[Federal Register Volume 76, Number 12 (Wednesday, January 19, 2011)]
[Notices]
[Pages 3165-3174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-974]
[[Page 3165]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction
Restrictions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code). This notice includes the
following proposed exemptions: D-11580, Robert W. Baird & Co.
Incorporated and its Current and Future Affiliates and subsidiaries
(collectively, Baird); and D-11611, Security Benefit Mutual Holding
Company (MHC) Benefit Life Insurance Company (SBL, and together with
the Applicants), et al.
DATES: All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice.
ADDRESSES: Comments and requests for a hearing should state: (1) The
name, address, and telephone number of the person making the comment or
request, and (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
All written comments and requests for a hearing (at least three
copies) should be sent to the Employee Benefits Security Administration
(EBSA), Office of Exemption Determinations, Room N-5700, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No.------, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
[email protected], or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
SUPPLEMENTARY INFORMATION:
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).
The proposed exemptions were requested in applications filed
pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the
Code, and in accordance with procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990). Effective December 31,
1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1
(1996), transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor.
Therefore, these notices of proposed exemption are issued solely by the
Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Robert W. Baird and Co. Incorporated and Its Current and Future
Affiliates and Subsidiaries (Collectively, Baird), Located in
Milwaukee, Wisconsin
[Application No. D-11580]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal
Revenue Code and in accordance with the procedures set forth in 29 CFR
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Transactions
If the proposed 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, effective October 9, 2009, to the
cash sale (the Sale) by a Plan (as defined in Section II(d)) of an
Auction Rate Security (as defined in Section II(b)) to Baird, provided
that the following conditions are met: \1\
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\1\ For purposes of this proposed exemption, references to
section 406 of ERISA to refer as well to the corresponding
provisions of section 4975 of the Code.
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(a) The Sale was a one-time transaction made on a delivery versus
payment basis in the amount described in paragraph (b);
(b) The Plan received an amount equal to par value of the Auction
Rate Securities (the ARS or the Securities) plus accrued but unpaid
income (interest or dividends, as applicable) as of the date of the
Sale;
(c) The last auction for the Securities was unsuccessful;
(d) The Sale was made in connection with a written offer (the
Offer) by Baird containing all of the material terms of the Sale;
(e) The Plans did not bear any commissions or transaction costs
with respect to the Sale;
(f) The decision to accept the Offer or retain the Auction Rate
Security was made by a Plan fiduciary or Plan participant or an
individual retirement account (an IRA (as defined in Section II(d))
owner who is independent (as defined in Section II(c)) of Baird.
Notwithstanding the foregoing, in the case of an IRA which is
beneficially owned by an employee, officer, director or partner of
Baird, the decision to accept the Offer or retain the Auction Rate
Security may be made by such employee, officer, director or partner if
all of the other conditions of this Section I have been met;
(g) The Plan does not waive any rights or claims in connection with
the Sale;
(h) The Sale is not part of an arrangement, agreement or
understanding designed to benefit a party in interest with respect to
the Plan;
(i) If the exercise of any of Baird's rights, claims or causes of
action in
[[Page 3166]]
connection with its ownership of the Securities results in Baird
recovering from the issuer of the Securities, or any third party, an
aggregate amount that is more than the sum of:
(1) The purchase price paid to the Plan for the Securities by
Baird; and
(2) The income (interest or dividends, as applicable) due on the
Securities from and after the date Baird purchased the Securities from
the Plan, at the rate specified in the respective offering documents
for the Securities or determined pursuant to a successful auction with
respect to the Securities, Baird will refund such excess amount
promptly to the Plan (after deducting all reasonable expenses incurred
in connection with the recovery);
(j) Neither Baird nor any affiliate exercises investment discretion
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to the decision to accept the written Offer or
retain the Security (unless the Sale involves an IRA whose owner is an
employee, officer, director or partner of Baird);
(k) Baird and its affiliates, as applicable, maintain, or cause to
be maintained, for a period of six (6) years from the date of the Sale
such records as are necessary to enable the person described below in
paragraph (l)(i), to determine whether the conditions of this proposed
exemption, if granted, have been met, except that--
(i) No party in interest with respect to a Plan which engages in a
Sale, other than Baird and its affiliates, shall be subject to a civil
penalty under section 502(i) of the Act or the taxes imposed by section
4975(a) and (b) of the Code, if such records are not maintained, or not
available for examination, as required, below, by paragraph (l)(i);
(ii) A separate prohibited transaction shall not be considered to
have occurred solely because due to circumstances beyond the control of
Baird, such records are lost or destroyed prior to the end of the six-
year period.
(l)(i) Except as provided, below, in paragraph (l)(ii), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to, above, in paragraph (k) are
unconditionally available at their customary location for examination
during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(B) Any fiduciary of any Plan that engages in the covered
transactions, or any duly authorized employee or representative of such
fiduciary;
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a Plan that engages in the
covered transactions, or any authorized employee or representative of
these entities; or
(D) Any IRA owner, participant or beneficiary of a Plan that
engages in the Sale, or duly authorized representative of such IRA
owner, Plan participant or beneficiary;
(ii) None of the persons described, above, in paragraph (l)(i)(B)-
(D) shall be authorized to examine trade secrets of Baird, or
commercial or financial information which is privileged or
confidential; and
(iii) Should Baird refuse to disclose information on the basis that
such information is exempt from disclosure, Baird shall, by the close
of the thirtieth (30th) day following the request, provide a written
notice advising that person of the reasons for the refusal and that the
Department may request such information.
Section II. Definitions
(a) The term ``affiliate'' of another person means: Any person
directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such other
person;
(b) The term ``Auction Rate Security'' means a security:
(1) That is either a debt instrument (generally with a long-term
nominal maturity) or preferred stock; and
(2) with an interest rate or dividend that is reset at specific
intervals through a ``Dutch Auction'' process.
(c) The term ``Independent'' means a person who is not Baird or an
affiliate (as defined in Section II(a)).
(d) The term ``Plan'' means an individual retirement account or
similar account described in section 4975(e)(1)(B) through (F) of the
Code (an IRA); or an employee benefit plan as defined in section 3(3)
of the Act.
Effective Date: If this proposed exemption is granted, it will be
effective October 9, 2009.
Summary of Facts and Representations
1. Founded in 1919, Robert W. Baird & Co. Incorporated (``Baird'')
is an employee-owned wealth management, capital markets, asset
management and private equity firm. With its headquarters in Milwaukee,
Wisconsin, Baird has offices in the United States, Europe and Asia.
Baird is a registered broker-dealer under the Securities Exchange Act
of 1934 and a member of the Financial Industry Regulatory Authority.
Baird is also a federally registered investment adviser. It provides
trade execution, custody and other standard brokerage services, as well
as investment advice and asset management services to individual,
trust, institutional, corporate and other clients, including pension,
profit-sharing and retirement plans and accounts.
2. In October 2009, Baird communicated in writing to its clients,
including the Plans, its offer (the Offer) to purchase certain auction
rate securities (i.e., the Securities) for an amount equal to the par
value of the applicable Security, plus any accrued and unpaid income
(interest or dividends, as applicable) thereon. The purchase
transactions occurred on the first regular auction date for the
applicable Security that followed the Plan's submission to Baird of its
written acceptance of the Offer.
3. The Plans that have so far purchased the Securities from Baird
pursuant to the Offer include sixty-six Individual Retirement Accounts
(IRAs), subject to section 4975 of the Code, for which Baird serves as
a nonbank custodian or trustee.
4. Baird represents that the Securities are debt or preferred
equity auction rate securities issued with an interest or dividend rate
that is reset on a regular basis (generally between every 7 and 35
days) through a ``Dutch Auction'' process. Historically, by means of
such auction process, the interest or dividend rate was periodically
adjusted to a level at which demand for the Security depleted the
available supply at a purchase price equal to the par value of the
Securities. In this way, the auctions served as a form of secondary
market for the Securities, by providing liquidity at par on a regular,
periodic basis to any holder who wished to sell the Securities. The
applicant represents that the Securities were frequently purchased by,
or for the benefit of, clients seeking a reasonable short-term return
and a high degree of liquidity.
5. If an auction for one of the Securities fails (e.g., because
there is insufficient demand for the Security), the interest or
dividend rate will be reset to the ``maximum rate'' or ``failed auction
rate'' (in either case, ``default rate'') for that Security as
specified in the offering documents for such Security. In some cases,
the default rate changes from time to time as specified in the relevant
documents.
6. Baird states that auctions for the Securities have failed
consistently since approximately February, 2008. In addition, because
the auctions have failed consistently since February, 2008 and given
the absence of any other
[[Page 3167]]
meaningful secondary market for the Securities, the Securities no
longer provide the liquidity that had been anticipated when they were
acquired. The proposed exemption, if granted, will be retroactive to
October 9, 2009, the date of the written Offer by Baird to acquire the
Securities from the Plans.
7. Baird represents that the Securities that were held by the IRAs
were issued by a variety of issuers.
8. Generally, the IRAs purchased the Securities through Baird or
another broker-dealer.
9. Baird states that the terms of the Offer expressly provided that
a client is not obligated to sell Securities and must affirmatively
agree to enter into a sale of Securities to Baird, (i.e., a Sale).
Baird represents that any IRA's decision to sell the Securities to
Baird pursuant to its Offer has been made by the IRA owner.
10. Baird estimates that the total aggregate par value plus accrued
and unpaid income (interest or dividends, as applicable) thereon for
Securities held by the IRAs represent $8.125 million.
11. Baird represents that the Sale of the Securities by an IRA
benefited the IRA because of the IRA's inability to sell the Securities
at par as a result of continuing failed auctions. In addition, Baird
states that each transaction was a one-time Sale for cash in connection
with which such IRA did not bear any brokerage commissions, fees or
other expenses.
12. Baird states that, pursuant to the terms of the Offer, the Sale
of Securities by an IRA to Baird resulted in an assignment of all of
the IRA's rights, claims, and causes of action against an issuer or any
third party arising in connection with or out of the client's purchase,
holding or ownership of the Securities. This assignment did not include
any rights, claims or other causes of action against Baird. Rather,
such assignment was limited to rights, claims and causes of action
against the issuers of the Securities and any third parties unrelated
to Baird. This has been the case at all times with respect to the
subject Securities from the date as of which retroactive relief has
been requested. Baird states further that if the exercise of any of the
foregoing rights, claims or causes of action results in Baird
recovering from the issuer or any third party an aggregate amount that
is more than the sum of (a) the purchase price paid for the Securities
by Baird and (b) the income (interest or dividends, as applicable) due
on the Securities from and after the date on which Baird purchased the
Securities from the IRA, Baird will refund such excess amount promptly
to the IRA (after deducting all reasonable expenses incurred in
connection with the recovery).
13. In summary, Baird represents that the transactions satisfied
the statutory criteria of section 4975(c)(2) of the Code because: (a)
Each Sale was a one-time transaction for cash; (b) each IRA received an
amount equal to the par value of the Securities, plus accrued but
unpaid income (interest or dividends, as applicable), which was
beneficial to the IRA due to the IRA's inability to sell the Securities
at par because of continuing failed auctions; (c) no IRA paid any
commission or other transaction expenses with respect to the Sale; (d)
each IRA voluntarily entered into the Sale, as determined in the
discretion of the IRA owner; and (e) Baird will promptly refund to the
applicable Plan any amounts recovered from the issuer or any third
party in connection with its exercise of any rights, claims or causes
of action as a result of its ownership of the Securities, if such
amounts are in excess of the sum of (i) the purchase price paid for the
Securities by Baird and (ii) the income (interest or dividends, as
applicable) due on the Securities from and after the date on which
Baird purchased the Securities from the Plan, at the rate specified in
the offering documents for the ARS or determined pursuant to a
successful auction with respect to the Securities.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 693-8546. (This is not a toll-free number.)
Security Benefit Mutual Holding Company (MHC) and Security Benefit Life
Insurance Company (SBL, and Together With MHC, the Applicants), Located
in Topeka, Kansas
[Application No. D-11621]
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 (or ERISA) 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).
Section I. Covered Transaction
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,\2\ shall not apply, effective July 30, 2010, to the receipt of
cash or policy credits (Policy Credits), by or on behalf of a policy
owner of SBL that is an eligible member (Eligible Member), which is an
employee benefit plan or retirement arrangement that is subject to
section 406 of the Act and/or section 4975 of the Code (a Plan), other
than a Plan maintained by MHC and/or its affiliates, in exchange for
the extinguishment of such Eligible Member's membership interest in
MHC, in accordance with the terms of a plan of demutualization and
dissolution (the D&D Plan), adopted by MHC and implemented in
accordance with Kansas Insurance Law.
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\2\ For purposes of this proposed exemption, references to the
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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This proposed exemption is subject to the general conditions set
forth below in Section II.
Section II. General Conditions
(a) The D&D Plan was implemented in accordance with procedural and
substantive safeguards that were imposed under the laws of the State of
Kansas and was subject to review, approval, and supervision by the
Kansas Commissioner of Insurance (the Commissioner).
(b) The Commissioner reviewed the terms that were provided to
Eligible Members as part of such Commissioner's review of the D&D Plan,
and the Commissioner approved the D&D Plan following a determination
that such D&D Plan was fair and equitable to all Eligible Members.
(c) Each Eligible Member had an opportunity to comment on the D&D
Plan at the Commissioner's public comment meeting or evidentiary
hearing on the D&D Plan.
(d) Each Eligible Member had an opportunity to vote to approve the
D&D Plan after full written disclosure was given to the Eligible
Members by MHC.
(e) Pursuant to the D&D Plan, an Eligible Member generally received
cash, except that an Eligible Member received Policy Credits, and not
cash, to the extent that--
(1) Consideration was allocable to the Eligible Member based on
ownership of a Tax-Qualified Contract; or
(2) SBL made an objective determination that payment of
Consideration in the form of cash would be disadvantageous to such
Eligible Member in respect of applicable income or other taxation
provisions.
(f) Any determination made by SBL under Paragraphs (e)(1) or (e)(2)
above was based upon objective criteria that was applied consistently
to similarly situated Eligible Members.
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(g) Any act or determination undertaken by an Eligible Member that
was a Plan with respect to attending and/or submitting comments for the
Commissioner's public comment meeting and/or evidentiary hearing,
attending MHC's special meeting to consider the D&D Plan, and/or voting
on the D&D Plan, was made by one or more Plan fiduciaries that were
independent of SBL and its affiliates, and neither SBL nor any of its
affiliates provided investment advice within the meaning of 29 CFR
2510.3-21(c) or exercised investment discretion with respect to such
act or determination.
(h) All Eligible Members that were Plans participated in the
demutualization of MHC (the Demutualization) on the same basis as all
other Eligible Members that were not Plans.
(i) No Eligible Member paid any brokerage commissions or fees in
connection with the receipt of Policy Credits.
(j) All of SBL's policyholder obligations remained in force and
were not affected by the D&D Plan.
(k) The terms of the Demutualization were at least as favorable to
the Plans as the terms of an arm's length transaction between unrelated
parties.
(l) Any Plan Eligible Member whose Consideration was placed in a
trust, escrow account, or other similar arrangement (the Escrow
Arrangement), pursuant to the D&D Plan, will receive a distribution of
such Consideration from the Escrow Arrangement, and will not forfeit
such Consideration.
(m) SBL maintains or causes to be maintained, for a period of (6)
six years, the records necessary to enable the persons described in
paragraph (n)(1) of this section to determine whether the applicable
conditions of this exemption have been met. Such records are readily
available to assure accessibility by the persons identified in
paragraph (n)(1) of this section.
(n)(1) Notwithstanding any provisions of section 504(a)(2) and (b)
of the Act, the records referred to in paragraph (m) of this section
are unconditionally available at their customary location for
examination during normal business hours by--
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of an Eligible Member that is a Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any Eligible Member that is a Plan
or any duly authorized employee representative of such employer; and
(D) Any participant or beneficiary of any Eligible Member that is a
Plan, or any duly authorized representative of such participant or
beneficiary.
(2) A prohibited transaction is not deemed to have occurred if, due
to circumstances beyond the control of SBL, the records are lost or
destroyed prior to the end of the six-year period, and no party in
interest other than SBL is subject to the civil penalty that may be
assessed under section 502(i) of the Act or to the taxes imposed by
sections 4975(a) and (b) of the Code if the records are not maintained
or are not available for examination as required by paragraph (n)(1) of
this section.
(3) None of the persons described in paragraphs (B)-(D) of section
(n)(1) are authorized to examine the trade secrets of SBL or commercial
or financial information which is privileged or confidential.
(4) Should SBL refuse to disclose information on the basis that
such information is exempt from disclosure, SBL shall, by the close of
the thirtieth (30th) day following the request, provide written notice
advising that person of the reason for the refusal and that the
Department may request such information.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``MHC'' means Security Benefit Mutual Holding Company,
and any affiliate of MHC, as defined below in Section III(b).
(b) An ``affiliate'' of a person includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such entity (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); and
(2) Any officer of, director of, or partner in such person.
(c) The ``Adoption Date'' refers to March 2, 2010, the date that
MHC's Board of Directors adopted the D&D Plan.
(d) The term ``Consideration'' means the cash or Policy Credits
receivable by an Eligible Member in exchange for the extinguishment of
such Eligible Member's membership interest in MHC, in accordance with
the terms of the D&D Plan.
(e) The ``D&D Plan'' means the plan of demutualization and
dissolution adopted by MHC and implemented in accordance with Kansas
Insurance Law, dated as of March 2, 2010.
(f) The term ``Eligible Member'' means a person, other than MHC or
its subsidiaries, who, as reflected in the records of SBL or other
relevant entities, is the owner of one or more Eligible Policies on the
Adoption Date.
(g) The term ``Eligible Policy'' or ``Eligible Policies'' means a
policy that, as reflected in the records of SBL or other relevant
entities, is in force on the Adoption Date, unless the policy is
excluded pursuant to the D&D Plan.
(h) The term ``Policy Credit'' means consideration to be paid in
the form of an increase in cash value, account value, dividend
accumulations or benefit payment, as appropriate, depending upon the
policy.
(i) The term ``SBL'' means Security Benefit Life Insurance Company
and any affiliate of SBL, as defined in Section III(b).
(j) The term ``Tax-Qualified Contract'' means an Eligible Policy in
one of the following forms, that is held, other than through a trust,
on the date that Consideration is distributed--
(1) An annuity contract that qualifies for the treatment described
in section 403(b) of the Code;
(2) An individual retirement annuity within the meaning of section
408(b) of the Code;
(3) An individual annuity contract or an individual life insurance
policy issued directly to a Plan participant pursuant to a Plan
qualified under section 401(a) or section 403(a) of the Code;
(4) A group annuity contract issued to an employer, designed to
fund benefits under a Plan sponsored by the employer that qualifies
under section 401(a) or section 403(a) of the Code;
(5) An annuity contract issued in connection with a Plan
established by a governmental entity that qualifies for the treatment
described in section 457 of the Code; or
(6) Any other form of contract MHC determines must receive Policy
Credits in order to retain the contract's tax-favored status.
Section IV. Effective Date
If granted, this proposed exemption will be effective as of July
30, 2010.
Summary of Facts and Representations
MHC and Affiliated Entities
1. MHC, which is no longer in existence, was the Topeka, Kansas-
based, former common parent of a consolidated group of companies that
included Security Benefit Corporation (SBC), which in turn was the
parent corporation of a consolidated group of companies that included
Security
[[Page 3169]]
Benefit Life Insurance Company (SBL).\3\ MHC was formed in 1998 as a
mutual holding company for SBL and its affiliates. At the time of MHC's
formation, SBL converted from a mutual life insurance company to a
stock life insurance company within a mutual holding company structure
pursuant to a plan of conversion (the Prior Conversion). The Prior
Conversion had the effect of separating policyholders' contract rights
and membership interests under SBL's policies such that the contract
rights under the policies remained with SBL and the membership
interests transferred to MHC.
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\3\ MHC wholly owned SBC, which in turn was the common parent
corporation of SBL, First Security Benefit Life Insurance and
Annuity Company of New York, Security Financial Resources, Inc.
SFR), Security Distributors, Inc., Rydex Holdings, LLC, Security
Investors, LLC, Security Global Investors, LLC, and se2, Inc.
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2. As a mutual holding company, MHC could not issue common or
preferred stock. Instead, SBL policyholders, by reason of their
ownership of SBL policies, became members of MHC (the Members) and had
certain rights under Kansas law. These rights (Membership Interests)
entitled the Members to vote on members of the Board of Directors of
MHC and on extraordinary transactions and to receive assets in the
event of the demutualization, dissolution or liquidation of MHC. The
rights inherent in each Membership Interest were created by operation
of Kansas law solely as a result of the policyholder's acquisition of
the underlying SBL policy. Further, if an SBL policyholder surrendered
his or her SBL policy, or if the contract terminated by the payment of
benefits to the policy beneficiary, the policyholder's Membership
Interest would terminate without payment of any consideration.
3. The Applicants explain that, as a mutual insurance holding
company, MHC was not authorized to engage in the business of insurance.
It was also not authorized to pay dividends or to make any other
distributions or payments of income or profit, except as was directed
or approved by the Commissioner or was provided by MHC's Articles of
Incorporation in the event of MHC's liquidation or dissolution.
4. SBL, a direct wholly-owned subsidiary of SBC and an indirect
wholly-owned subsidiary of MHC, is the largest Kansas-domiciled stock
life insurance company, and is licensed to sell insurance products in
every state except New York. Also based in Topeka, Kansas, SBL was
founded in 1892 and became a mutual life insurance company in 1950,
assuming its present name. SBL remained a mutual life insurance company
until it converted to a stock company within a mutual holding company
structure in 1998 in the Prior Conversion.
5. According to the Applicants, a major part of SBL's business
involves the sale of (a) Annuity contracts that are held as part of
tax-qualified and tax-sheltered retirement plans described in section
401(a), section 403(a), and section 403(b) of the Code, (b) annuities
as part of individual retirement accounts or as individual retirement
annuities described in section 408 of the Code and (c) annuity
contracts held as part of plans described in section 457 of the Code.
The Applicants represent that certain affiliates of MHC and SBL provide
services to retirement plans, including SFR, which provides
recordkeeping and related non-discretionary administrative services to
retirement plan policyholders of SBL. The Applicants state that the SBL
policyholders do not include any plans sponsored by MHC, SBL and/or any
of their respective affiliates.
The Party in Interest Relationship/Request for Exemptive Relief
6. The Applicants represent that neither MHC nor SBL is a ``party
in interest,'' as that term is defined in the Act, with respect to any
Eligible Member which is an employee benefit plan or retirement
arrangement that is subject to section 406 of the Act and/or section
4975 of the Code merely because SBL has issued an insurance policy to
such Plan. However, according to the Applicants, affiliates of MHC and
SBL provide a variety of services to Plans that are Eligible Members.
The Applicants state that the provision of such services may cause MHC
and/or SBL, due to their relationship with the service providers, to be
parties in interest with respect to such Plans by reason of the
derivative provisions of section 3(14) of the Act.
7. The Applicants note that, as a practical matter, it is not
possible to identify all of the party in interest relationships that
may exist between MHC and SBL and the Plans. Accordingly, the
Applicants are seeking a broad exemption from the prohibited
transaction restrictions of the Act in order to resolve inadvertent
prohibited transactions that may occur in connection with
implementation of the D&D Plan. As such, the Applicants have requested
exemptive relief to cover the receipt of cash or Policy Credits by both
trusteed and non-trusteed Plans upon the extinguishment of their
existing Membership Interests in MHC, which may be viewed as a
prohibited sale or exchange of property between such Plan and MHC and/
or SBL in violation of section 406(a)(1)(A) of the Act and could also
be construed as a transfer of plan assets to, or a use of plan assets
by or for the benefit of, a party in interest in violation of section
406(a)(1)(D) of the Act. If granted, the exemption will be effective as
of July 30, 2010.
The Decision To Demutualize
8. The Applicants state that, as of December 31, 2009, SBL's
policyholder surplus, as reflected in its statutory financial
statement, was approximately $427 million. Furthermore, SBL's financial
strength rating from Standard & Poor's Ratings Services, a Standard &
Poor's Financial Services, LLC business (S&P), as of February 26, 2010,
was ``BB+.'' The Applicants represent that SBL's capital and surplus
position deteriorated significantly in 2008 and 2009 as a result of,
among other things, realized and unrealized losses on collateralized
debt obligations and other investments. According to the Applicants,
when combined with the impact of lower equity markets on revenues and
reserve requirements, these losses resulted in a decline of more than
50% in SBL's capital and surplus between the middle of 2008 and
September 30, 2009.
9. In response to the deterioration of SBL's financial condition in
2008 and 2009, MHC's Board of Directors considered, and management
pursued, a variety of strategic initiatives aimed at (a) Ensuring that
obligations to policyholders would continue to be met, (b) raising
significant amounts of new capital, (c) increasing liquidity and risk
based capital at SBL, and (d) obtaining an investment grade financial
strength rating from the rating agencies. Potential capital raising
initiatives included, among other things, reinsurance transactions and
other strategic combinations, the sale of various MHC subsidiaries and
affiliates, and a merger or demutualization of MHC. MHC's Board of
Directors also considered the viability of retaining MHC's current
structure.
10. At the time, the Kansas Insurance Department had been closely
monitoring SBL's financial condition and efforts to secure additional
capital, in order to determine whether regulatory action was warranted
or required. Based on the results of the strategic initiatives, and
following discussions with the Kansas Insurance Department, MHC's Board
of Directors determined that it would not be possible to secure the
significant capital infusion needed by SBL to ensure that the
[[Page 3170]]
company would not become subject to regulatory action while maintaining
the current mutual holding company structure.
11. On December 23, 2009, MHC and its direct wholly-owned
subsidiary, SBC, entered into a non-binding letter agreement (the
Letter Agreement) with Guggenheim Partners, LLC (Guggenheim), an
unrelated party, contemplating the following plan: (a) An interim
recapitalization of SBL; and (b) MHC's sale of SBC to an investor group
led by Guggenheim (the Acquisition) and the concurrent Demutualization
and dissolution (the Dissolution) of MHC. The Demutualization and
Dissolution, together with the Acquisition, are cumulatively referred
to herein as the ``Transaction.'' On February 15, 2010, MHC, SBC and an
investment vehicle for the investor group led by Guggenheim, Guggenheim
SBC Holdings, LLC (the Investor), entered into a purchase and sale
agreement (the Purchase and Sale Agreement) which superseded the Letter
Agreement, pursuant to which (a) on February 25, 2010, SBC received
$175 million from the Investor in the form of a loan in exchange for a
secured note, and contributed the $175 million as capital to SBL (the
Interim Recapitalization); (b) assuming that the Demutualization and
Dissolution occurred as contemplated, the loan and all accrued interest
thereon would be automatically converted into equity in SBC, and SBL
would receive, through SBC, up to approximately $175 million in
additional capital from the Investor at the closing of the Acquisition;
(c) MHC would transfer all of SBC's issued and outstanding shares to
the Investor; (d) Eligible Members would as a group, subject to any
claims against MHC and certain conditions described herein, receive, in
addition to increased capitalization of SBL, up to $20 million in cash
or Policy Credits upon the extinguishment of their Membership Interests
in MHC in the Demutualization and Dissolution; and (e) funds invested
by the Investor would pay for the transaction expenses incurred by MHC,
SBC and SBL. Thereafter, on or after the effective date of the
Demutualization and Dissolution, MHC would dissolve.
12. The Kansas Insurance Department was actively monitoring the
development of the Transaction, including the Letter Agreement, the
Purchase and Sale Agreement and the D&D Plan. According to the
Applicants, if MHC was unable to consummate the Transaction, MHC would
be unable to ensure that the Kansas Insurance Department would not take
regulatory action.
13. The Applicants note that MHC's Board of Directors believed that
the Transaction would significantly improve SBL's financial condition.
The Applicants explain that SBL's improved financial condition would
allow SBL to mitigate current capital and regulatory concerns and
permit SBL to operate with a stronger capital position, better
prospects, higher financial strength ratings, and greater assurance
that it will fulfill its obligations to its policyholders. In that
regard, S&P improved its financial strength rating on SBL, first to
``BB,'' credit watch positive (from credit watch negative), upon
announcement of the Transaction, and then to ``BB+,'' credit watch
positive, upon completion of the Interim Recapitalization. S&P had
further indicated that it could upgrade SBL to as high as ``BBB+'' upon
closing of the Transaction.\4\ In addition to strengthening the capital
and surplus of SBL, the Applicants suggest that the cash or Policy
Credits totaling up to $20 million in the aggregate, to be provided to
Eligible Members upon the extinguishment of their otherwise illiquid
Membership Interests, would enable Eligible Members to realize economic
value from their Membership Interests that was not otherwise available
to them.
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\4\ On Monday, August 2, 2010, three days after the closing of
the Transaction, S&P improved its financial strength rating on SBL
and its affiliate to ``BBB+'' from ``BB+'' and issued a positive
outlook report.
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14. The Applicants note that the Transaction proceeded on a more
expedited basis than is typical of most demutualizations, because of
SBL's precarious financial condition. According to the Applicants,
MHC's Board of Directors determined that an expedited process was
essential in order to avoid SBL becoming subject to regulatory action,
thereby imperiling SBL's obligations to its policyholders. Furthermore,
the Applicants state that the Board of Directors of MHC was concerned
that, as time progressed, and SBL's financial situation worsened, it
would be more difficult to effect the sale of SBL to a third party,
such as Guggenheim.
Regulatory Supervision
15. Article 40 of Chapter 40 of the Kansas Insurance Code provides
a procedural and substantive framework for the demutualization and
dissolution of a mutual holding company.\5\ Under Section 40-4002(a) of
the Kansas Insurance Code, the board of directors of the insurer, by
two-thirds majority, must (a) Adopt a resolution stating the reason why
the demutualization will benefit the insurer and be in the best
interests of its policyholders, and (b) approve a plan of
demutualization. Pursuant to Section 40-4002(b) of the Kansas Insurance
Code, a draft of the plan of demutualization may be submitted to the
Commissioner for preliminary examination and comment prior to or after
the adoption of the resolution. In addition, the Commissioner is
permitted to retain experts in connection with its review at the
expense of the insurer, pursuant to Section 40-4013 of the Kansas
Insurance Code.
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\5\ Sections 40-4001 and 40-4003a(c)(5) of the Kansas Insurance
Code provide the Commissioner with the authority to apply this
framework to the demutualization of a mutual holding company.
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After the completion of the process of preliminary examination and
comment and finalization of any revisions requested by the
Commissioner, the plan of demutualization is submitted to the
Commissioner for written approval. The plan of demutualization shall
not become effective unless it is approved by the Commissioner pursuant
to Section 40-4002(c) of the Kansas Insurance Code.
Among other requirements, the Commissioner's approval is subject to
a finding that the plan of demutualization is fair and equitable to the
policyholders, pursuant to Section 40-4004(a)(1) of the Kansas
Insurance Code. This provision also requires the Commissioner to order
a hearing on the plan of demutualization, conducted in accordance with
the Kansas Administrative Procedure Act, for which the Commissioner
will provide no less than twenty days written notice to the insurer and
the policyholders (by publication or otherwise).
The plan of demutualization must be voted on by those policyholders
who were policyholders of the mutual insurer on the day the plan of
demutualization is initially approved by the board of directors of the
mutual insurer, pursuant to Section 40-4002(d) and (g) of the Kansas
Insurance Code. To be effective, the plan of demutualization must
receive approval of two-thirds of those policyholders voting in person
or by proxy at a meeting of the policyholders called for that purpose,
pursuant to the bylaws of the insurer, except that if a majority of all
the policyholders vote in person or by proxy, then approval by a
majority of those voting shall constitute approval of the plan of
demutualization, in accordance with Section 40-4002(d) of the Kansas
Insurance Code.
[[Page 3171]]
The meeting for approval of the plan of demutualization by the
policyholders must be called by a majority of the board of directors,
the chairperson of the board or the president, pursuant to Section 40-
4005 of the Kansas Insurance Code. That provision also requires notice
of the meeting to be accompanied by a copy of the plan of
demutualization and such other information the Commissioner deems
necessary to policyholder understanding, including a summary of the
plan of demutualization in a form approved by the Commissioner.
16. Consistent with the requirements of the relevant portions of
Articles 33 \6\ and 40 of Chapter 40 of the Kansas Insurance Code, on
March 2, 2010, MHC's Board of Directors unanimously (a) adopted a
resolution approving the Demutualization and Dissolution of MHC and (b)
approved and adopted the D&D Plan. The D&D Plan was submitted to the
Commissioner for preliminary examination and comment in February 2010
and again in March 2010. On March 30, 2010, MHC's Board of Directors
adopted a resolution approving and adopting the amended and restated
D&D Plan, and they formally filed such plan with the Commissioner, for
written approval, on March 31, 2010. In connection with her review of
the D&D Plan, the Commissioner retained actuarial, financial, and legal
advisors.
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\6\ Article 33 of the Kansas Insurance Code governs insurance
holding companies.
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17. On March 31, 2010, at least 20 days in advance of the Public
Comment Meeting to be held by the Commissioner, MHC provided each
Eligible Member with a copy of the Security Benefit Member Information
Booklet (MIB), describing in detail the transactions described herein.
The Commissioner held the Public Comment Meeting on April 28, 2010,
during which statements, questions, and comments were invited to be
heard, but none were offered.
18. In addition to the D&D Plan, the Acquisition was subject to the
approval of the Commissioner.\7\ The Commissioner held an evidentiary
hearing regarding the D&D Plan and the Transaction on May 5, 2010. At
the hearing, the Commissioner incorporated all evidence, including
exhibits submitted in support of the Transaction, into the record, and
further announced that the record would remain open until May 11, 2010,
to admit additional materials and statements. Subsequently, on May 18,
2010, based on its review of the record, the Commissioner issued an
order approving the Transaction, subject to MHC's receipt of the
required approval of its members to demutualize and dissolve.
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\7\ Section 40-3304 of the Kansas Insurance Code provides that a
domestic insurer, including any person controlling a domestic
insurer, shall not be the target of an acquisition, take-over or
merger unless the Commissioner approves such action following a
hearing conducted in accordance with the Kansas Administrative
Procedure Act.
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19. A special meeting of the Members for approving the D&D Plan was
called by the chairman of MHC's board of directors and took place on
May 26, 2010. Each Member entitled to vote was entitled to only one
vote regardless of the number of policies or amount of insurance and
benefits held by or issued to the Member. According to the Applicants,
there were approximately 190,784 Members eligible to vote on the D&D
Plan.\8\ According to the Applicants, of those members voting,
approximately 90 percent voted in favor of the Plan. On July 30, 2010,
the Transaction closed, and $165 million of capital was injected into
SBL following an initial $175 million infusion on February 25, 2010.
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\8\ Members who held policies with SBL that were in force as of
March 2, 2010, the date on which the D&D Plan was adopted, were
eligible to vote on the D&D Plan.
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20. The Applicants represent that any act or determination
undertaken by an Eligible Member that was a Plan with respect to
attending and/or submitting comments for the Commissioner's public
comment meeting and/or evidentiary hearing, attending MHC's special
meeting to consider the D&D Plan, and/or voting on the D&D Plan, was
made by one or more Plan fiduciaries that were independent of SBL and
its affiliates, and neither SBL nor any of its affiliates provided
investment advice within the meaning of 29 CFR 2510.3-21(c) or
exercised investment discretion with respect to such act or
determination.
Distributions to Eligible Members
21. As noted above, and as outlined in the D&D Plan, the Investor
made available $20 million for payment as Consideration to Eligible
Members, provided, however, that this Consideration would be reduced by
any claims against MHC in excess of $500,000 in the aggregate that were
not otherwise paid or provided for, with the remainder paid as
consideration to Eligible Members upon the extinguishment of their
Membership Interests (such remainder, the Total Aggregate
Consideration).\9\ The cash portion of the Total Aggregate
Consideration was distributed by check to Eligible Members entitled to
receive cash payments, in accordance with the D&D Plan. In addition,
pursuant to the D&D Plan, the Investor delivered the Policy Credit
funding portion of the Total Aggregate Consideration to SBL, for
crediting Policy Credits to Eligible Members entitled to be credited
Policy Credits.\10\
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\9\ According to the Applicants, as provided by the D&D Plan,
individuals having a claim of any kind were afforded an opportunity
to file proof of such claim with the Kansas Insurance Department and
MHC by May 4, 2010. As part of the Commissioner's approval of the
D&D Plan, the Commissioner found the one claim submitted to be
invalid. As a result, the Applicants state that the contemplated
Total Aggregate Consideration will likely equal $20 million.
\10\ ``The proceeds of the demutualization will belong to the
plan if they would be deemed to be owned by the plan under ordinary
notions of property rights. See ERISA Advisory Opinion 92-02A,
January 17, 1992 (assets of plan generally are to be identified on
the basis of ordinary notions of property rights under non-ERISA
law). It is the view of the Department that, in the case of an
employee welfare benefit plan with respect to which participants pay
a portion of the premiums, the appropriate plan fiduciary must treat
as plan assets the portion of the demutualization proceeds
attributable to participant contributions. In determining what
portion of the proceeds are attributable to participant
contributions, the plan fiduciary should give appropriate
consideration to those facts and circumstances that the fiduciary
knows or should know are relevant to the determination, including
the documents and instruments governing the plan and the proportion
of total participant contributions to the total premiums paid over
an appropriate time period. In the case of an employee pension
benefit plan, or where any type of plan or trust is the
policyholder, or where the policy is paid for out of trust assets,
it is the view of the Department that all of the proceeds received
by the policyholder in connection with a demutualization would
constitute plan assets.'' See ERISA Advisory Opinion 2001-02A,
February 15, 2001.
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22. The Applicants state that, pursuant to the D&D Plan, upon the
extinguishment of their Membership Interests, Eligible Members had the
opportunity to receive, in addition to the benefits of SBL's capital
and surplus being strengthened, their share of the Total Aggregate
Consideration. The Applicants represent that the Transaction did not
diminish the benefits, values, guarantees and dividend eligibility of
the Members' policies, nor did it change the premiums for such
policies; however, the Transaction did extinguish the Membership
Interests.
23. As described above, the D&D Plan provided Eligible Members
whose Membership Interests were extinguished by the Transaction with
Consideration in the form of cash or Policy Credits. The D&D Plan
provides that, for this purpose, (a) ``Eligible Member'' means the
owner of an Eligible Policy, (b) ``Eligible Policy'' generally means a
policy that was in force as of the close of business on March 2, 2010,
the date that the D&D Plan was initially adopted
[[Page 3172]]
by MHC's Board of Directors, unless the policy is excluded pursuant to
the terms of the D&D Plan, and (c) ``Policy Credit'' means
Consideration to be paid in the form of an increase in cash value,
account value, dividend accumulations or benefit payment, as
appropriate, depending upon the policy.
24. Each Eligible Member was allocated only a fixed component of
Consideration in an amount determined by dividing the Total Aggregate
Consideration by the total number of Eligible Members. The Applicants
note that no Eligible Member received any variable component of
Consideration, and neither MHC nor any of its subsidiaries were
Eligible Members with respect to any policy owned by any of them.
25. Pursuant to the D&D Plan, Consideration was generally paid to
Eligible Members in cash; however, Consideration was paid by the
crediting of Policy Credits, and not in cash, to each Eligible Member
who owned an Eligible Policy that was in force and not in payout status
on the date that the Consideration was distributed and was held, other
than through a trust,\11\ in one of the following forms of Tax-
Qualified Contracts:
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\11\ According to the Applicants, the IRS takes the position
that a mutual insurance company's payment of cash consideration to
the holder of a tax-qualified retirement contract in connection with
the company's demutualization could have adverse tax consequences
for the holder, including income taxation on the proceeds, excise
tax penalties, and potential disqualification of the contract from
favorable tax treatment. However, the IRS has issued a number of
private letter rulings in the context of prior demutualization
transactions holding that policy credits can be used to compensate
holders of tax-qualified retirement contracts for the extinguishment
of their membership interests in a demutualization transaction
without negatively affecting the tax-favored status of the contract.
See, e.g., PLR 200820009 (May 16, 2008); PLR 200240051 (October 4,
2002); PLR 200132033 August 13, 2001); PLR 200124001 (June 18,
2001); PLR 200011035 (March 20, 2000); PLR 9512021 (December 29,
1994); and PLR 9230033 (February 4, 1992) (involving conversions of
mutual holding companies as well as mutual insurance companies).
Furthermore, the Applicants explain, in situations in which a tax-
qualified retirement contract is held in a section 401(a) qualified
trust, the IRS considers the membership interest to be held in the
trust, which may receive consideration other than policy credits
without experiencing adverse tax consequences.
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(a) An annuity contract that qualifies for the treatment described
in section 403(b) of the Code;
(b) An individual retirement annuity within the meaning of section
408(b) of the Code;
(c) An individual annuity contract or an individual life insurance
policy issued directly to a plan participant pursuant to a plan
qualified under section 401(a) or section 403(a) of the Code;
(d) A group annuity contract issued to an employer, designed to
fund benefits under a retirement plan sponsored by the employer that
qualifies under section 401(a) or section 403(a) of the Code;
(e) An annuity contract issued in connection with a plan
established by a governmental entity that qualifies for the treatment
described in section 457 of the Code; or
(f) Any other form of contract MHC determined must receive Policy
Credits in order to retain the contract's tax-favored status.\12\
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\12\ However, cash was paid to an Eligible Member who held an
Eligible Policy that was a supplementary contract or a settlement
option issued pursuant to an Eligible Policy on or before the
effective date of the D&D Plan and to effect the annuitization of an
individual deferred annuity, an immediate annuity contract or a
deferred annuity contract in the period following deferment of
annuity payments, if SBL determined that such cash was not subject
to excise tax and did not constitute a prohibited transaction under
the Code or cause a disqualification of the policy, or a related
plan, in respect of which the cash was issued.
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26. In addition, Policy Credits were paid to an Eligible Member in
the event that SBL determined that payment of Consideration in the form
of cash would be disadvantageous to such Eligible Member in respect of
applicable income or other taxation provisions. If an Eligible Member
owned one or more Tax-Qualified Contracts and one or more other
Eligible Policies, Consideration was credited to one of the Eligible
Member's Tax-Qualified Contracts or Eligible Policies, as determined by
SBL in accordance with operational rules established by SBL for
allocating Consideration among one or more of such contracts. According
to the Applicants, these rules were intended to be fixed rules that
eliminate discretion in their application, and the overriding goal of
the rules was to protect Eligible Members from adverse tax
consequences.
27. The Applicants represent that, with regard to any determination
made by SBL whether an Eligible Member would receive cash or Policy
Credits, described above, the form of Consideration to be received by
an Eligible Member was determined by SBL based on objective criteria,
including the tax-qualification status of the Eligible Policy, whether
the Eligible Policy was in payout status, and the number and type of
Eligible Policies held by the Eligible Member. Furthermore, the
Applicants state that, in order to ensure consistent application and
the absence of any discretion in making these determinations, such
criteria were set forth in written operating rules.
28. Under the D&D Plan, and except as described below, as soon as
reasonably practicable and no more than 60 days following the effective
date of the D&D Plan (i.e., July 30, 2010), unless otherwise approved
by the Commissioner, (a) SBL or, if applicable and with funds
transferred by SBL, any company to which SBL reinsured or coinsured any
Eligible Policy, credited Policy Credits to the Eligible Members that
were entitled to be credited Policy Credits under the D&D Plan and (b)
MHC, SBC, SBL or a bank or trust company (or such other entity)
designated by MHC and that was reasonably acceptable to the Investor
distributed cash, by check, net of any required withholdings, to the
Eligible Members that were entitled to receive such cash. The
Applicants state that no interest was payable on the Consideration and
no Eligible Member paid any commissions or fees in connection with the
receipt of the Consideration.
The Escrow Arrangement
29. The D&D Plan further provided that, if an exemption from the
Department had not been granted prior to the effective date of the
Transaction (i.e., July 30, 2010), MHC and SBL would delay distribution
of Consideration to Eligible Members that were Plans and place the
Consideration in an escrow, trust, or similar arrangement (i.e., the
Escrow Arrangement) \13\ until the earlier of (a) the date the
exemption was granted in form and substance satisfactory to SBL (or, if
later and applicable to the Eligible Member, the date that private
letter rulings from the IRS related to the distribution of Policy
Credits to Eligible Members holding Tax-Qualified Contracts (the IRS
Rulings) were obtained in form and substance satisfactory to SBL),\14\
(b) December 31, 2010, or (c) such later date as may be required by the
Commissioner (i.e., June 30, 2011, see Representation 34). The D&D Plan
further provided that, once the exemption was granted in form and
substance satisfactory to SBL, the Consideration held in the Escrow
Arrangement would be distributed, without interest, to the Eligible
[[Page 3173]]
Members that were Plans unless those Eligible Members had been
allocated Consideration that was subject to further delay associated
with the IRS Rulings. SBC or its affiliates would bear all costs and
expenses of maintaining the Escrow Arrangement.
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\13\ The Applicants represent that the Escrow Arrangement was
established with Deutsche Bank Trust Company Americas, a subsidiary
of Deutsche Bank AG. The Applicants further represent that SBL has
no ownership affiliation or other material relationship to Deutsche
Bank Trust Company Americas.
\14\ The IRS Rulings were issued on December 20, 2010.
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30. According to the Applicants, if Eligible Members holding
contracts subject to the Act (ERISA Contracts) or Tax-Qualified
Contracts were paid Consideration without having received the exemption
or IRS Rulings, adverse consequences could result, including the
imposition of prohibited transaction excise taxes under section 4975 of
the Code, unanticipated taxes on distributions (including additional
taxes under section 72(t) of the Code, excise taxes and withholding
penalties) and the potential disqualification of Eligible Members that
were Plans. Thus, the Applicants contend that the Escrow Arrangement
was necessary because the delivery of Consideration to Eligible Members
was not made contingent upon the receipt of the exemption or the IRS
Rulings. The Applicants explain that, because time was of the essence
in closing the Transaction, MHC could not plan for every contingency,
such as the receipt of the exemption and the IRS Rulings.
As noted above, MHC was cognizant of SBL's precarious financial
situation and its need to secure a capital infusion resulting from the
Acquisition. In addition, MHC was concerned that the Investor would
abandon its plans to purchase SBC, and the Kansas Insurance Department
would intervene to take regulatory action, if the Transaction was not
consummated quickly. Consequently, the Transaction closed on July 30,
2010, and the Escrow Arrangement was utilized to avoid the potential
adverse consequences flowing from the receipt of Consideration by
Eligible Members holding ERISA Contracts or Tax-Qualified Contracts in
advance of the receipt of the exemption or the IRS Rulings.
31. The Applicants further contend that no interest should be
required to be paid on any form of Consideration held in the Escrow
Arrangement, primarily because the amount of interest would be de
minimis as to each such Eligible Member.\15\ Moreover, the Applicants
suggest that the costs associated with calculating and adding the
interest to the Consideration would offset any benefit to be derived
from the interest payment.\16\
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\15\ The Applicants state that the amount of Consideration
allocable to each Eligible Member is approximately $100, and any
interest on such amount would constitute cents on the dollar.
\16\ The Applicants maintain that revised calculation
requirements, additional tax reporting requirements, and allocation
issues all could arise as a result of requiring the crediting of
interest on Consideration held in escrow.
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32. The D&D Plan also provides, in Section 5.4, that, if the
exemption is not granted in form and substance satisfactory to SBL on
or before December 31, 2010 (or such later date as may be required by
the Commissioner), the Consideration held in the Escrow Arrangement
shall be released to the general account of SBL, and Eligible Members
that are Plans and otherwise entitled to receive Consideration under
the D&D Plan in respect of their Tax-Qualified Contracts or ERISA
Contracts, as the case may be, will receive no Consideration in
connection with the Transaction.
33. According to the Applicants, the December 31, 2010 deadline for
receipt of the IRS Rulings or the exemption constitutes a ``failsafe''
mechanism, in that it is designed to protect Plans from potential
adverse tax consequences or disqualification in the event that
Consideration is paid to Eligible Members holding Tax-Qualified
Contracts or ERISA Contracts without the requisite regulatory
approvals. According to the Applicants, the benefit of receiving the
Consideration would be small (approximately $100 per Eligible Member)
in comparison to the risk of adverse tax consequences, plan
disqualification, and other penalties, if MHC failed to secure the
proper regulatory approvals for the Transaction. Furthermore, the
Applicants claim that there was a probability that only the exemption
or the IRS Rulings would be approved (but not the other), thereby
creating a ``catch-22'' where Consideration could neither be paid to
Eligible Members nor kept in the Escrow Arrangement indefinitely.
Instead, the Applicants suggest that Eligible Members would be better
served in having Consideration flow to SBL for the benefit of SBL's
policyholders, generally.
34. Furthermore, the Applicants explain that, at the time that the
D&D Plan was approved, MHC believed, based on past precedents, that the
December 31, 2010 ``failsafe'' date would allow adequate time for full
consideration of the applications by the IRS and the Department. They
also contend that Members assented to the inclusion of the failsafe
provisions in the D&D Plan when they approved the D&D Plan after full
consideration of its terms, including having had the opportunity to
review the MIB, to deliberate and vote on the D&D Plan, and to submit
comments to the Commissioner through various formal processes.
Furthermore, the Applicants note that the Commissioner approved of the
December 31, 2010 deadline and failsafe provisions as fair and
equitable and represented in writing to the Department that she would
extend the deadline by at least six months if MHC had not secured the
IRS Rulings or exemption by December 31, 2010.
35. The Department concurs with the Applicants that the increased
complexity and administrative cost involved with paying interest on
such Consideration, together with the small amount of Consideration
allocable to each Eligible Member, outweigh the benefit in receiving
nominal interest on such Consideration.
36. In addition, the Department understands that administrative
impracticalities inherent in holding Consideration in the Escrow
Arrangement for a period of time, prior to receipt of the exemption and
the IRS Rulings, may have provided sufficient rationale for the
failsafe provisions. However, the Department views the failsafe
mechanism in the D&D Plan as a forfeiture of plan assets and as
contrary to the protections afforded to plan assets and the parties who
are entitled to such assets under the Act. Moreover, the Department
believes that such failsafe mechanism, if employed, would fail to
satisfy Section II(h) of the proposed exemption, which provides that
Eligible Members that were Plans participated in the Demutualization on
the same basis as other Eligible Members that were not Plans, and
Section II(l) of the proposed exemption, which prohibits the forfeiture
of Consideration. However, because the Commissioner has agreed to
extend the December 31, 2010 deadline for an additional 6 months, the
Department notes that it is likely that the exemption will be granted
prior to such date.\17\ Therefore, the forfeiture of the Consideration
in the Escrow Arrangement and its associated prohibited transaction
implications should not arise.
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\17\ As noted in footnote 13, the IRS Rulings were issued on
December 20, 2010, prior to the occurrence of the December 31, 2010
deadline.
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Merits of the Transaction
37. As previously discussed, the Applicants assert that the
Transaction will significantly improve SBL's financial condition, which
will allow SBL to mitigate current capital and regulatory concerns and
permit SBL to operate with a stronger capital position,
[[Page 3174]]
better prospects, higher financial strength ratings and greater
assurance that it will fulfill its obligations to its policyholders.
Therefore, according to the Applicants, SBL's policyholders, including
those policyholders that are Plans, will derive a significant benefit
from the Transaction.
38. Furthermore, the Applicants note that, as part of the
Transaction and pursuant to the D&D Plan, Eligible Members, including
Plans, also had the opportunity to receive Consideration in the form of
cash or Policy Credits upon the extinguishment of such Eligible
Members' Membership Interests. These Membership Interests, note the
Applicants, were not transferable and had no value independent of the
policies to which they were attributable. Therefore, the Applicants
maintain, absent the Consideration payable under the D&D Plan, Eligible
Members received no remuneration for their Membership Interests in the
Demutualization.
Moreover, the Applicants declare that the D&D Plan will not
diminish the benefits, values, guarantees and dividend eligibility of
the Members' policies, nor will it change the premiums for such
policies.
Summary
39. In summary, the Applicants represent that the Transaction
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The D&D Plan was implemented in accordance with procedural and
substantive safeguards that were imposed under the laws of the State of
Kansas and was subject to review, approval, and supervision by the
Commissioner.
(b) The Commissioner reviewed the terms that were provided to
Eligible Members as part of such Commissioner's review of the D&D Plan,
and the Commissioner approved the D&D Plan following a determination
that such D&D Plan was fair and equitable to all Eligible Members.
(c) Each Eligible Member had an opportunity to comment on the D&D
Plan at the Commissioner's public comment meeting or evidentiary
hearing on the D&D Plan.
(d) Each Eligible Member had an opportunity to vote to approve the
D&D Plan after full written disclosure was given to the Eligible
Members by MHC.
(e) Pursuant to the D&D Plan, an Eligible Member generally received
cash, except that an Eligible Member received Policy Credits, and not
cash, to the extent that--
(1) Consideration was allocable to the Eligible Member based on
ownership of a Tax-Qualified Contract; or
(2) SBL made an objective determination that payment of
Consideration in the form of cash would be disadvantageous to such
Eligible Member in respect of applicable income or other taxation
provisions.
(f) Any determination made by SBL under Paragraphs (e)(1) or (e)(2)
of Section II of the proposed exemption was based upon objective
criteria that was applied consistently to similarly situated Eligible
Members.
(g) Any act or determination undertaken by an Eligible Member that
was a Plan with respect to attending and/or submitting comments for the
Commissioner's public comment meeting and/or evidentiary hearing,
attending MHC's special meeting to consider the D&D Plan, and/or voting
on the D&D Plan, was made by one or more Plan fiduciaries that were
independent of SBL and its affiliates, and neither SBL nor any of its
affiliates provided investment advice within the meaning of 29 CFR
2510.3-21(c) or exercised investment discretion with respect to such
act or determination.
(h) All Eligible Members that were Plans participated in the
Demutualization on the same basis as all other Eligible Members that
were not Plans.
(i) No Eligible Member paid any brokerage commissions or fees in
connection with the receipt of Policy Credits.
(j) All of SBL's policyholder obligations remained in force and
were not affected by the D&D Plan.
(k) The terms of the Demutualization were at least as favorable to
the Plans as the terms of an arm's length transaction between unrelated
parties.
(l) Any Plan Eligible Member whose Consideration was placed in the
Escrow Arrangement, pursuant to the D&D Plan, will receive a
distribution of such Consideration from the Escrow Arrangement and will
not forfeit such Consideration.
(m) SBL complied with and will continue to comply with, the
recordkeeping requirements provided herein to enable certain authorized
persons to determine whether the conditions of the exemption have been
met, for so long as such records are required to be maintained.
FOR FURTHER INFORMATION CONTACT: Warren Blinder of the Department,
telephone (202) 693-8553. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 13th day of January 2011.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2011-974 Filed 1-18-11; 8:45 am]
BILLING CODE 4510-29-P