7. The interests of the Plans under the Leases are represented for
all purposes by the Fiduciary, Julian R. Friedman, Esq., an attorney
who represents that he is independent of the Union.2 The Fiduciary
represents that he has substantial experience with collectively-
bargained employee benefit plans and the fiduciary responsibility
provisions of the Act. Acting as a fiduciary under the Act on behalf of
the Plans, the Fiduciary will oversee the relationship between the
Union as lessor and the Plans as lessees under the Leases, and will
monitor and enforce the Union's performance of its obligations
thereunder. The Fiduciary will be responsible for securing the
appraisals required by the Leases' rental-review provisions, and for
making any adjustments in the rent in accordance with such appraisals.
The Fiduciary negotiated and prepared the Leases on behalf of the
Plans, and he states that he has determined that they are in the best
interests of the participants and beneficiaries of the Plans due to the
protective and advantageous features of the Leases. The Fiduciary also
represents that he has determined that the particular space in the
Office Building which is shared by the Plans and rented from the Union
pursuant to the Leases is sufficient and appropriate for the Plans'
operations, and that the arrangement does not have the effect of
subsidizing the Union's use of other space in the Office Building.
\2\ The Fiduciary represents that he is not related to Richard
C. Friedman, S.R.A., a real property appraiser previously referred
to in this summary of facts and representations.
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8. The Department is not proposing exemptive relief for the Leases
for any period prior to February 16, 1995, because that is the date on
which the Plans's interests under the Leases commenced to be
represented for all purposes by the Fiduciary. The Union recognizes
that the leases of the Office Building to the Plans under the Leases
for the period commencing February 28, 1994 to February 16, 1995
constituted prohibited transactions under the Act and the Code for
which no exemptive relief is proposed herein. Accordingly, as a
condition of the proposed exemption, if granted, within sixty days of
the publication in the Federal Register of a notice granting the
exemption, the Union will pay any excise taxes which are applicable
under section 4975(a) of the Code by reason of such Leases of the
Office Building for the period commencing February 28, 1994 to February
16, 1995.
9. In summary, the applicant represents that the past and proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons: (1) The sale of the Office Building was necessary to
enhance the liquidity and diversification of the assets of the Welfare
Plan; (2) The sale was a cash transaction in which the Welfare Plan
received the full appraised fair market value of the Property as of the
sale date; (3) The interests of the Plans under the Leases are
represented by the Fiduciary, who has determined that the Leases are in
the best interests and protective of the participants and beneficiaries
of the Plans, and who will monitor and enforce the Union's compliance
with all Lease terms and conditions; (4) The Plans will pay no more
than fair market rental for the space leased in the Office Building;
and (5) Each Plan has the right under each Lease to terminate the Lease
for any reason upon sixty days written notice.
FOR FURTHER INFORMATION CONTACT: Ronald Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
State Mutual Life Assurance Company of America (State Mutual) Located
in Worcester, MA
[Application No. D-10008]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).3
\3\For purposes of this exemption, reference to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of
the Code, shall not apply to (a) the receipt of common stock of State
Mutual, (b) the substitution of the common stock of Allmerica Financial
Corporation (Allmerica), State Mutual's prospective sole owner, for the
State Mutual stock, or (c) the receipt of cash or policy credits, by or
on behalf of an employee benefit plan policyholder of
[[Page 49017]]
State Mutual (the Plan), other than any policyholder which is a Plan
maintained by State Mutual or an affiliate of State Mutual for its own
employees (the State Mutual Plans)4, in exchange for such
policyholder's membership interest in State Mutual, in accordance with
the terms of a plan of reorganization (the Demutualization Plan)
adopted by State Mutual and implemented pursuant to section 19E
(Section 19E) of Chapter 175 of the Massachusetts General Laws.
\4\With the exception of the State Mutual Companies' Pension
Plan (the State Mutual Pension Plan), State Mutual is not
requesting, nor is the Department providing exemptive relief herein
with respect to the distributions of State Mutual or Allmerica
common stock to other plans that State Mutual or its affiliates
maintain for their own employees. State Mutual represents that such
stock would constitute qualifying employer securities within the
meaning of section 407(d)(5) of the Act and that section 408(e) of
the Act would apply to such distributions. In this regard, the
Department expresses no opinion on whether such distributions would
satisfy the terms and conditions of section 408(e) of the Act.
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In addition, the restrictions of section 406(a)(1)(E) and (a)(2)
and section 407(a)(2) of the Act shall not apply to the receipt and
holding, by the State Mutual Pension Plan, of employer securities in
the form of excess stock, in accordance with the terms of the
Demutualization Plan.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II. General Conditions
(a) The Demutualization Plan is implemented in accordance with
procedural and substantive safeguards that are imposed under
Massachusetts law and is subject to the review and supervision by the
Massachusetts Commissioner of Insurance (the Commissioner).
(b) The Commissioner reviews the terms of the options that are
provided to certain policyholders of State Mutual, which include, but
are not limited to the subject Plans and the State Mutual Plans (the
Eligible Policyholders), as part of such Commissioner's review of the
Demutualization Plan, and approves the Demutualization Plan following a
determination that such Demutualization Plan is not prejudicial to all
Eligible Policyholders.
(c) The Demutualization Plan is filed with the New York
Superintendent of Insurance (the Superintendent) who determines whether
the Demutualization Plan is fair and equitable to Eligible
Policyholders from New York.
(d) Each Eligible Policyholder has an opportunity to comment on the
Demutualization Plan and decide whether to vote to approve such
Demutualization Plan after full written disclosure is given such
Eligible Policyholder by State Mutual, of the terms of the
Demutualization Plan.
(e) Any election by an Eligible Policyholder which is a Plan
(including the State Mutual Plans), to receive stock, cash or policy
credits, pursuant to the terms of the Demutualization Plan is made by
one or more independent fiduciaries (the Independent Fiduciaries) of
such Plan and neither State Mutual nor any of its affiliates exercises
any discretion or provides investment advice with respect to such
election.
(f) In the case of the State Mutual Plans, where the consideration
is in the form of stock, the Independent Fiduciary--
(1) Elects the form of consideration that such Plans receive;
(2) Monitors, on behalf of such Plans, the acquisition and holding
of the stock;
(3) Makes determinations on behalf of such Plans with respect to
the voting, the continued holding or the disposition of such stock; and
(4) Disposes, in a prudent manner, shares of stock exceeding the 10
percent holding limitation of section 407(a)(2) of the Act within 90
days following its receipt by the State Mutual Pension Plan. Such
shares that are not disposed of during this initial 90 day period must
be disposed of within an additional period of 90 days.
(g) After each Eligible Policyholder entitled to receive stock is
allocated at least thirty shares of 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 State Mutual which formulas
have been approved by the Commissioner and the Superintendent.
(h) All Eligible Policyholders that are Plans participate in the
transactions on the same basis as other Eligible Policyholders that are
not Plans.
(i) 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.
(j) All of State Mutual's policyholder obligations remain in force
and are not affected by the Demutualization Plan.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``State Mutual'' means State Mutual Life Assurance
Company of America and any affiliate of State Mutual as defined in
paragraph (b) of this Section III.
(b) An ``affiliate'' of State Mutual includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with State 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 whose
name appears on the conversion date on the insurer's records as owner
of a participating policy under which there is a right to vote and
which is in full force on both the December 31 immediately preceding
the conversion date and the date the insurer's board of directors first
votes to convert to stock form. Under Massachusetts law, only such
policyholders are entitled to receive consideration in the
demutualization. Policyholders who are not Eligible Policyholders will
not receive any stock or other consideration. As used herein, the term
``Eligible Policyholder'' includes, but is not limited to, the State
Mutual Pension Plan as well as those Plans that are not sponsored by
State Mutual.
(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.
Summary of Facts and Representations
1. State Mutual is a mutual life insurance company organized under
the laws of the State of Massachusetts and maintaining its headquarters
in Worcester, Massachusetts. It is the fifth oldest life insurance
company in the United States. In asset size, State Mutual ranks among
the 20 largest mutual life insurance companies in the country. As of
December 31, 1994, State Mutual and its subsidiaries had total assets
in excess of $10.5 billion and more than $40.2 billion of individual
life insurance policies in force. State Mutual has a number of
subsidiaries and affiliates that provide a variety of financial
services to policyholders including investment management and brokerage
services. State Mutual and its investment management subsidiaries had
approximately $10.7 billion in
[[Page 49018]]
assets under management as of December 31, 1994.
As a mutual life insurance company, State Mutual has no
stockholders. Instead, policyholders of State Mutual are considered
members of the company and, in this capacity, are entitled to vote to
elect directors of State Mutual and to share in the assets of the
company upon its liquidation.
2. State Mutual is the common parent of an affiliated group of
companies. One of these companies is SMA Financial Corporation (SMA
Financial), a Massachusetts corporation which is a wholly owned, direct
subsidiary of State Mutual. SMA Financial owns 57 percent of the common
stock of Allmerica Property & Casualty Companies, Inc. (APY), a
Delaware corporation. As a majority shareholder, State Mutual exercises
management control over APY. SMA Financial also owns 100 percent of the
stock of SMA Life Assurance Company (SMA Life), a Delaware stock life
insurance company.
The stock of APY that is not held by SMA Financial is widely held
and is traded on the New York Stock Exchange. APY is the holding
company and is the common parent of an affiliated group of companies
which includes two property and casualty insurance companies--The
Hanover Insurance Company and Citizens Insurance Company of America.
State Mutual and its affiliates provide a variety of fiduciary and
other services to Plans. These services include plan administration and
related services, investment management services and securities
brokerage and related services. Many Plans for which State Mutual
provides services are also State Mutual policyholders. As of December
31, 1994, there were approximately 10,000 State Mutual insurance
policies and contracts held by pension and welfare plans.
3. State Mutual and its affiliates sponsor a number of plans for
which it is not requesting exemptive relief herein.\5\ However, one
plan, for which State Mutual has specifically requested exemptive
relief is the State Mutual Companies' Pension Plan, a defined benefit
plan. The State Mutual Pension Plan covers eligible career agents,
general agents and clerical employees of State Mutual and its
affiliates. The State Mutual Pension Plan provides retirement,
disability and death benefits to eligible participants and their
beneficiaries. The trustee of the State Mutual Pension Plan is
Mechanics Bank of Worcester, Massachusetts. The decisionmakers with
respect to investments in the State Mutual Pension Plan are members of
an investment committee consisting of State Mutual's Board of
Directors. As of December 31, 1994, the State Mutual Pension Plan had
6,187 participants. As of December 31, 1994, the State Mutual Pension
Plan had net assets available for benefits of $156,100,000.
\5\As stated previously, State Mutual believes that
distributions of stock to such Plans would constitute ``qualifying
employer securities'' within the meaning of section 407(d)(5) of the
Act and that section 408(e) of the Act would apply to such
distributions.
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4. In July 1993, State Mutual's Board of Directors authorized
management to develop a plan of demutualization whereby State Mutual
would be converted from a mutual life insurance company to a stock life
insurance company. The purposes of the Demutualization Plan are to (a)
improve State Mutual's access to the capital markets and
competitiveness in the insurance industry; (b) establish Allmerica, a
single, publicly-traded company, which will become the exclusive owner
of State Mutual and whose stock will be issued by State Mutual to
certain Eligible Policyholders as a result of the demutualization; and
(c) raise capital for State Mutual through an initial public offering
(the IPO) of the stock of the new publicly-traded company. State Mutual
has developed the Demutualization Plan and its Board of Directors
formally adopted the Demutualization Plan on February 28, 1995.
5. It is currently anticipated that the following steps will be
undertaken with respect to the implementation of State Mutual's
Demutualization Plan:
(a) The Demutualization. To become a stock life insurance company,
State Mutual will demutualize under Massachusetts law as well as under
the provisions of the Demutualization Plan. Each policyholder's
membership interest in State Mutual will be terminated. As compensation
for their membership interests, Eligible Policyholders will receive
cash, policy credits and initially, shares of State Mutual common
stock. The State Mutual common stock will be issued to First Chicago
Trust Company of New York as transfer agent on behalf of Eligible
Policyholders and exchanged in the merger described below in Step (b).
(b) Creation of Special Purpose Subsidiary. Allmerica will form a
special purpose Massachusetts subsidiary called ``Allmerica Merger
Subsidiary Inc.'' (Merger Sub). On the effective date of the
demutualization (i.e., on or before December 31, 1995), Merger Sub will
merge with and into the demutualized State Mutual pursuant to Section
19E of Massachusetts demutualization law. In the merger, Eligible
Policyholders will receive shares of Allmerica common stock in exchange
for the shares of State Mutual common stock they initially held. The
stock of Merger Sub will be converted into the only issued and
outstanding stock of State Mutual. State Mutual will then become a
wholly owned subsidiary of Allmerica.
(c) The IPO. Allmerica may sell new Allmerica stock in an
underwritten IPO, which is expected to occur on the same day as the
demutualization. At present, the size of the IPO is not known.\6\
\6\The Demutualization Plan provides that in addition to the
IPO, Allmerica may raise capital through one or more of the
following: (a) A private placement of debt securities on or prior to
the demutualization date, (b) bank borrowings on or prior to the
demutualization date or (c) a public offering of debt securities on
the demutualization date.
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(d) Contribution to the Capital of State Mutual. Following the
transactions described above, Allmerica will contribute cash raised in
the IPO to State Mutual. The Demutualization Plan requires that the
contribution be in an amount at least equal to the amount required for
State Mutual (a) to pay transaction expenses resulting from the
demutualization, (b) to pay cash and fund policy credits awarded to
Eligible Policyholders required to receive such consideration under the
terms of such Demutalization Plan and (c) to purchase assets required
for the funding of certain ``closed block'' policies.\7\ The amount of
this contribution is currently anticipated to be in excess of $100
million.
\7\According to State Mutual, the closed block is an accounting
mechanism whereby the experience on certain dividend-paying policies
and contracts of State Mutual will be accounted for separately on
State Mutual's books so that dividend scales can be revised in the
future to reflect that experience. No assets will be physically
segregated. The closed block is not set aside or deposited for the
purpose of doing business. Thus, the purpose of the closed block is
to protect the dividend expectations of such dividend-paying
policies and contracts after the effective date of the
Demutualization Plan.
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The Demutualization Plan also permits Allmerica to retain, for
general corporate purposes, amounts raised in the IPO (or by the other
transactions described above) in excess of the amount to State Mutual.
6. In addition to economic arguments raised by State Mutual in
support of the Demutualization Plan, as noted above, State Mutual
represents that its proposed conversion from a mutual life insurance
company to a stock life insurance company will give Eligible
Policyholders marketable securities, cash or policy credits in exchange
for their membership interests. State Mutual represents that the
[[Page 49019]]
demutualization will provide the flexibility to cause its non-insurance
operations to become direct holdings of an ``upstream'' holding company
and enable it to use stock options or other equity-based compensation
arrangements in order to attract and retain talented employees. State
Mutual believes these consequences of the conversion will benefit all
of its policyholders. State Mutual further explains that its insurance
policies will remain in force and policyholders will be entitled to
receive the benefits under their policies and contracts to which they
would have been entitled if the Demutualization Plan had not been
adopted.
7. State Mutual represents that Section 19E of the Massachusetts
demutualization law establishes an approval process for the
demutualization of a life insurance company organized under
Massachusetts law. Section 19E requires that the demutualization plan
be filed with, and approved by, the Massachusetts Commissioner of
Insurance. The Commissioner may approve the demutalization plan only
after notice is given to the insurer, its directors, officers,
employees and policyholders and a hearing on such plan is held. All
persons to whom notice is given have the right to appear and be heard
at the hearing and to present oral or written comments.
After the hearing, State Mutual explains that the Commissioner may
approve the demutualization plan if he determines that the plan is not
prejudicial to the insurer's policyholders or to the ``insuring
public.'' The Commissioner must also determine that the demutualization
plan conforms to the provisions of Section 19E. In pertinent part,
Section 19E requires that (a) policyholders be provided with reasonable
notice of the procedure for voting on the demutualization plan; (b)
each policyholder, in exchange for membership interests in the insurer,
is given appropriate consideration determined under a fair and
reasonable formula, which is based upon the insurer's entire adjusted
surplus; (c) unless not approved by the Commissioner, each policyholder
is given a preemptive right to acquire such policyholder's
proportionate interest in the capital stock of the insurer within a
reasonable time period; (d) shares of the insurer's stock are offered
to policyholders at a price not greater than that offered to others
under the demutualization plan; (e) each policyholder receives
consideration which may consist of cash, securities, a certificate of
contribution, additional life insurance or annuity benefits, increased
dividends or other consideration or any combination of such forms of
consideration; (f) the converted insurer's paid-in capital stock is in
an amount not less than the minimum paid-in capital stock plus the net
cash surplus required of a new domestic stock insurer authorized to
transact similar kinds of insurance business; (g) the insurer's
management has not sought to affect the number or identity of the
insurer's policyholders to be entitled to participate in the
demutualization plan, or to secure for the insurer's management, any
unfair advantage through the demutualization plan; and (h) the
classifications of management and employee groups that are offered
shares not subscribed for by policyholders in the preemptive offering
are reasonable.
Section 19E authorizes the Commissioner to employ staff personnel
and to engage outside consultants to assist the Commissioner in
determining whether a demutualization plan meets the requirements of
Section 19E and any other relevant provisions of Massachusetts law. In
the case of State Mutual, it is anticipated that the Commissioner will
retain an actuarial firm, legal advisers and an investment banking firm
as consultants, and possibly other consultants as well. A decision by
the Commissioner to approve a demutualization plan under Section 19E is
subject to judicial review in the Massachusetts courts.
In addition to being approved by the Commissioner, State Mutual
represents that the demutualization plan must be approved by the
policyholders of the insurer. In this regard, Section 19E, requires
that the policyholders be provided with notice of a meeting convened
for the purpose of voting on whether to approve the demutualization
plan. Moreover, the demutalization plan must be approved by a vote of
not less than two-thirds of the votes of the policyholders who may vote
in person, by proxy or by mail.\8\
\8\State Mutual has approximately 100,000 policyholders who are
eligible to vote on the Demutualization Plan. The voting provisions
follow the voting regulations for annual meetings of mutual
insurance companies, as set out in Chapter 175, Section 94 of
Massachusetts Insurance Law. The number of votes to which any
Eligible Policyholder is entitled will vary with the number of
policies and the amounts of insurance owned by such Policyholder. In
no case, however, may an Eligible Policyholder cast more than 20
votes.
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8. State Mutual represents that it is licensed to transact business
in all fifty states. However, only the State of New York requires that
a foreign insurance company that is planning to demutualize file a copy
of its demutualization plan with state insurance authorities. In this
regard, State Mutual explains that section 1106(i) (Section 1106(i)) of
the New York Insurance Law authorizes the Superintendent to review the
demutualization plan of a foreign life insurer licensed in New York and
to specify the conditions that the Superintendent would impose in order
for the foreign insurer to retain its New York license following its
demutualization. Specifically, Section 1106(i) requires that a foreign
life insurer licensed in New York file with the Superintendent a copy
of the demutualization plan at least 90 days prior to the earlier of
(a) the date of any public hearing required to be held on the
demutualization plan by the insurer's state of domicile, and (b) the
proposed date of the demutualization.
If, after examining the demutualization plan, the Superintendent
finds that the plan is not fair or equitable to the New York
policyholders of the insurer, the Superintendent must set forth the
reasons for his findings. In addition, the Superintendent must notify
the insurer and its domestic state insurance regulator of his findings
and his reasons for such findings and advise of any requirements he
considers necessary for the protection of current New York
policyholders in order to permit the insurer to continue to conduct
business in New York as a stock life insurer after the demutualization.
In the event the Superintendent has any objections to the
Demutualization Plan, State Mutual represents that it will amend the
Plan so that it will meet the approval of the Superintendent or
otherwise, work out a satisfactory solution with the Superintendent.
However, should the Superintendent require changes in the
Demutualization Plan that are unacceptable to the Commissioner, State
Mutual will make a decision on how to proceed.
9. Once finalized, it is expected that State Mutual's
Demutualization Plan will provide for Eligible Policyholders to
ultimately receive common stock of Allmerica,\9\ cash or policy credits
as consideration for giving up their membership interests in State
Mutual. Accordingly, State Mutual requests an administrative exemption
from the Department in order that certain of its
[[Page 49020]]
Eligible Policyholders that are Plans, including the State Mutual
Plans, may receive stock, cash or policy credits in exchange for their
membership interests in State Mutual. In addition, State Mutual
requests exemptive relief in order that the State Mutual Pension Plan,
may receive consideration in the form of stock. Because the value of
the stock to be received by the State Mutual Pension Plan will exceed
the 10 percent limitation prescribed in section 407(a)(2) of the Act by
6 percent, State Mutual requests exemptive relief so that the State
Mutual Pension Plan may continue holding stock exceeding such
limitation for a temporary, three month period.
\9\It is expected that Allmerica stock will be traded on the New
York Stock Exchange. Under the terms of the Demutualization Plan,
Allmerica is required to arrange for the listing of its stock on a
national securities exchange and to use its best efforts to maintain
such listing for as long as it is a publicly-traded company.
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10. According to the Demutualization Plan, certain Eligible
Policyholders will receive cash or policy credits in lieu of stock
under the following circumstances:
a. Cash will be received in lieu of allocable stock (1) with
respect to a policy that is known to State Mutual to be subject to a
lien (other than a policy loan made by State Mutual) or a bankruptcy
proceeding, or (2) where the Eligible Policyholder's address for
mailing purposes, as shown on the records of State Mutual, is located
outside the United States of America, or (3) where the Eligible
Policyholder has made an affirmative election, on a form provided to
such Eligible Policyholder by State Mutual, to receive cash in lieu of
stock. (If no such preference is expressed under Item 3, the Eligible
Policyholder will receive stock.\10\
\10\Under the Demutualization Plan, Eligible Policyholders who
receive their entire consideration in the form of Allmerica common
stock were asked to express a preference for cash in lieu of stock,
should funds become available. However, these ``cash elections'' are
restricted by a number of factors. First, a limited amount of cash
will be available to pay all such cash elections (currently
estimated at $24 million). Second, all Eligible Policyholders
actually receiving cash pursuant to cash elections will receive
their entire consideration in the form of cash. Third, to the extent
the available cash is insufficient to satisfy all cash elections,
the cash elections of Eligible Policyholders allocated the fewest
number of shares will be satisfied first. Fourth, if State Mutual is
unable to pay cash to Eligible Policyholders allocated the fewest
number of shares who have expressed a cash preference, no cash
payments (other than mandatory cash payments) will be made.
Accordingly, on the effective date of the Demutualization Plan,
State Mutual, with the approval of the Commissioner, will allocate
an amount to make cash elections. Such cash will be applied first to
pay the entire consideration of those Eligible Policyholders
allocated the fewest number of shares, if all such requests for cash
may be satisfied. Thereafter, State Mutual will continue to apply
the allocated cash to pay the entire consideration of each Eligible
Policyholder requesting cash at higher share allocations until such
allocated cash is exhausted. After the allocated cash is exhausted,
each Eligible Policyholder whose request cannot be satisfied will
receive his or her entire consideration in the form of stock. Thus,
Eligible Policyholders electing cash will receive either stock or
cash but not both.
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b. Policy credits will be received in lieu of stock allocable to
any policy that is (1) an individual retirement annuity contract within
the meaning of section 408 of the Code, (2) a tax sheltered annuity
contract within the meaning of section 403(b) of the Code, (3) an
individual annuity contract that has been issued pursuant to a plan
qualified under section 401(a) of the Code directly to the plan
participant, or (4) an individual life insurance policy that has been
issued pursuant to a plan qualified under section 401(a) of the Code
directly to the plan participant.
The cash or policy credits will have a value equal to the stock
such policyholders would otherwise have received, based on the price
per share of Allmerica stock in the IPO which is expected to occur at
the time of the demutualization. Any election by a Plan, including the
State Mutual Plans, to receive stock or cash pursuant to the terms of
the Demutualization Plan, will be made by one or more fiduciaries of
such Plan which is independent of State Mutual.\11\ In addition,
neither State Mutual nor any of its affiliates may exercise discretion
or provide investment advice with respect to such election. Further, no
Eligible Policyholder will pay any brokerage commissions or fees in
connection with their receipt of stock.\12\
\11\State Mutual represents that under paragraph 5 of Section
19E of Massachusetts Insurance Law, the policyholder eligible to
participate in the distribution of stock, cash, policy credits or
other consideration resulting from the Demutualization Plan is ``the
person whose name appears . . . on the insurer's records as owner''
of the policy. State Mutual further represents that an insurance or
annuity policy that provides benefits under an employee benefit
plan, typically designates the employer that sponsors the plan, or a
trustee acting on behalf of the plan, as the owner of the policy. In
regard to insurance or annuity policies that designate the employer
or trustee as owner of the policy, State Mutual asserts that it is
required under Massachusetts Insurance Law to make distributions
resulting from the Demutualization Plan to the employer or trustee
as owner of the policy, with the following exception. Specifically,
the Demutualization Plan provides that where group policies or
annuities have been issued to a trust established by State Mutual
for an employee benefit plan, the employer will be deemed to be the
owner of such policy if the employer plan or policy has adopted the
master trust to which the policy is issued. The trustee of any such
trust established by State Mutual will not be considered a
policyholder or owner.
In general, it is the Department's view that, if an insurance
policy (including an annuity contract) is purchased with assets of
an employee benefit plan, and if there exist any participants
covered under the plan (as defined at 29 CFR 2510.3-3) at the time
when State Mutual incurs the obligation to distribute stock, cash,
policy credits or other compensation, then such consideration would
constitute an asset of such plan. Under these circumstances, the
appropriate plan fiduciaries must take all necessary steps to
safeguard the assets of the plan in order to avoid engaging in a
violation of the fiduciary responsibility provisions of the Act.
\12\Under current provisions of the Demutualization Plan,
Eligible Policyholders who receive stock or, for that matter, any
other form of consideration, will not be entitled to receive
subscription rights to purchase additional stock. Under Section 19E
of Massachusetts Insurance Law, the Commissioner has the authority
to approve a plan which provides for no preemptive rights.
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The stock allocated to Eligible Policyholders will be allocated
among them by providing at least thirty shares for each such
Policyholder. This number is, however, subject to proportional
adjustment. Any remaining stock will be allocated substantially on the
basis of the contributions to surplus made by each such Policyholder's
in force participating policies. The allocation methodology must be
fair and reasonable and approved by the Commissioner. The allocation
formulas are also subject to review by the Superintendent.
11. State Mutual notes that the proposed receipt of stock by the
State Mutual Pension Plan would violate section 406(a)(1)(E) of the Act
because the receipt of such stock would be in violation of section
407(a)(2) of the Act, which prohibits the acquisition by a plan of any
qualifying employer security if immediately after such acquisition, the
aggregate fair market value of such securities exceeds 10 percent of
the fair market value of the plan's assets. State Mutual represents
that the stock, which will be a ``qualifying employer security''
represent approximately 16 percent of the assets of the State Mutual
Pension Plan after its acquisition and thus will exceed the 10 percent
limitation of section 407(a)(2) of the Act. Accordingly, State Mutual
represents that the statutory exemptive relief contained in section
408(e) of the Act will not apply to the acquisition and holding of the
stock by the State Mutual Pension Plan. Thus, State Mutual requests
administrative exemptive relief from the Department. State Mutual
further notes that the holding of stock by the State Mutual Pension
Plan will not violate the provisions of section 407(f) of the Act.
12. State Mutual represents that pursuant to a Retainer Agreement
and an Indemnification Agreement, both of which are dated March 27,
1995 (collectively, the Engagement Agreements), it has retained the
services of State Street Bank and Trust Company (State Street) of
Quincy, Massachusetts to serve, on behalf of the State Mutual Pension
Plan and the other State Mutual Plans, as the Independent Fiduciary
[[Page 49021]]
(and also investment manager). Specifically, State Street represents
that it has been retained to consider, on behalf of the State Mutual
Plans, whether to approve the proposed transactions and, if so
approved, whether to receive consideration in the form of stock or
cash. To assist State Street in carrying out its fiduciary
responsibilities under the Engagement Agreements, State Street has
retained Whitman Heffernan Rhein & Co. (WHR & Co.), as its independent
financial adviser, and Paul, Weiss, Rifkind, Wharton & Garrison (Paul
Weiss), as its independent legal counsel.
State Street represents that it is one of the largest trust
companies in the United States with over $170 billion in assets under
management, a significant percentage of which consists of pension plan
assets. State Street also represents that it has served as an
independent fiduciary for numerous retirement plans that acquire or
hold employer securities and has managed, at various times, over $20
billion in employer securities held by various retirement plans. In
managing such investments, State Street states that it has supervised
numerous transactions involving the acquisition, retention and
disposition of employer securities. Further, State Street explains that
it monitors the performance of the employer securities it manages on a
continuing basis.
State Street represents that it has the following de minimus
business relationships with State Mutual:
(a) Its Insurance Division provides various services to several
retained asset accounts of State Mutual and/or various subsidiaries of
State Mutual. Revenue received by State Street for these services in
1994 totaled approximately $52,000.
(b) It serves as an investment manager for fixed income investment
funds of defined contribution plans. Currently, it manages
approximately $6 billion in fixed income securities. Approximately $84
million of that is invested, on behalf of various clients, in
guaranteed investment contracts issued by State Mutual. Revenue
received in 1994 by State Street for the investment in these contracts
totaled less than $10,000.
(c) It provides master trust and custody services to various
pension plans. Some of these plans may invest in guaranteed investment
contracts issued by State Mutual. It also serves as a directed trustee/
custodian to these plans and receives no revenue from the investment in
these contracts. State Street receives a trust/custody fee based on the
total value of the plan, irrespective of the investments.
(d) It has voting and/or dispositive control over 221,800 shares of
Allmerica stock.
State Street also explains that it had revenues in 1994 of over
$981 million. However, State Street points out that all revenues and
fees that were associated with State Mutual represented less than one-
hundredth of one percent of State Street's total revenues.
In addition, State Street represents that none of its officers or
directors is an officer or director of State Mutual or vice versa.
Further, State Street represents that State Mutual does not have an
ownership interest in State Street and State Street does not have an
ownership interest in State Mutual except for the relationships
described above.
As the Independent Fiduciary for the State Mutual Plans, State
Street represents that it understands and acknowledges its duties,
responsibilities and liabilities under the Act as a fiduciary for such
Plans. In this regard, State Street asserts that it will have the
authority and responsibility to monitor the acquisition and holding of
the stock that is received by the State Mutual Plans. State Street also
represents that it will be authorized to dispose, in a prudent manner,
shares of the stock that is held by the State Mutual Pension Plan which
exceeds the 10 percent limitation imposed by section 407(a)(2) of the
Act. Such disposition will take place within 90 days of the receipt of
the stock by the State Mutual Pension Plan. If, however, State Street
is unable to dispose of the stock following the initial 90 day period,
it will sell the stock within the following 90 day period. Therefore,
State Street must dispose of all shares of excess stock that are held
by the State Mutual Pension Plan within 180 days of receipt.
State Street also asserts that it will act as the Independent
Fiduciary for both the State Mutual Plans with respect to the
policyholder vote and decisions to be made by such plans as to the form
of consideration. Moreover, State Street explains that it will monitor
the proposed transactions throughout their duration on behalf of these
Plans and take all actions that are necessary and proper to safeguard
the interests of such Plans.
State Street represents that the proposed transactions are prudent
for the State Mutual Plans and in the best interests of such Plans'
participants and beneficiaries. State Street notes that the
consummation of the proposed transactions is conditioned upon approval
by Eligible Policyholders of State Mutual as well as the other
conditions set forth in the Demutualization Plan (including the receipt
of state regulatory approval). As a general matter, however, State
Street explains that its determination that the proposed transactions
are appropriate for the State Mutual Plans is based upon an economic
analysis of the consideration to be acquired by such Plans. In this
connection, State Street represents that WHR & Co. has performed a
comprehensive analysis of State Mutual in the context of prevailing
market conditions and has concluded that for each State Mutual Plan,
the proposed consideration to be received is fair to such plan from a
financial point of view. In reaching this conclusion, State Street
indicates that WHR & Co. has performed various activities such as
reviewing annual reports prepared by State Mutual and its affiliates,
conducting discussions with senior management of State Mutual and
Allmerica and reviewing the Demutualization Plan and portions of the
Policyholder Information Statement. In addition, State Street
represents that it has conducted its own due diligence which included a
review of all available policyholder information, a review of all
relevant Plan information, interviews with management and attending
policyholder meetings and public hearings relating to the proposed
transaction. Finally, State Street asserts that its fiduciary committee
met and determined, based on presentations from WHR & Co., Paul Weiss,
corporate counsel and other bank management officials, that the
transactions would be in the best interests of all of the State Mutual
Plans and their participants and beneficiaries. Accordingly, State
Street has directed the appropriate fiduciaries to approve the proposed
transactions.
13. The Demutualization Plan provides for the establishment of a
commission-free sales program whereby Eligible Policyholders will be
permitted to sell the stock they have received pursuant to the
Demutualization Plan in the public market. The commission-free sales
program will commence on the first business day after the six month
anniversary of the effective date of the demutualization and will
continue for ninety days thereafter. The program may be extended with
the approval of the Commissioner, if the Board of Directors of
Allmerica determines such extension would be appropriate and in the
best interest of Allmerica and its stockholders. In the commission-free
sales program, any Eligible Policyholder receiving fewer than one
hundred shares of stock will have the opportunity to sell, at
prevailing market prices, all of the stock or to increase
[[Page 49022]]
such Eligible Policyholder's holdings to a one hundred share round lot.
No brokerage commissions, mailing charges, registration fees or other
administrative expenses will be charged in connection with either the
demutualization or with sales or purchases of stock under the
commission-free sales program.
14. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Demutualization Plan will be implemented in accordance with
procedural and substantive safeguards that are imposed under
Massachusetts law and will be subject to the review and supervision by
the Commissioner.
(b) The Commissioner will review the terms of the options that are
provided to Eligible Policyholders of State Mutual as part of such
Commissioner's review of the Demutualization Plan, and will approve the
Demutualization Plan following a determination that such
Demutualization Plan is not prejudicial to all Eligible Policyholders.
(c) The Demutualization Plan will be filed with the New York
Superintendent who will determine whether the Demutualization Plan is
fair and equitable to Eligible Policyholders from New York.
(d) Each Eligible Policyholder will have an opportunity to comment
orally or in writing on the Demutualization Plan and decide whether to
vote to approve in writing such Demutualization Plan after full written
disclosure is given such policyholder by State Mutual, of the terms of
the Demutualization Plan.
(e) Any election by an Eligible Policyholder which is a Plan to
receive stock, cash or policy credits, pursuant to the terms of the
Demutualization Plan will be made by one or more Independent
Fiduciaries of such plan and neither State Mutual nor any of its
affiliates will exercise any discretion or provides investment advice
with respect to such election.
(f) In the case of the State Mutual Plans, where the consideration
is in the form of stock, an Independent Fiduciary will (1) monitor, on
behalf of such Plans, the acquisition and holding of the stock; (2)
make determinations, on behalf of such Plans, with respect to the
voting, the holding or the disposition of such stock, and (3) dispose,
in a prudent manner, on behalf of the State Mutual Pension Plan, stock
that exceeds the 10 percent limitation under section 407(a)(2) of the
Act within 90 days following its receipt; however, if there are any
shares of excess stock remaining after the initial period, the
Independent Fiduciary will have an additional 90 days to sell such
stock.
(g) After each Eligible Policyholder is allocated at least thirty
shares of stock, additional consideration allocated to Eligible
Policyholders who own participating policies will be based on actuarial
formulas that take into account each participating policy's
contribution to the surplus of State Mutual which formulas have been
approved by the Commissioner and reviewed by the Superintendent.
(h) All Plans that are Eligible Policyholders, including the State
Mutual Plans and the State Mutual Pension Pension Plan, will
participate in the transactions on the same basis as other Eligible
Policyholders that are not Plans.
(i) No Eligible Policyholder will pay any brokerage commissions or
fees in connection with such Eligible Policyholder's receipt of stock
or in connection with the implementation of the commission-free sales
program.
(j) All of State Mutual's policyholder obligations will remain in
force and will not be affected by the Demutualization Plan.
Notice to Interested Persons
State Mutual will provide notice of the proposed exemption to
Eligible Policyholders which include Plans and the State Mutual Plan
within 5 days of the publication of the notice of pendency in the
Federal Register. Such notice will be provided to interested persons by
first class mail and will include a copy of the notice of proposed
exemption as published in the Federal Register. The notice will also
inform interested persons of their right to comment on the proposed
exemption and/or to request a hearing. Comments with respect to the
notice of proposed exemption are due within 35 days after the date of
publication of this exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Michael Elkin Individual Retirement Account (the IRA), Located in New
York, New York
[Application No. D-10022]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (E) of the Code, shall not apply to
the proposed purchase for cash of a certain limited partnership
interest in the Medallion Fund (the Interest) by the IRA from Michael
Elkin, a disqualified person with respect to the IRA,13 provided
the following conditions are met:
\13\Pursuant to 29 CFR 2510.3-2(d), there is no jurisdiction
with respect to the IRA under Title I of the Act. However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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(a) The purchase is a one-time transaction for cash;
(b) The terms and conditions of the purchase are at least as
favorable to the IRA as those obtainable in an arm's-length transaction
with an unrelated party;
(c) The IRA pays no more than the fair market value of the
Interest, as established by an independent qualified appraiser at the
time of the transaction;
(d) The IRA is not required to pay any commissions, costs or other
expenses in connection with the transaction; and
(e) The fair market value of the Interest is based on an
independent valuation of the total net asset value of the Fund and does
not represent more than 25% of the total assets of the IRA at the time
of the transaction.
Summary of Facts and Representations
1. The IRA is an individual retirement account, as described under
section 408(a) of the Code, which was established by Michael Elkin (Mr.
Elkin). As of March 31, 1995, the IRA had assets valued at $330,286.
The trustee of the IRA is the Independent Trust Corporation, located at
15255 S. 94th Avenue, Orland Park, Illinois.
2. Mr. Elkin owns a limited partnership interest in the Medallion
Fund (the Fund). Mr. Elkin's interest in the Fund had a net asset value
of $251,854 as of April 30, 1995. The total net asset value of the Fund
was $585,910,089, as of April 30, 1995. Thus, Mr. Elkin states that his
interest in the Fund represented less than 1/20 of one (1) percent of
the total net asset value of the Fund as of such date.
3. The Fund is an investment fund established on April 1, 1988,
which was organized as an exempted limited partnership under the laws
of the Islands of Bermuda. The Fund was formed for the purpose of
investing in commodities of various types (i.e. foodstuffs, metals,
industrial raw materials, etc.), commodity futures contracts, financial
futures contracts (including stock index futures contracts), forward
contracts, as well as
[[Page 49023]]
options to purchase or sell any of the foregoing financial instruments.
Assets of the Fund not on deposit with brokers are invested principally
in U.S. Treasury Bills held at the Bank of New York, checking accounts
held at other major banks in the United States, and short-term
commercial paper with a minimum rating of A-1 or P-1 by Moody's
Investors Service.
Interests in the Fund are not registered under the Securities Act
of 1933 (the Securities Act), the Investment Company Act of 1940, or
the securities laws of any of the States of the United States. Mr.
Elkin states that he purchased his interest in the Fund as part of an
offering that was made in reliance upon an exemption from the
registration requirements of the Securities Act for a sale of
securities which does not involve a public offering, and analogous
exemptions under state securities laws. However, Mr. Elkin represents
that the Fund otherwise is fully registered with the appropriate U.S.
regulatory authorities and complies with various state ``blue sky''
laws, as discussed in the Fund's Information Memorandum. Mr. Elkin also
represents that the Fund fully complies with U.S. tax laws. In this
regard, the Fund files U.S. tax returns and provides all investors
(i.e. partners) with K-1 information returns so that such investors can
include their proportionate income in their personal tax returns.
The Information Memorandum for the Fund indicates that interests in
the Fund are subject to substantial restrictions on transferability.
However, certain transfers of Fund interests to relatives or other
entities are permissible under the terms of the Fund. In addition,
limited partners of the Fund may redeem all or part of their interests
in the Fund at the end of each calendar quarter on ten days notice.
Limited partners may also make, with permission of the managing
general partner, additional capital contributions to the Fund on the
first day of any calendar quarter. Each limited partner's respective
liability for the Fund's debts and other obligations is limited to the
balances in such partner's capital account. The Fund's limited partners
are under no obligation to make additional capital contributions to the
Fund.
4. The managing general partner of the Fund is Medallion Limited,
located at 3 Reid Street, Hamilton, Bermuda. The applicant states that
the individuals who are officers of Medallion Limited, Norman J.
Holbrow (President) and Jan J. Spiering (Vice President), have no
relationship to Mr. Elkin or any of his affiliates.
The investment general partner of the Fund is the Renaissance
Technologies Corporation (Renaissance), a corporation organized under
the laws of the State of Delaware with its principal offices located at
800 Third Avenue, New York, New York. The Information Memorandum for
the Fund states that Renaissance has been registered with the Commodity
Futures Trading Commission (CFTC) as both the commodity pool operator
and commodity trading adviser (CTA) of the Fund since July 6, 1988 and
April 2, 1991, respectively. The applicant represents that since
Renaissance is registered with the CFTC as a commodity pool operator
and a CTA, the Fund is subject to the same regulatory regimen as any
U.S. based commodity partnership. Mr. Elkin also states that he is
independent of and unrelated to Renaissance and its affiliates.
5. The applicant proposes to have the IRA invest approximately
$75,000 to purchase part of Mr. Elkin's interest in the Fund (i.e. the
Interest). The IRA would purchase the Interest directly from Mr. Elkin
for cash. The applicant represents that the proposed transaction would
be permissible under the terms of the Fund as they relate to the
restrictions on the transferability of a limited partner's interests in
the Fund. The IRA would pay no more than the fair market value of the
Interest as established by an independent, qualified appraiser (as
described below in Paragraph 7). The IRA would not pay any commissions
or other expenses in connection with the transaction.
Mr. Elkin states that the proposed purchase of the Interest for
$75,000 would involve approximately 22% of the total assets of the IRA.
Mr. Elkin states further that the proposed transaction will not exceed
the lesser of either $75,000 or 25% of the IRA's total assets at the
time of the transaction (see Paragraph 7 below). After the purchase of
the Interest by the IRA, the IRA would own approximately 1/60 of one
(1) percent of the Fund, based on recent quarterly valuations for the
Fund.14 Mr. Elkin would continue to own the balance of his current
interest in the Fund.
\14\ The applicant represents that the Fund's assets are not
considered to be ``plan assets'' under the Department's regulations
defining that term for purposes of plan investments because
investments in the Fund by benefit plan investors are not
significant (see 29 CFR 2510.3-101). In this regard, the Information
Memorandum for the Fund states that it is the intention of the Fund
to ensure that all types of plan investors collectively will own
less than 25 percent of the outstanding interests in the Fund. The
Department expresses no opinion in this proposed exemption as to
whether the assets held by the Fund would be considered ``plan
assets'' under the Department's regulations.
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6. Mr. Elkin states that the Fund has exhibited superior investment
performance over the last year. Mr. Elkin believes that an investment
in the Fund by the IRA would represent an excellent opportunity for the
IRA to achieve a high rate of return. Mr. Elkin states that the
proposed purchase of the Interest by the IRA would be consistent with
his investment strategy for the IRA's assets. In this regard, Mr. Elkin
maintains that his primary goal for the assets of the IRA that would be
involved in the proposed transaction is growth of capital, despite the
higher degree of risk involved with such an investment.15 Mr.
Elkin represents that he has reviewed information regarding investment
funds similar to the Fund and believes that the Fund offers a better
prospect for achieving superior returns on capital invested than other
such funds.
\15\The Department notes that the Internal Revenue Service has
taken the view that if a plan is exposed to the risk of large losses
because of the speculative nature of investments made by the plan,
such an investment strategy may raise questions in regard to the
exclusive benefit rule under section 401(a) of the Code. For
example, see Rev. Rul. 73-532, 1973-2 C.B. 128, which states, among
other things, that the safeguards and diversity that a prudent
investor would adhere to must be present in order for the
``exclusive-benefit-of-employees'' requirement to be met. The
Department notes further that section 408(a) of the Code, which
describes the tax qualification provisions for IRAs, also contains
an exclusive benefit rule for an individual and his or her
beneficiaries. However, the Department is expressing no opinion in
this proposed exemption regarding whether violations of section
408(a) of the Code would occur as a result of an IRA's acquisition
of investments that may be speculative in nature, such as the
proposed purchase of a partnership interest in a fund which invests
in exchange-traded futures contracts as well as forward contracts
and options relating to such financial instruments.
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7. Kempe & Whittle Associates Limited (KWAL), the administrators
for the Fund, will act as an independent, qualified appraiser to
establish the fair market value of the Interest for purposes of the
proposed transaction. KWAL is responsible for the maintenance of the
Fund's books and records and for the preparation of the Fund's
financial statements, annual reports, and monthly reports to investors.
In addition, KWAL determines the total net asset value of the Fund on a
quarterly basis for purposes of any redemptions of limited partnership
interests by partners in the Fund at that time. KWAL states that a
limited partnership interest in the Fund is equal to a partner's share
of the Fund's total net asset value on such date.
Therefore, Mr. Elkin proposes to have the IRA purchase the Interest
from
[[Page 49024]]
himself at an amount equal to the total net asset value which the
Interest would represent, as established by KWAL, as of the end of the
next calendar quarter following the granting of this proposed
exemption, provided that such amount does not exceed the lesser of
either $75,000 or 25% of the IRA's total assets at the time of the
transaction.
8. In summary, the applicant represents that the proposed
transaction would satisfy the statutory criteria of section 4975(c)(2)
of the Code because: (a) The terms and conditions of the purchase will
be at least as favorable to the IRA as those obtainable in an arm's-
length transaction with an unrelated party; (b) the purchase will a
one-time cash transaction which will allow the IRA to acquire an asset
which, in the applicant's view, has the prospect for superior
investment returns; (c) the IRA will pay no more than the fair market
value of the Interest, as established by an independent, qualified
appraiser at the time of the transaction; (d) the IRA will not pay any
commissions or other expenses in connection with the transaction; (e)
the fair market value of the Interest will be based on an independent
valuation of the total net asset value of the Fund and will not
represent more than 25% of the total assets of the IRA at the time of
the transaction; and (f) Mr. Elkin has determined that the proposed
transaction will be in the best interests of the IRA.
NOTICE TO INTERESTED PERSONS: Because Mr. Elkin is the only participant
in the IRA, 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 thirty (30) days after publication of
this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. E. F. Williams of the Department,
telephone (202) 219-8194. (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 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 18th day of September, 1995.
Ivan Strasfeld,
Director of Exemption Determinations Pension and Welfare Benefits
Administration U.S. Department of Labor.
[FR Doc. 95-23464 Filed 9-20-95; 8:45 am]
BILLING CODE 4510-29-P
